Dillema and Consequences of Economic Policy Amid the COVID-19 Pandemic | By: Dyah Kartika

05 November 2020 | admin
Article, Essay & Opinion, Main Slide, Media

Yokyakarta, CPPS UGMThe Covid-19 pandemic, which first appeared in Wuhan at the end of 2019 and is facing uncertainty to its end, has brought an impact on various aspects. Not only hitting the health sector, but Covid-19 has also torn apart the economy in many countries, including Indonesia.

In the fourth quarter of 2019, the growth of Gross Domestic Product/GDP (Y-on-Y) was still at 4.97. Then, in the first quarter of 2020, during the early days of Covid-19 hitting Indonesia, the GDP (Y-on-Y) fell to 2.97 although it still showed a positive number. In the latest development, the GDP (Y-on-Y) in the second quarter of 2020 has contracted to -5.32 (Official Statistic News No. 64/08/Year XXIII, August 5, 2020).

Based on business fields, the agricultural sector is the only sector that still has positive growth. Meanwhile, based on expenditure, all types of expenditure have also contracted. Imports and exports were the expenditure sectors that experienced the deepest contraction, respectively -16.96% and -11.66%. Economic shocks due to the Covid-19 pandemic that hit almost all countries in the world have resulted in a decline in the prices of many export commodities and the sluggish global economy.

>Government’s expenditure in the second quarter of 2020 contracted to -6.90 due to the slow absorption of budget expenditures. The implementation of budget expenditure had only reached 48% until August 2020. The three ministries with the lowest budget absorption are the Ministry of Transportation (34.3%), the Ministry of Public Works and Public Housing (41.5%), and the Ministry of Health (43.6%). This prompted President Joko Widodo to give a harsh warning to all ministries to accelerate budget absorption more effectively.

In line with the enactment of the new normal and the relaxation of Large-Scale Social Restrictions (PSBB), some ministries are back on official travel activities to the regions. The activities are annually undertaken by the ministries. However, due to the pandemic condition that cannot be controlled and even the trend of adding cases is increasing, it is not wise to undertake many official trips let alone if the goal is only to accelerate budget absorption. Apart from being contradictory to an attempt to break the chain of the virus, this action also becomes a bad example for the community in responding to an ongoing pandemic.

Some of the costs of official travel can be diverted to programs that can boost household consumption instead of taking a lot of official travel which contracted to -5.51% in the second quarter of 2020. It is obvious that the government has implemented several policies to boost household consumption, such as 1) Maximizing the expansion of beneficiaries of the Family Hope Program (Program Keluarga Harapan/PKH) to 10 million Beneficiary Families (Keluarga Penerima Manfaat/KPM); 2) Changing the duration of PKH distribution to be per month; 3) Increasing the amount of PKH benefits and Non-Cash Food Assistance (Bantuan Pangan Non-Tunai/BPNT); 4) Providing subsidies for electricity costs; 5) Giving Pre-employment Card (Kartu Pra Kerja) program, and more.

In the short term, these programs help to maintain household consumption. However, in the long term, even after the pandemic has passed, there will be problems that must be anticipated, such as the widening inequality in society. The middle-upper class people have experienced a decline in consumption, but it is more temporary. Besides, their financial assets are saved because dollar-denominated assets currently provide good returns, the gold prices have increased, and the savings in foreign currency have increased as a result of the weakening of Indonesian currency.

In short, the middle-upper class of society are in a stable economic condition and are benefiting from the current situation. On the other hand, the lower-middle-class experienced a decrease in consumption as a consequence of reduced or lost income due to the restrictions on activities. Moreover, some of them are also the victims of Termination of Employment (PHK) affected by the efficiency made by the companies after the economic activities have not optimally run. In other words, they are a vulnerable group who will become increasingly poorer if the economic activities and labor requirements are not immediately back to normal.

The government is indeed facing a big dilemma in overcoming the pandemic and saving the economy. This year, the Indonesian state recorded a deficit of IDR 1,039 trillion. Bank Indonesia (BI), like central banks in other countries, is also experiencing a dilemma, helping the government to boost the economy or keeping the Indonesian currency exchange rate from weakening.

A strong rupiah exchange rate is so far combined with high-interest rates or yields as well as the capital to attract portfolio funds from abroad. Like it or not, it helps prop up the country’s foreign exchange and lower the current account deficit, even before the pandemic. However, keeping interest rates high will not help domestic business actors who are currently experiencing a slump. To revive the domestic economy, interest rates must be lowered, thus bank interest costs will also be lower.

Overall, the capital costs that must be incurred by business actors are also cheaper, so the economic activities can be more active and job opportunities will be more open. It is the choice taken by BI. By lowering the interest rates from around 5% to 4% as of July 2020, the government was able to push the economy even stronger. BI’s willingness to help the government is also able to reduce the deficit through burden-sharing mechanisms this year.

By taking government bonds in the primary market worth IDR 397 trillion, the government does not have to bother selling bonds to the market and can pay lower interest rates. This policy carries a high risk because it means that 1) BI will print new rupiah liquidity for the government, which will then weaken the rupiah exchange rate, and 2) BI’s independence as a monetary regulator is diminishing. In the end, these two things will reduce the interest of foreign investors to invest their portfolios in Indonesia.

The choice has been made after all. The government must be able to account for these choices and the consequences that may occur. In the meantime, foreign investment may not be as expected due to low-interest rates. In practical terms, the domestic economy must be boosted more. The new liquidity (new money) printed by Bank Indonesia (BI) in the amount of IDR 397 trillion as a result of the burden-sharing mechanism must be accountable for its use by the government.

Government programs, especially the national economic recovery program financed from this liquidity, must be effectively implemented to improve the economy of the people and the state. It is expected that this liquidity will be fruitless and cause new problems in the future. If the government wants to maintain global public confidence to give their investment in Indonesia, they need to reconsider its plans to request financial assistance from BI until 2022 and revise several regulations that have the potential to cut BI’s authority and independence.

The global public is doubt about investing its portfolio in Indonesia since the handling of Covid-19 in Indonesia is poor, as well as the burden-sharing policy made by the government and BI. Such doubt should not be compounded by unsettling issues regarding BI’s financing plans until 2022 and the revision of BI regulations. Although it is uncertain that it will be undertaken, its impact on Indonesia in the eyes of the global economy must be taken into account.

*Dyah Kartika, S.Si, M.Ec.Dev | Research Assistant at Center for Population and Policy Studies UGM | Illustration: M. Affen Irhandi/PSKKUGM