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Economic, fiscal resilience set solid foundation for exit strategy
One of the most imminent downside risks to the economy is related to the United States Federal Reserve’s upcoming monetary tightening.
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Back in business: Workers assemble Isuzu Traga trucks at an Isuzu factory in East Karawang, West Java, on Aug. 3, 2020. (JP/Seto Wardhana)
F
iscal policy is one of the most important instruments to fight the pandemic. Despite working hard with a budget deficit almost three times its normal ratio to gross domestic product to fight health and welfare loss, Indonesian fiscal policy has remained prudent. The government, therefore, has a solid foundation for a smooth post-pandemic exit.
One way to look at it is by comparing Indonesia’s economic output in 2021 with its pre-pandemic level (2019). In an index where above 100 represents an increase from the previous level of economic output, the country scored 101.1, meaning it has returned to pre-pandemic growth levels. Other emerging economies that have returned to pre-pandemic levels are Vietnam (104.9), while developed countries that have returned to pre-pandemic growth include China (110.5). On the other hand, many countries, such as Thailand (94.4) and the Philippines (94.3), have yet to meet pre-pandemic growth levels.
The recovery was also generally faster than the previous crisis, the 1997-1998 Asian financial crisis. The economic recovery from the 1998 crisis took five years. For the manufacturing sector, it took more than three years to return to pre-crisis levels. Meanwhile, the construction sector only returned to its pre-crisis level seven years later.
During the COVID-19 period, data shows that the economic recovery process has been sensitive to changes in the pandemic. However, in the third quarter of 2021, the manufacturing and construction sectors began to return to pre-pandemic levels.
The recovery was also of high quality. By 2021, the poverty rate had returned to a single digit, just like pre-pandemic levels, namely to 9.71 percent, from 10.19 percent in 2020. The large budget allocations for social safety net programs should be credited with the poverty decline. Without social protection, the World Bank had predicted that the poverty rate would climb to 11.4 percent in 2021.
The unemployment rate also fell by 0.58 percentage points from 2020 to 2021, or by 670,000 people. Furthermore, the level of inequality as reflected in the Gini ratio also decreased to almost the pre-pandemic level of 0.381 (2020: 0.385).
Fiscal policy remained prudent with an accumulated deficit of 10.8 percent of GDP in 2020-2021. Other emerging market countries have larger accumulated deficits: such as Malaysia (11.1 percent), Thailand (11.6 percent) and the Philippines (13.4 percent). Only a few countries, such as Russia (4.6 percent) and Vietnam (8.6 percent), had lower accumulated deficits. The latest IMF assessment also confirmed Indonesia’s fiscal credibility.
