Tuesday, May 30, 2023 | 08:59 WIB

INDONESIA STRENGTHENS DOMESTIC ECONOMY – Gov’t demands Co’s repatriation of Foreign Proceeds


Jakarta, IO – The global economy is currently mired in uncertainty, with a number of countries experiencing extraordinarily strong inflationary pressures. In the US and UK, inflation rates hit 9.1 percent and 11.1 percent in 2022. In Indonesia, inflation touched 5.95 percent last year. 

To curb surging inflation, central banks across the world have raised their benchmark interest rates. The Fed, for instance, raised US interest rates from 0.25 percent to 4.5 percent. Bank Indonesia (BI) followed suit, with a hike from 3.5 percent to 5.75 percent. 

As high interest rates could undermine economic resilience, the government needs to issue appropriate policies to reduce economic vulnerability. One way is to bolster the country’s foreign exchange reserves, a measure necessary to strengthen national resilience from various directions. For the real sector, forex reserves are crucial in building export resilience. Meanwhile, from a monetary aspect, it is instrumental in maintaining exchange rates. The efforts to shore up forex reserves call for support from all parties, including business players. 

Resilience of Domestic Economy 

Indonesia is the fourth-most-populous country in the world, counting 275.3 million people in 2022. It is thus no wonder that household consumption plays a central role in driving Indonesia’s economy. In the period of 2019-2021, it accounted for 56.2 percent of total GDP, on average. 

As a dominant contributor to GDP, it is of great significance that this engine of growth is protected and maintained. Domestic demand can be met through local production and imports. Ideally, goods are imported only when domestic production cannot meet demand or is not effective in producing needed goods. 

The resilience of our domestic economy is also measured in terms of foreign exchange supply, which indicates the availability of foreign currency to pay for imports and to service the government’s external debt. Therefore, there is an international standard stipulating that a country’s foreign exchange should at least be able to cover three months of imports and repayment of sovereign debt. Currently, Indonesia’s forex reserves are sufficient for six months, meaning that they are still at a safe level, although the country must remain vigilant. (FIGURE 1) 

The above chart shows that in the period 2015-21 the value of consumer goods imports in Indonesia was rising, save for the year when the Covid-19 pandemic hit. In 2021, it hit US$20,182.8 million, up 38 percent over the previous year. This indicated that purchasing power has started to rebound from the pandemic slump. Imported goods consist of food and beverages, refined fuels and lubricants, non-industrial transportation equipment and consumer products. 

As the volume of imported goods increases, the Indonesian government needs to ensure that foreign exchange reserves are in a safe position to finance them. Foreign exchange reserves are assets held on reserve by a central bank in foreign currencies. Bank Indonesia (BI), as Indonesia’s central bank, holds assets such as foreign currencies, bonds, treasury bills, Special Drawing Rights (SDRs) and gold. Foreign exchange reserves are mainly used to finance international trade. (FIGURE 2) 

Foreign exchange reserves as of December 2022 stood at US$137.2 billion, higher than US$134 billion recorded the previous month, but down 5 percent YoY. At this position, it was able to finance 5.9 months of imports and external debt repayment. And notably, it is above the international adequacy standard of three months. 

Other than foreign exchange reserves, Rupiah exchange rates against the US dollar are another important indicator in international trade. While a weaker exchange rate is good for exports, if it is too weak it will make imports more expensive and cause debt obligations to swell, putting more strain on a state budget. Thus, it is crucial to maintain exchange rate stability. (FIGURE 3) 


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