Is the Economic Recovery Task Force up to the task?
IO – It’s been seven months now since the Covid-19 pandemic started to haunt our social and economic way of life. It’s unimaginable that the year’s challenges turned out to be more complex than we previously expected. Last year’s economic slowdown was supposed to be the beginning of our economic recovery. But exactly the opposite happened. Our economy is sliding further downhill and now suffering negative growth.
All due to the Covid-19 pandemic. The restriction in social and economic life has resulted in business screeching to a halt. Purchasing power is significantly down, leading to weakened household consumption. In turn, investment also plummeted, as exports and imports contracted due to the global demand being destroyed by the pandemic. Thus, negative economic growth becomes inevitable. Only a few countries are still able to witness positive economic growth and that has been made possible by their ability to bring the pandemic under control.
Since the beginning, the pandemic response strategy has been dilemmatic. The first option is a strategy that focuses on pandemic mitigation, for example by imposing a strict lockdown, which means sacrificing the economy. A strict lockdown doesn’t give room for businesses to operate, causing huge losses. Large corporations and MSMEs will all close down, leading to a wave of retrenchments or furloughs. Most people will lose their income. Unemployment and poverty rate will increase.
This strategy can succeed in the early days of the pandemic only if the people are disciplined enough to endure a lockdown. But this strategy can no longer be an option when the pandemic has spread so far and wide that it becomes increasingly difficult to determine which areas need to be locked down. It will be even more impossible to do when society has a poor level of discipline to comply with lockdown measures.
Only a few countries are successful in containing the pandemic through strict lockdowns. One of these is China. China can be said to have beaten the Covid-19 pandemic, which has enabled their economy to gradually recover. In contrast, other countries that had also implemented a lockdown are not as fortunate as China. Lockdown without strong discipline only serves to plunge those countries off a recession cliff. Argentina is a fitting example in this respect.
The second option is a strategy that prioritizes the economy. Ignore the pandemic. There are no restrictions whatsoever on social and economic activities. Factories and malls can still operate as they would normally. People can still gather without any worries. This strategy generally results in a dramatic increase in cases and deaths. The poster boy in this case is the United States of America.
Indonesia, on the other hand, has from the start avoided the polar extremes mentioned above. Indonesia didn’t choose a strict lockdown strategy because it seems that the Government is aware that the discipline of our people is not strong enough to support the implementation of a lockdown. In addition, the Government also calculated that it wouldn’t be feasible to keep funding the lockdown through cash handouts and job retention schemes, especially when it can’t be ascertained when the wave of infections will be over. However, the Government also can’t ignore the deadly coronavirus. Ultimately, the Government chose the middle way – a difficult balancing act between handling the Covid-19 and safeguarding the economy at the same time.
The Government’s policy in tackling the Covid-19 pandemic while protecting the economy initiated a stimulus program, which at that time costed Rp405 trillion. In later developments, the Government didn’t only increase the budget but also tried to bolster the management of the pandemic response and its collateral damage. The Covid-19 stimulus measure was then increased to Rp695 trillion. Meanwhile, to improve the management of the pandemic response, President Joko Widodo issued Presidential Decree No. 82/2020 on the Covid-19 Response and National Economic Recovery Committee.
Economic Recovery Task Force’s Missions
Based on the decree, the President will exert direct control and monitoring capability over all policies related to the handling of Covid-19 and national economic recovery. Under the President is a Policy Committee tasked with making recommendations on appropriate policies and strategies. The Policy Committee consists of the Coordinating Economic Minister as the Chairman, assisted by six deputies, consisting of the Coordinating Maritime Affairs and Investment Minister, the Coordinating Political, Legal and Security Affairs Minister, the Coordinating Human Development and Cultural Minister, Finance Minister, Health Minister and Home Minister.
At the operational level, there is a Chief Executive whose responsibilities are to execute the policy in the field and coordinate the two task forces (the Covid-19 Handling Task Force and the National Economic Recovery and Transformation Task Force). The former is headed by Doni Monardo, while the latter is led by Budi Gunadi Sadikin, who is also the Deputy SOE Minister.
The programs carried out by the National Economic Recovery (PEN) task force aims to protect, support and improve the economic capacity of business actors in carrying out their businesses during the Covid-19 pandemic. PEN programs are expected to rejuvenate demand as well as the supply side.
On the demand side, the Government has initiated a program called the Acceleration and Strengthening of Subsidies and Social Assistance for the Poor and Vulnerable Communities. Here, the Government increases the amount of staple food assistance, strengthens the pre-work card program, exempts electricity tariffs for customers with small electricity connections, and increases the distribution of the Family Hope Program.
In line with its objective to protect and support the business sector, PEN programs are directed toward the Micro, Small and Medium Enterprise (MSME), large corporations and State-owned Enterprise (SOE) in the form of state expenditures (including the provision of interest subsidy for MSMEs), fund placements in banks, working capital loans guarantee, state capital injection for SOEs, or in the form of government investment.
For MSMEs, in particular, the PEN program is expected to not only increase their resilience but also their performance, so that they can contribute more to the Indonesian economy, especially during the pandemic.
The program’s total allocation for MSME is Rp68.21 trillion, which consists of an interest subsidy (Rp34.15 trillion), income tax exemption (Rp28.06 trillion) and working capital loan guarantee (Rp6 trillion).
For large corporations, support was given in the form of import duty exemption, a corporate income tax cut, VAT refunds totaling Rp34.95 trillion and fund placement in banks for loan restructuring, worth a total of Rp35 trillion.
Assistance to SOEs is provided in the form of a State Capital Injection (PMN), compensation payments, working capital investment, as well as other forms of support such as SOE optimization, bill repayment, loss limit guarantee, delaying dividend collection, loan guarantee, and covering payments for national strategic projects.
We can clearly see the breath of the PEN program which implies the enormity and complexity of the challenges faced by the Government in its efforts to resuscitate the national economy.
Realization and effectiveness of PEN programs
Up to the end of September 2020, the realization of the PEN program budget has reached 45.8% or equivalent to Rp318.48 trillion of the total PEN budget of Rp695.2 trillion. For the four programs that are the main focus of the task force, namely social assistance, support for MSMEs, ministries/institutions and local governments, as well as corporate financing, the realization of budget has reached Rp268.49 trillion.
Despite the task force’s hard work to accelerate the realization of the PEN program and budget, it seems unlikely that our national economy will avoid a recession. Economic growth in Q3 is predicted to still remain in negative territory at -3%. This means that Indonesia’s economy has posted negative growth in two consecutive quarters and is therefore technically in a recession.
A recession does not mean that the PEN program has failed. Recession has indeed become the new normal in the midst of a pandemic, experienced by almost all countries. The restriction put on social and economic activities has skewed the economy and led to negative growth. As long as the pandemic persists, economic growth will be difficult to achieve. An indicator of success of the PEN program is actually not economic growth. According to its objectives, the PEN program is aimed at building the resilience of the community and the business sector in coping with the Covid-19 pandemic with the hope that once the pandemic is over our economy can rebound quickly. The PEN program was designed with the concern in mind that if the society collapses or businesses go bankrupt during the pandemic, it will be difficult to jumpstart the national economy once the pandemic is over. When this happens, then PEN program would be adjudged a failure.
With only two months left, the PEN task force must work hard to ensure that all programs and budgets can be fully realized. The task force has laid out the steps it will take to achieve this target, namely, extending of various programs up to December 2020, accelerating approval and their realization, redesigning existing programs to make them more effective, and accelerating the bureaucracy streamlining program.
Even though it is highly unlikely that economic growth will return to the positive territory in 2020, the full realization of the PEN program and budget will be of great support to the community and business sector in surviving the pandemic.
Synergy among authorities
The success of the Covid-19 Response and National Economic Recovery Committee will highly depend on the synergy between the Government and other authorities, namely Bank Indonesia as the monetary authority and the Financial Services Authority (OJK) which regulates and oversees the financial industry.
In many countries, the central bank played at least two major roles in national economic recovery efforts. First, to implement conventional monetary policy, namely monetary easing in the form of lowering interest rates, decreasing reserve requirements, as well as a more expansionary approach to monetary operation. This conventional policy has been implemented by Bank Indonesia since early 2020 before Covid-19 arrived in Indonesia in March.
Secondly, fiscal stimulus financing, by buying government bonds in the primary market and private placement market. This is categorized as unconventional monetary policy and is often called “quantitative easing”.
In addition to the two major roles above, central banks in several countries, such as the Fed in the United States, have played an even bigger role, namely by providing direct financing to MSMEs and big corporations.
Although BI stopped short of providing direct financing to MSMEs and big corporations, it has done its best to boost national economic recovery. The willingness of BI to undertake burden sharing, buying government bonds was very helpful in financing a variety of PEN programs. This burden-sharing cooperation is expected to continue until 2022.
Other than burden sharing, BI also played a major role in the PEN program through monetary easing policies, by lowering interest rates and the reserve requirement. During the pandemic, BI has lowered interest rates by 50 basis points and decreased the benchmark interest rate to a record level in the history of monetary policy in Indonesia. In addition, BI has decreased the reserve requirement several times, which in turn increased bank liquidity. Lower benchmark interest rates and abundant bank liquidity will greatly assist the Government in achieving PEN program targets.
Likewise, OJK also plays an important role in the success of the PEN program. The speed with which OJK responds to the impact of the Covid-19 pandemic by issuing a policy on loan restructuring has greatly boosted the resilience of the business and financial sector.
Due to the pandemic, many companies are feeling tremendous cash flow pressure. Revenues have fallen dramatically while costs remain high, among others, principal and interest repayments. OJK’s policy to loosen loan restructuring provisions provides opportunities for companies to negotiate with banks, restructure principal and interest repayments in accordance with the company’s financial capabilities, so that their cashflows can remain positive. The loan restructuring has not only helped save companies from cashflow problems, but also helped banks avoid getting loaded up with bad debt.
OJK swiftly responded by issuing OJK Regulation No. 11/2020 on National Economic Stimulus as a Countercyclical Policy on the Impact of Covid-19 Pandemic, which includes relaxing debt payments, has had a positive impact on the resilience of the business sector as well as maintaining the stability of the banking system. As of August 2020, the quality of bank loans was well-maintained, as can be gleaned from the ratio of non-performing loans (NPL) which remained in a healthy range of 3.2%. With well-managed NPL, the banks’ capital adequacy ratio (CAR) can be maintained well above the minimum standard as prescribed by the Basel regulations. The banking industry’s CAR until August 2020 was still in a range of 23%.
Another indicator that shows the resilience of the banking system amid the pandemic is liquidity. The banking industry’s loan-to-deposit ratio in August 2020 was in a range of 87%. This indicates that Indonesian banks have sufficient liquidity. This cannot be separated from the growth of third-party funds, which continue to increase amid a credit crunch.
Vaccine and health protocols
The economy can only fully recover only when the pandemic is truly over. In this quest, a vaccine plays a critical role. Even so, it isn’t a wise move if we depend solely on vaccine as a solution.
Even when a vaccine is discovered, the process of distributing and administering vaccinations to millions of Indonesians will take a long time. In the meantime, the Government must ensure the new normal works through, among others, enforcing discipline in following the health protocols. Without this, vaccine availability nonetheless, Covid-19 handling will not be swift and complete and ultimately a PEN program can’t be fully effective and national economic recovery will be slow.
Conclusion
The relaxation of Large-scale Social Restriction and implementation of PEN program over the last few months, as indicated by higher budget realization, has to some extent jolted the economy back to life. Macroeconomic indicators such as the real sales index have trended upward, which many economists believe will be followed by improved household consumption. This is supported by a gradually-rising consumer confidence index. Meanwhile, on the supply side, the business sector is witnessing an increase in the purchasing manager index (PMI). In August 2020, the PMI index has even passed the 50 mark, which indicates that companies are starting to expand their business.
Even though the macroeconomic indicators above are still very fragile, they at least signal that our economy is still surviving amid the unprecedented pressure of the Covid-19 pandemic. The improvement in several economic indicators also indicates that the direction of the national economic recovery policy is well on track.
The effectiveness of the PEN program should not be measured by the rate of economic growth. Economic growth in Q3 and Q4 is believed to be still in negative territory but that is no reason to say that the PEN program is ineffective. The success of the PEN program should be seen in the resilience of society and the business sector, because only their survival can ensure that national economic recovery can successfully occur once the pandemic is defeated. (Dr. Piter Abdullah Redjalam, SE, MA)
Dr. Piter Abdullah Redjalam, SE, MA is an economic observer. He graduated from the Faculty of Economics, Universitas Gadjah Mada (UGM), Yogyakarta with a major in Management. From 1994 to 2017, he served in Bank Indonesia, with the last position as Deputy Director in charge of monetary policy. He then joined the macroeconomic working group of the National Economic and Industry Committee (KEIN) and Deposit Insurance Corporation (LPS) as Research Advisor. Since 2017, he has been the Research Director, Center of Reform on Economics (CORE) Indonesia and actively taught as a lecturer in Perbanas (Banking) Institute.