Don’t take crises lightly

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Didik J. Rachbini Institute for Development of Economics and Finance (“Indef”) Senior Economist and Chairman of the Economic and Social Research, Education, and Information Institute (Lembaga Penelitian, Pendidikan dan Penerangan Ekonomi dan Sosial – “LP3ES”) Central Management Council

IO – The weakening of our currency’s exchange rate has been going on for 4-5 years, while there have been practically no significant or serious measures taken to slow it down. Perhaps it would be better to say that the economic policies currently being implemented are not capable of halting the decaying exchange rate. The strongest point was 5 years ago, when it stood at Rp 9,000.00 per USD, while our currency has now fallen as low as Rp 15,000.00 per USD. Without taking single periods into account, the exchange rate within this time frame has weakened by 60%. Partial data used to obtain exchange rate weakening indicate an 8% loss just within the last few months.

The clever practice of “data polishing” (in order to make the situation look good) has been going on for such a long time that the Government has neglected its duty to implement valid macro-economic policies that focus on actual vital issues. Exchange rate weakening over the past 4 years has been the worst in history. What’s more, according to Faisal Basri, this year’s average exchange rate has been the most acute fall so far.

A sudden controversy has arisen among the public, as people do not understand the process: the controversy as to whether Indonesia is going to suffer another crisis like the one that befell it in 1998. One side thinks that the exchange rate has triggered a crisis in heat, like back in 1998, while the other extreme believes that the economy is fine and no crisis is in sight. This controversy is further confused by a continued cover-up and image-building campaign, while the Government persistently refuses to focus on actual issues. The harsh exchange rate weakening of about 60% within 4 years is a clear indicator that current macro policies are neither prudent nor effective, and people are beginning to suspect that they are being fed intensive image-building only.

Graph of IDR-USD Exchange Rate from 1967 to 2018
The issue is not in the controversy, wherein one side considers that Indonesia is heading towards a crisis.  The conditions are different: the economy in 1998 was marred by political weariness: a crumbling, ineffective power structure that no one knew how to terminate or when it would be replaced. In this era Indonesia’s political and economic structures are more open, so that all possibilities are shown transparently. However, this does not automatically mean that our economy is crisis-free or that the exchange rate is under control. The attempt to polish existing macro-economic data generates an impression that Indonesia’s economy is fine. This will boomerang back on us later on, as careless behavior will sooner or later really push Indonesia’s economy over the edge and into a genuine crisis.

The 60% weakening of our exchange rate for several years should automatically be able to stimulate exports, which would then help both the trade balance and the current balance. However, these two crucial balances are in conflict because there is an absence of suitable economic policies that can withstand hostile external pressures. When the Rupiah fell to a rate of Rp 15,000.00 per USD, the action taken was to spin an external image that the nation’s economy was doing fine. The odd thing is that this explanation was accepted implicitly and believed by the public, while in fact it was a cover-up and image-building exercise.

 

We have an acute problem that we really cannot resolve: current balance deficits. Yet there have been no systematic effective efforts to resolve this, a key structural issue that we never bothered to resolve, or at least ameliorate its magnitude. The Government continues to allow this structural illness to run its course, and even covers up the situation by regularly stating that macro-economic management is being carried out both carefully and prudently. If so, how is it that last year’s current balance deficit reached no less than USD 17.3 billion? And if economic policies are considered casually, maintaining “business as usual”, we estimate that next year’s deficit will reach more than USD 24 billion!

In fact, we are suffering from another structural illness apart from a deficit in the service balance: a trade balance deficit, which is no less than USD 3 billion. Do not make the mistake of taking this structural illness lightly, by saying that macro-economic policies are “being implemented carefully and prudently”! As long as this macro indicator continues to worsen, a thousand “prudent” and “careful” policies will mean nothing, as the economy will continue to spiral downward. Do not be deluded by the great mass media and colorful social machinations that make existing futile policies seem to be careful and prudent.

Above and beyond issues of foreign trade, the Government also suffers from a primary deficit in the State Budget, signifying that it is insufficient to fund our country’s expenses, let alone pay down outstanding debts. The acute level of deficits means the Government is forced to seek fresh loans, not only to repay current debts but also to cover its deficits. The amount of debts to be repaid – both principal and interest – thus swells year after year. Repaying interest is inevitable, but payment on the principal is delayed and cut into more and more tiny instalments, “kicking the can down the road” and creating a burden for future governments. Again, is such behavior proof of prudence and care? Any clear-headed economist would naturally say “No”, but glamorous economists who care only about looking good will massage and play around with statistics and indicators.

In conclusion, it is sad to have to report that our President does not seem to be aware of the dire fact that our economy is sick. This may be because his ministers only show him polished data, or data viewed from special angles, to make it look like that our economy is healthy. The above data plainly display how Indonesia is actually suffering from multiple crises: a service balance deficit, a current balance deficit, a trade balance deficit and as well a primary State Budget deficit. These critical indicators show that Indonesia’s economy can, and is very likely to, erupt into another full-blown crisis. We should not just play around with statistics – doing so is tantamount to lying to the public, and prevents us from actually seeking policies that might point to true solutions to our problems. It is better for us to admit our illness and find proper treatment, rather than persistently insisting that we are not at all sick, refusing to seek medical treatment and actually getting worse as time goes by.

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