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Monetary easing is not enough
Bank Indonesia continued with its pro-growth policy last week, cutting its benchmark rate by another 25 basis points (bps) to 5
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span>Bank Indonesia continued with its pro-growth policy last week, cutting its benchmark rate by another 25 basis points (bps) to 5.25 percent, the first time the central bank has slashed its policy rate three consecutive months since early 2016. BI further strengthened the policy by relaxing macroprudential policies to increase liquidity and enhance growth in consumption credit.
Analysts predict another 25 bps cut before the end of the year and another similar cut in early 2020 on the back of favorable macroeconomic indicators such as low inflation and a stable current account deficit. Other economists argue that the monetary easing will not be very effective in driving growth without the support of fiscal stimulus.
Indeed, monetary policy alone will not be able to boost growth, but we don’t have a broad space for fiscal stimulus, given the persistently low tax ratio (tax revenue as a percentage of gross domestic product (GDP)), the grim export outlook, low commodity prices amid the economic slowdown in Europe, the United States and China, and the risk of high oil prices due to Middle East tensions.
The government’s plan to limit the fiscal deficit at 1.8 percent of GDP next year as stipulated in its proposed 2020 budget, currently under deliberation at the House of Representatives, is a wise move to maintain prudent macroeconomic management. Hence, only a higher pace of bold structural reforms would make the monetary easing more effective in stimulating investment to consequently propel higher economic growth. Unfortunately, this seems to be the weakest point of President Joko “Jokowi” Widodo’s administration.
The latest World Bank assessment of the Indonesian economy, issued early this month, commended the government’s prudent macroeconomic policy framework but strongly warned that this policy would not be effective in driving growth without bold structural reforms.
Its assessment even considers Indonesia to be one of the least attractive places in ASEAN for foreign manufacturing investors due to numerous regulatory and bureaucratic barriers to business licensing and foreign trade, utterly poor policy coordination between various line ministries, inadequate institutional capacity to implement government policies and contradictory regulations among regional administrations.
What makes the World Bank assessment so damaging to the government’s credibility in policy execution is that President Jokowi has made deregulation and bureaucratic reform — in addition to physical infrastructure development — the top priority programs of his administration since early 2015.
Hopefully, Jokowi will show stronger political daring during his second and final term, which starts later next month, to open the economy wider to foreign investors through bolder reforms to reinvigorate investment in labor-intensive and export-oriented manufacturing plants. Most of the foreign direct investment that has entered the country over the past few years went toward natural resource development, especially in the refining and smelting of minerals, which is both capital and technology intensive.
The government has recently been quite aggressive in offering generous tax incentives to investments in priority sectors, but these incentives would be ineffective in promoting greenfield investment projects, if business licensing remains arduous and policies remain inconsistent and unpredictable.
