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Jakarta Post

World Bank warns of 2% contraction in Indonesia’s economy this year

  • Yunindita Prasidya

    The Jakarta Post

Jakarta   /   Fri, July 17, 2020   /   12:12 pm
World Bank warns of 2% contraction in Indonesia’s economy this year A stage director looks on at the IMF/World Bank Annual Fall Meetings Plenary Session in Washington, DC, on Oct. 18, 2019. The World Bank has warned that the Indonesian economy might contract by 2 percent this year. (AFP/Andrew Caballero-Reynolds)

The World Bank has warned that the Indonesian economy might contract 2 percent this year if mobility restrictions are further implemented to contain the spread of COVID-19.

“Under somewhat harsher assumptions on the global economy of a deeper contraction, and if there is a need for mobility restrictions to be reinstated going forward, we do think that the economy could actually contract by 2 percent in 2020,” World Bank Indonesia lead economist Frederico Gil Sander said during the virtual launch of World Bank’s Indonesia Economic Prospect report on Thursday. 

The coronavirus outbreak in Indonesia has not shown any signs of abating as more than 1,000 new cases have been recorded daily since June. Infections stood at 81,600 as of Thursday afternoon with 3,800 deaths, official data show.

Despite the rising number of cases, the government and regional administrations relaxed social restrictions amid concerns of a slumping economy.

Read also: Indonesia’s economy could enter recession in Q3: Sri Mulyani

The government projects the country’s economy to grow by 1 percent this year under the baseline scenario or contract by 4 percent under the worst case scenario as the pandemic batters business activity and hits demand. The economy grew 2.97 percent in the first quarter, the lowest in 19 years.

The World Bank’s report, titled The Long Road to Recovery, published this month, states that Indonesia’s GDP is expected to be unchanged from 2019. Last year, the country’s GDP grew 5 percent. 

World Bank Indonesia country director Satu Kahkonen explained during the webinar that the zero percent growth forecast was predicated on three things, namely: the global GDP to contract by 5.2 percent this year, the economy to be fully open in August and no second wave infections. 

The report suggested that a 2 percent contraction would take place if the global economy slipped into a deeper recession, wherein the global GDP shrank by 7.8 percent, impacting investment and exports. 

“Under this scenario where the economy would actually contract, poverty would increase quite significantly, especially if there is no additional social assistance,” Sander went on to say.

The Washington, DC-based development bank estimated that without the government’s social assistance, 5.5 million to 8 million Indonesians could fall into poverty this year as a result of an aggregate decline in household income of 5 percent to 7 percent due to lower earnings and unemployment. 

Read also: Bank Indonesia cuts rate for fourth time to four-year low to bolster growth

Around 1.63 million people fell into poverty in March, increasing the number of people living below the poverty line to 26.42 million people, Statistics Indonesia (BPS) data show. 

Aside from ensuring robust health system preparedness to handle the pandemic curve, the government needs to assist firms to stay afloat and push for reforms to increase financial sector resilience, Sanders said, as he outlined suggestions for the government.

Most importantly, he went on to say, the government should invest more on human and physical capital as the post-COVID-19 economy was likely to require different skills from workers. The country also needed to flatten its debt curve when it started to recover.

“The idea that Indonesia can flatten the debt curve by cutting expenditure is very risky in terms of competitiveness. So, the only way out is [by increasing] tax [collection],” he said. 

According to the Finance Ministry, Indonesia’s borrowing needs of around Rp 1.53 quadrillion (US$104.53 billion) this year to fund the budget deficit will increase the country’s debt-to-GDP ratio to 37.64-38.5 percent by year-end from around 30 percent in 2019.

The government has allocated Rp 695.2 trillion to help strengthen the healthcare system, provide social aid and support economic recovery.

Read also: Administrative issues hamper COVID-19 budget disbursement: Sri Mulyani

“This is not about ‘Do you really know what kind of policy design would be good?’ We know. But do we have all the necessary infrastructure to be able to execute those good policy designs so that they are going to be able to then reach the objective that we want to achieve? This is always the challenge,” Sri Mulyani said in the webinar. 

She explained that the government struggled when it came to data collection, as the country depended on local government database updates to identify and target poor families. On that basis, she is working alongside the Social Affairs Ministry and the Home Ministry to provide incentives for local governments to update the needed data. 

“Data will not only help you to better target but to also monitor whether what you are doing is [bringing results],” World Bank managing director for development policy and partnership Mari Elka Pangestu said. 

“A lot of what Indonesia is doing for households, cash transfers, food and other measures, as well as for small and medium enterprises and the informal sector, is actually pretty much best practice,” Mari said.