Nightmare and Illusion of National Economic Recovery

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Anthony Budiawan Managing Director of Political Economy and Policy Studies (PEPS)

IO – Since the COVID-19 pandemic swept across Indonesia, the government has been stuttering. Authorities look amateurish. Officials’ strange and unkind comments open the eyes of the people. Incompetence is flaunted without embarrassment. 

Perppu (Government Regulation in Lieu of Law) COVID-19 suddenly appeared, equipped with articles of legal protection for the rulers. Even though Indonesia is a state ruled by law. At least, that’s what is written in our constitution, the 1945 Constitution, both the “false” and the original. It says that all citizens are equal before the law. However, the pandemic can change the law. 

The government is stuttering in its attempt to deal with Coronavirus. The debate is going on, as they cannot decide whether coronavirus is a pandemic or simply an epidemic. Whether accurate handling implies a lockdown, a regional quarantine, or PSBB (Large-Scale Social Restrictions). The status of the disaster has consequences for state finances, as the territorial quarantine obliges the state to provide food to the people. 

The government is wavering between health and humanity on the one hand and reviving the economy on the other, between dealing with COVID-19 or improving a sick economy. 

The government formed a team to handle coronavirus, or the “Task Force for the Acceleration of Handling COVID-19”, on March 13, 2020. Handling of the economy and finances is under the coordination of the KSSK (Financial System Stability Committee), which is given unlimited power in running a budget deficit and financing (“printing money”). 

Effective handling of COVID-19 and the economic recovery team can be called a complete failure. Positive cases of COVID-19 have jumped sharply, and economic growth in the second quarter of 2020 fell by minus 5.32 percent. 

So, the Dream Team must be overhauled. A new committee was formed on July 20, 2020, to handle both: the Committee for Handling COVID-19 and the National Economic Recovery (PEN). This committee is chaired by the Coordinating Minister for the Economy with the chief executive of the SOE Minister. 

This committee is likely to have the same fate: to fail miserably. The composition of personnel making up this committee seems odd. The committee chair and daily chairperson are not known to be well-versed in health matters or economics. How can the two of them deal with these two monumental problems? 

Meanwhile, COVID-19 case numbers continue to soar, from 88,214 cases as of 20 July 2020 to 116,871 cases as of 5 August 2020. An increase of 28,657 cases, or 28.7 percent, in just 16 days. Hopefully, the handling of the economy can be better. Even though we are pessimistic, we also pray for success. 

However, we also have to be realistic. Expecting state-owned companies (BUMN) to act as the locomotive of national economic recovery is like wishing for the moon. Just an illusion. 

The reasons are as follows. The economic crisis occurred because the demand (consumption) side of the economy fell sharply. The pandemic has also caused foreign (or export) demand and domestic demand to plummet. Social restrictions and fears of contracting COVID-19 have shrunken domestic demand. 

A fall in demand results in the supply side of the economy being burdened with excess goods. Prices collapse, there is deflation. Production must be cut back. Employees are laid off or even permanently dismissed (PHK). Investment has stopped. Bad credit ballooned. The bank lacks liquidity, et cetera. 

Therefore, national economic recovery cannot rely on BUMN, cannot rely on the production side of the economy for the main problem of the economic crisis is the demand which has fallen sharply. People’s purchasing power has plummeted. 

The recovery of the national economy depends on two factors: global economic recovery and restoration of people’s purchasing power. 

Global economic recovery would see exports rise. Countries with strong exports such as Vietnam or Singapore will benefit more. Economic recovery will be faster. As for Indonesia, whose exports are relatively weak, economic recovery will not be as fast as our officials predict. And the global economic recovery factor is of course beyond the control of the COVID-19 and PEN Committee. 

Domestic economic recovery will depend on people’s purchasing power. The government can stimulate this by providing financial assistance (social safety nets) to the public, particularly the low middle-income groups. This policy will solve two problems at once. Caring for the poor, and at the same time increasing economic demand, so that the economy can move again, and more companies can add employees. 

Even so, don’t expect economic growth in the third quarter of 2020 to be positive. I estimate that economic growth will continue to be negative until the first quarter of 2021. Even in the third quarter of 2020 economic growth could fall deeper than the second quarter of 2020