P

robably no one predicted that in early 2020 we would experience a significant drop in economic growth. Prior to this we were still discussing positive global economic growth in 2020. Suddenly, in March we find that economic growth is very likely to be negative due to the global COVID-19 pandemic. For example, the Economist Intelligence Unit (EIU) predicts that the global economy will decline by 2.2 percent, significantly different from the forecast before the coronavirus outbreak of 2.3 percent growth.

According to the World Bank East Asia and Pacific Economic Update in April 2000, the economic growth of East Asian Pacific developing countries in 2020 will be only 2.1 percent in the baseline scenario but will contract by 0.5 percent in the worst-case scenario, much worse than the prediction before the pandemic of 5.8 percent growth. Indonesia, according to this report, will grow only 2.1 percent in 2020 in the baseline scenario and decline by 3.5 percent in the worst-case scenario.

To be honest, I would say that it is very difficult to forecast the 2020 economic prospects because of the great uncertainty. Generally, the economy in 2020 will largely depend on how long the pandemic lasts. Unfortunately, it is not clear when the pandemic will end implying difficulty in measuring the effect on economic variables, such as consumer spending, production or investment.

Furthermore, the current economic situation is completely different from the previous economic slowdown in 2008 or economic crisis in 1998. Nowadays, the economic drop is simply due to the global COVID-19 pandemic, which has reduced economic activity through several channels. The first channel is consumer spending contracting because people are social distancing or even locked down in extreme cases.

The second channel is production shrinking as people are restricted from going to offices, factories or other production sites. For example, some automotive manufacturers in Karawang, West Java, have closed their production facilities in order to protect their employees from COVID-19 infection.

Consequently, the key issue is clear that the COVID-19 pandemic should end before we can see an economic recovery. We are currently depending on natural processes to stop the pandemic with some interventions, such as social distancing to flatten the number of infections. Another solution is finding an effective vaccine and treatment for infected people, it is not known when these will be available.

Back to the economic scenario in 2020, as we know that economic growth will be weak, government intervention is urgently required for the economy. The government launched a stimulus policy package on April 1. This policy package has allocated an emergency budget amounting to Rp 405 trillion (US$24.65 billion), 2.55 percent of GDP for the 2020 fiscal year, which will be spent on health spending (Rp 75 trillion), social protection (Rp 110 trillion), tax incentives and debt repayment cancelation for the micro credit program (Rp 70 trillion) and national economic recovery program (Rp 150 trillion).

In my opinion, the government response is sufficient to tackle the COVID-19 pandemic and its resulting economic slump. We hope that the Rp 75 trillion for the health sector will be spent properly on hospital operational costs, personal protection equipment (PPE), medicines, ventilators and other things to treat COVID-19 cases.

The speed of spending execution is the main challenge because procurement procedures usually take a lot of time. We hope Presidential Regulation No. 16/2018 on government procurement of goods and services and National Procurement Agency Regulation No. 13/2018 on government procurement of goods and services needed in the handling of an emergency situation are able to speed up the procurement process.

The funding that will be allocated for social protection is also very important to support low-income people. The economic slump will create unemployment and affect people’s incomes, limiting the ability to buy even staple foods.

The main challenge of this program is setting the target for who should receive the assistance. This challenge is even bigger because the government must identify new low-income people, many of whom are in the informal sector or workers without civil registry documents, such as street vendors, motorcycle taxi drivers, plumbers, builders and many others.

The funding that will be allocated for businesses, namely tax incentives and debt repayment cancelation in the micro credit program and national economic recovery program, are key to the survival of both small and medium enterprises, given the economic problems caused by the epidemic.

The revenues of corporations will drop significantly because of either falling demand or supply side problems, such as production sites closed down as workers are infected or because of government instructions, a lack of raw materials, capital goods or skilled foreign workers. As a result, corporations may have liquidity problems in the short term, which may subsequently become solvency problems if the problem lasts too long. So, the funding allocated for businesses should be able to support companies before the pandemic creates serious problems. I think the main challenge of this program is to avoid moral hazard as businesses see an opportunity to get a form of subsidy from the government but they misuse the money for irrelevant purposes.

In summary, I would say that we are dealing with a very difficult situation because we do not know when the COVID-19 pandemic will end. Fortunately, we believe the government response has provided a good direction to anticipate possible economic problems in the near future. At this point, we should prepare for the worst but hope for the best.