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Jakarta Post

Indonesia’s GDP to decline more than thought as virus keeps spreading: IMF

  • Adrian Wail Akhlas

    The Jakarta Post

Jakarta   /   Wed, October 14, 2020   /   07:49 am
Indonesia’s GDP to decline more than thought as virus keeps spreading: IMF Shopkeepers prepare their clothing kiosk for business at Tanah Abang Market in Central Jakarta on June 15. Indonesia’s economy is expected to shrink more this year than previously expected as Southeast Asia’s largest economy struggles to contain the coronavirus pandemic, the International Monetary Fund (IMF) has said. (JP/Dhoni Setiawan)

Indonesia’s economic downturn is likely to be worse than previously expected as Southeast Asia’s largest economy struggles to contain the coronavirus pandemic, says the International Monetary Fund (IMF).

Indonesia’s gross domestic product (GDP) is now expected to shrink by 1.5 percent this year rather than the 0.3 percent contraction the IMF had projected in June.

The downward revision for Indonesia comes as the IMF has turned less pessimistic about the global economy, according to the October update of the World Economic Outlook, published on Tuesday.

Indonesia’s economic state remains precarious because of the continuing spread of the pandemic and the adverse impact on severely affected sectors, such as tourism, the Washington-based institution said.

“All emerging market and developing economy regions are expected to contract this year, including notably emerging Asia, where large economies, such as India and Indonesia, continue to try to bring the pandemic under control,” the IMF said in its report.

Indonesia has been struggling to contain the outbreak in the country as COVID-19 cases reached 340,622 with more than 12,000 deaths as of Tuesday afternoon, official data show. The country has been adding around 3,000 to 4,000 cases daily since Sept. 19.

The IMF projection is largely in line with the government’s estimate for a full-year contraction of 0.6 percent to 1.7 percent made in late September, down from GDP growth of 5.02 percent in 2019.

Indonesia’s GDP was down 5.32 percent year-on-year (yoy) in the second quarter due to falling household spending and investment, with economists and government officials projecting another contraction in the third quarter, which would mark a recession.

The global economy, meanwhile, is expected to shrink by 4.4 percent this year, a less severe contraction compared to the IMF’s previous estimate of 4.9 percent, due to better-than-expected second-quarter GDP data in countries where activity began to improve after lockdowns and signs of rapid recovery in the third quarter.

GDP figures could have been much weaker had it not been for “sizable, swift, and unprecedented” fiscal, monetary and regulatory responses that maintained income for households, cash flow for firms and credit provision, according to IMF economic counsellor Gita Gopinath.

“Collectively, these actions have so far prevented a recurrence of the financial catastrophe of 2008 and 2009,” she said in the report. “While the global economy is coming back, the ascent will likely be long, uneven and uncertain.”

The pandemic will reverse the progress made since the 1990s in reducing global poverty and will increase inequality, as the IMF expects nearly 90 million people to fall into poverty this year.

In Indonesia, the government has said it expects an additional 4 million Indonesians to fall into poverty and 5.5 million people to lose their jobs during the coronavirus pandemic.

The IMF expects the global economy to rebound and grow by 5.2 percent in 2021, while Indonesia’s economy is expected to expand by 6.1 percent.

Although social distancing would continue into 2021, it may fade over time as vaccine coverage expanded and governments’ fiscal support was extended, IMF said. 

Risks, however, loomed for the global economy, such as further outbreaks, premature withdrawal of policy support as well as liquidity shortfalls and insolvencies.

As countries reopened their economies, the IMF urged governments to support the recovery by facilitating the reallocation of workers and resources to sectors less affected by social distancing and providing stimulus where needed.

“[Furthermore,] investment in healthcare, education and infrastructure projects could help support the economy,” it said. “Moreover, as lifelines are unwound, social spending should be expanded to protect the most vulnerable where gaps exist in the safety net.”

The government’s efforts to contain the pandemic and extended fiscal support would help boost economic growth to 5 percent in 2021, the Finance Ministry’s Fiscal Policy Agency director for state budget policy, Ubaidi Socheh Hamidi, said on Tuesday, adding that a rise in commodity prices and accommodative fiscal and monetary policies would help lift the economy.

“With consistent government efforts, we expect growth at 5 percent next year, despite the risks of an escalating outbreak and uncertainty surrounding [coronavirus] vaccines and the global economy,” he told a discussion. “We expect a rebound next year, but we will be careful going forward.”

The government will prepare Rp 2.75 quadrillion (US$186.3 billion) in state expenditure to fuel the virus-battered economy next year, with a large chunk of the spending allocated to infrastructure, education and health care.