Managing Director of the Political Economy and Policy Studies (PEPS)
IO – The title for this article is taken from the episode title of the Indonesia Business Forum talk show, broadcast in TVOne on 3 July. The title aroused varied reactions among the people, especially the term “fragile economy”. Some people disagreed and protested. According to them, Indonesia’s economy is currently doing fine, even doing well with a growth rate of 5%. How can such a condition be called a “fragile economy”?
On the other hand, others opine that the title reflects the reality of our economic condition: it is fragile. Therefore, the title should be appreciated for reflecting truth and honesty. Only by honestly admitting the truth, no matter how bitter it may be, can we know our weaknesses and find the solution to resolve it. On the contrary, “if it makes the Boss happy” or “if it makes the people happy” false flatteries would bring our people’s economy to the brink of destruction.
The word “fragile” per se need not carry a negative connotation. “Fragile” in the dictionary means “delicate” or “weak. “Fragile economy” can mean that our economy is either in a weak or delicate condition. Last year, several foreign media also wrote down Indonesia’s economic condition as “fragile”.
Indications of the Indonesian economy’s fragility are as follows:
First, actual economic growth in 2015-2018 (i.e. for 4 years) was a mere 5.04% per year, far below the initial target of 7%. This low rate of growth naturally does not imply a strong economy in Indonesia. It was even lower than the 2010-2013 economic growth rate (also for 4 years) in the previous government at 6.0% per year. Therefore, Indonesia’s current economy is weak, or at least weakened in comparison than in the previous term – or even in comparison with the target.
Second, tax income ration to the GDP continues to drop from 11.36% in 2014 to 10.25% in 2018. In fact, in Q1 of 2019, the tax collection ratio was only 7.4%. This is a worrisome condition. We need to question the Government’s fiscal abilities, as such weak fiscal condition would necessitate the rise of taxes and fees in order for the State Treasury to be replenished. In turn, that would cause further negative impact on economic growth. Low tax ratio strips the Government of its power, limits its ability to stimulate the economy, increases budget deficits and increases foreign debt.
Finally, the performance of trade balance and current transaction balance is a major cause for concern. Exports have sagged. Highest export performance occurred in 2011 with an export value of USD 203.5 billion. In 2018, Indonesia’s exports were a mere USD 180.06 billion. On the other hand, imports increased. In 2011, imports were recorded at USD 177.44 billion, and in 2018 they rose to USD 188.63 billion. Therefore, our trade balance dropped from a surplus of USD 26.06 billion in 2011 to a deficit of USD 8.57 billion in 2018, which is the worst trade balance performance in Indonesian history.
Current transaction balance has also worsened. Last year’s deficit was USD 31.06 billion, or equal to 2.98% of GDP. Current transaction deficit in Q1 of 2019 worsened to USD 6.97 billion, much higher than the Q1 of 2018 deficit at USD 5.2 billion. Consequently, the Government’s foreign debt magnified ominously. In the 4 years of the current Government’s term (2015-2018), Governmental foreign debt increased USD 59.39 billion, from USD 123.81 billion at the end of 2014 to USD 183.2 billion at the end of 2018, for an increase of 47.97%. On the other hand, during the first 4 years of the previous Government’s term, Governmental foreign debts increased only 25.8%.
From the above explanation, it is very clear that Indonesia’s economic condition in the past 4 years really has become fragile.