IO – The pandemic has forced all types of businesses to feel a painful blow. Economic growth contracted to negative 5.32% in the second quarter of 2020. Followed by a spike in the number of layoffs, estimated at more than 15 million workers, by the end of 2020. This figure does not include those on unpayed leave. Major sectors, such as manufacturing, transportation and tourism services are struggling to recover.
To deal with the contraction, Government has instituted various forms of economic rescue package, particularly in the SME sector. It is important to note that the SME sector has been the strongest during every economic crisis in Indonesia since 1998, and even in 2008, when there was a global recession. During severe economic downturns, SMEs are still able to absorb labor, and when there are mass layoffs in the formal sector, SMEs are ready to accommodate migrating workers, especially from industrial areas to rural or suburban areas.
SMEs Should be Prioritized
Based on official data, SMEs absorb approximately 97% of the total workforce, meaning they must be saved first as a priority sector. However, in fact the portion of assistance for SMEs in 2020 only reaches IDR123 trillion. This figure is far below the stimulus for corporations, both directly or indirectly, including the placement of government funds in banks.
The economic stimulus approach that focuses too heavily on large-scale companies will actually slow down economic recovery, due to the strong connections between conglomerates in the financial sector in Indonesia and the international financial sector. An approach based on large-scale economic interests also shows the influence of oligarchy on economic policies during the pandemic. This inequality between SMEs and corporate stimulus means that the government does not appear to be serious in dealing with problems facing SMEs. On the other hand, the situation in 2020 is clearly different from previous crises.
In 2020 almost all SMEs have suffered income pressure. In simple words, SMEs also feel the significant impact of the pandemic. Therefore, in order to revive the economy more quickly, there is no other way but to continually add and expand assistance to SMEs. But far from ideal, SMEs received 17.7% shares of a total of IDR695 trillion in stimulus packages known as PEN.
Table 1.1 Share Split of Stimulus Packages in 2020
The SME stimulus package in 2021 has even decreased by -60.5%, from IDR123.4 trillion in Presidential Decree 72/2020 to IDR48.8 trillion in the 2021 Draft State Budget. However, sectoral ministries and local government received a 28.8% higher budget level over the previous year. This increase indicates that the Government is reverting to encourage bureaucratic spending in the form of personnel and material expenditures, rather than direct stimulus to business actors. The Government has also provided a budget for infrastructure development, of IDR414 trillion in 2021. This also marks the return of the large-scale infrastructure project regime, one which is assumed to be able to revive the economy, but this assumption is actually incorrect because what is needed now is not grand megaprojects such as relocating a new capital or construction of toll roads but rather economic recovery based on SMEs.
Table 1.2 Comparison of Govt Stimulus Allocations in 2020 and 2021
Problems of SME Stimulus
There are several forms of SME support that need to be underlined, one of which is assistance in the form of tax incentives, whose realization is still very low because the government does not carry out automatic programs for SMEs to get tax incentives. SMEs have to submit complicated forms themselves in order to get tax incentives from the government. Indeed, these methods actually mean the fiscal incentives for SMEs cannot be maximally absorbed.
Besides tax incentives, there are other problems related to SME stimulus packages which are still constrained by interest subsidy assistance. In connection with the ineffective UMKM stimulus, the Government consciously acknowledges that some of the stimulus in SMEs are not calculated accurately or there are miscalculations. For example, the interest subsidy stimulus where the budget ceiling reached IDR35.2 trillion, but turns out that only IDR 2.5 trillion or 7.2% was disbursed. The rate of disbursement of this interest subsidy is relatively low. Even within a few months the bank did not distribute any interest subsidies. This condition is certainly contradicting the needs of SME debtors who need financial assistance from the Government to survive. More than 90% of Indonesia SMEs need financial assistance from the Government to continue their business based on ADB Survey during the ongoing pandemic.
Due to problematic inter est rate subsidy, government launched another program, directly disbursing SME cash handouts. Productive assistance in the form of cash needs to be recognized as a breakthrough to save SMEs even though this assistance is very late because it was only done when the pandemic situation was so severe and SMEs barely received significant assistance from the start of the pandemic to the end of first semester of 2020.
However, the same problem might occur again. The crucial problem in the UMKM interest subsidy program and cash transfer lies in the concept of government assistance, which is too dependent on the banking system to help SME entrepreneurs. Banking services are a type of business that before the pandemic have kept their distance from SME debtors. Some evidence supports this thesis, one of which is that financial inclusion in Indonesia is still relatively low and credit penetration to GDP has not yet reached 40% compared to other countries that are already above 100%, such as China, Singapore and then Malaysia. The question is thus, why does the government rely on banks to channel stimulus to SME businesses? Why not cooperatives?
Why don’t they use Cooperatives instead of Banks?
The low involvement of cooperatives is reflected in the Government’s minimal support for the non-bank financial sector. The cooperative was effectively abandoned. In fact, the cooperative has created a much better mechanism for distributing funds to SMEs. Indonesia has 126,000 cooperatives. One of the advantages of cooperatives is that they have a better understanding of the characteristics of SME debtors, including the risks to SME debtors, especially the micro and ultra-micro segments. The Ultra-micro segment is an “unbankable” segment and occupies a portion of 98% of total SMEs, so that the Government naturally should see the function of the cooperative as a partner or main partner to distribute aid to SMEs. The problem of implementation of government SME stimulus package was terrible. The cooperative management, for example, already complained because the government only asked SMEs for data. However, the mechanism for channeling cash transfers or productive assistance or interest subsidies still uses a conventional banking mechanism.
The government must also ensure that the provision of assistance is effective and right on target. Why? because in a very short time it does not rule out that there are a lot of invalid SME business actors or fictitious SME business actors. This fictitious SME means that these purported SME business actors suddenly become active business actors to get government financial benefits: even though the fictitious SMEs previously had a business that was no longer active, they still qualify for support from the government. This type of recipient competes to get permits in a very short time so that they could be included as recipients of UMKM subsidy assistance.
In addition, when we see that the government is speeding up provision of assistance to SMEs, it is clear that this level of supervision of funds has been very low. During the pandemic it become clear the stimulus package was very easy to corrupt. Therefore, we suggest the role of the anti-corruption body (KPK), the role of the Attorney General’s Office and the role of the police and the participation of the public or the public must be optimized. This effort is in fact very important so that supervision can be tiered and enable the recipients of this aid to actually receive assistance.
The opportunity for deviations from aid funds for SMEs also increases during regional elections or Pilkada in many regions. It can be risky where some candidates take advantage of stimulus from the government to attract votes from the public. Moral Hazard will only make assistance to SMEs less effective because the targets may be misled.
Other technical problems of SME cash transfers are related to the readiness of banks to distribute cash assistance. From several observations, there are some banks that experience a shortage of money at their branch offices so that the time to take assistance is very limited while the number of recipients of SME assistance is lined up in front of the bank offices. This condition shows how the bank itself is not well-prepared to do business.
In particular, partner banks are still underperforming. It will take some time before there is a policy to distribute cash to SMEs: banks have to prepare themselves in terms of cash reserves at each branch office, especially in areas with large levels of recipients of SME assistance, so no problems will occur (such as running out of cash when recipients show up).
Another problem is related to the information on cash transfer to micro-business where the beneficiary must check the bank or check the website. It turns out that there are problems in terms of access to the internet, access to information and communication. Access to information is still very limited for many micro and ultra-micro business owners, so that many are not aware that there will be assistance to SMEs in the form of cash assistance. Thus, widerange information is needed not only through the media and online program, but also as a government official responsibility to ensure every SME receives funds.
Another big issue is related to the effectiveness of cash handout to SMEs, because the funds should be used to encourage SMEs or increase SME business expansion in the midst of a pandemic. However, many SMEs take advantage of this productive assistance by buying goods that have nothing to do with their business. This situation will certainly have an impact on the effectiveness of SME assistance, because such assistance is aimed at buying raw materials or capital goods, so that SMEs can start their business. This is where there is the importance of continuous evaluation and monitoring. For instance, monitoring can be in the form of random sampling or randomly selecting SME cash transfer recipients, so that it can be seen whether the assistance is truly effective in increasing business capital or makes no difference compared to other forms of assistance, such as Program Keluarga Harapan (a program for poor families).
Cash Handouts are Not Enough
In other countries, for example, there have been a lot of stimulus packages given to SMEs, for example not only by providing cash transfers but also providing free internet packages. The Malaysian government with PENJANA Package already disbursed free internet for SMEs. This program will help SMEs move into the digital ecosystem. The other program provides incentives for SMEs by covering shipping costs or parcel logistics costs. In Singapore, SMEs are also given lots of incentives, such as The Enterprise Development Grant (EDG) which supports projects that help companies upgrade their businesses, innovate or venture overseas. The EDG specifies 3 core areas that the project can fall under, namely: core capabilities, innovation and productivity and market access. A more extreme case is in the UK where the government provides incentives in the form of salary subsidies of up to 80%, so that SMEs can survive and not lay off their employees.
Time to Go Digital
Government stimulus packages also need to understand changing of the economic landscape during a pandemic. The impact caused by the pandemic encourages changes in consumer behavior in shopping. Data on the increase in online shopping during the pandemic shows increases of 26%, based on a study by Bank Indonesia. Society is forced to accept digital transformation as a necessity – no longer a dream of the future. On the other hand, the millennial generation, amounting to 90 million people, is the main motor in digital transformation. It could be said that during the pandemic there was a digital bonanza. A significant increase due to changes in the global economic landscape. The term bonanza was popular in the 70s when the price of crude oil gave Indonesia an unexpected windfall. Today what is happening is not a commodity bonanza, but a digital bonanza.
Digitalization helps SMEs expand the market while also keeping SMEs afloat by posting their products in a simple way on social media, for example, or on existing e-commerce platforms, as several studies prove that SMEs adapt more quickly in terms of turnover; the Digital platform can still be maintained compared to SMEs that rely on conventional methods in the midst of a pandemic situation.
When the benefits of digital transformation are felt, unfortunately there are important sectors that have been left out. Only 13% of SMEs have joined the digital platform. The rest are still doing business conventionally. The use of the internet is not optimal due to at least three things, limited information, barriers to access, and insufficient integrated digital services. For the first reason, digital literacy in Indonesia is still a challenge. Based on the 2019 World Digital Competitiveness Ranking, the adaptation component of Indonesian society to digital technology is ranked 60th out of 63 countries. Meanwhile, the micro and ultra-micro sectors feel that special knowledge is needed to use digital applications.
SMEs also need assistance so that it is easier for them to enter the digital ecosystem and this assistance should be provided by the Ministry of Cooperative and SMEs. The personal assistance can also take the form of collaboration with local governments, OJK and existing digital economy platforms, such as e-commerce platforms or online transportation. Personal assistance for ultra-micro-scale SMEs will be much more effective in targeted assistance to help SMEs to more easily market their products digitally and can also help SMEs to carry out quality control. The assistance provided by government then also makes SME products more attractive in terms of digital marketing and also provides instructions to SMEs on how to penetrate the export market. The portion of SMEs itself in exports is still very small, namely in the range of 14% of total non-oil and gas exports. so that the current situation should be utilized by SMEs to explore the export market. For example, economic improvement in the United States where economic growth has begun to improve, compared to the situation in the second quarter. of 2020: if SMEs are given assistance as well as assistance for exports, this will be a momentum to increases their competitiveness in international marketplaces.
Of course, as a step to support accelerated cooperation between digital economy and SMEs, internet access needs to be improved. This is related to the uneven infrastructure problem. Many entrepreneurs outside Java, for example, have not been touched by the digital economy bonanza due to unstable internet connections. Improvements to internet infrastructure is urgent. Data from the Speedtest Index shows Indonesia’s ranking in internet speed at 114 with an average speed of 16.9 Mbps. This ranking is one of the lowest in Asean, because Malaysia is at number 85 and Vietnam is 62.
The government should also provide free internet access to SME entrepreneurs so that they can get free high-speed internet in addition to getting cash handouts. This effort is a form of real support for the strategy of going digital SMEs, considering that many micro and ultra-micro-scale SMEs have not enjoyed adequate internet access.
Other reform to help SMEs that are very fundamental are for example, a faster and lower reduction in credit interest rates for micro businesses. What micro businesses will face when government assistance has been used up? SME player will face high loan interest rates. The average interest rate for SME loan can be above 20 to 30%. So, this is the momentum to make changes that are structural, not just temporary assistance.
Another challenge for the development of SMEs after the pandemic is the credit penetration in Indonesia is still very low, at 42.8% of GDP. This figure is very low even compared to a poor country like Bangladesh which has a credit penetration of 64.1% GDP, Cambodia is 85.7% and Vietnam’s 141.9%. Low credit penetration also plays an important role in supporting capital for SME entrepreneurs.
[ Graph. Credit Penetration to GDP (%) ]
It can be concluded that the assistance provided by the government to micro and ultra-micro entrepreneurs is not only insufficient in terms of numbers but also ineffective in terms of its distribution mechanism. Therefore, future improvements require more transparency, accountability mechanism and more importantly accuracy of targeted recipients of assistance. In addition to that, SME assistance should be combined with the UMKM go digital program so that there is continuity between government assistance and efforts to increase the portion of SMEs on digital platforms. (Bhima Yudhistira Adhinegara)
Bhima Yudhistira Adhinegara, INDEF (Institute for Development of Economics and Finance) researcher. He earned his Master’s degree in Finance from University of Bradford, UK and his Bachelor’s degree in Economy from the Faculty of Economics of Gadjah Mada University. He is active in financial market, banking, and digital economy researches.