Protecting Indonesia’s SMEs amid Pandemic

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Ronny P. Sasmita An International Political Economic and Strategic Analist, A Senior Fellow at Indonesia Economic Action Institution/EconAct

IO – In developed countries such as Japan, Micro, Small, and Medium Enterprises (MSMEs) have long been big corporate partners, not only at the national level, but also internationally. MSMEs spare parts, for example, are supplied to automotive giant factories such as Toyota, whose car markets are all over the world. Meanwhile, in Indonesia, the economic bargaining position of MSME is still weak. Those who can partner with new corporations are around 5%, out of a total of around 64.2 million units. MSMEs absorbs around 90 percent of the total Indonesian workforce, but its contribution to Indonesia’s gross domestic product (GDP) is still relatively not big enough, around 60.3%. 

The present monetary crisis is quite different from that back in 1998 where MSMEs actually supported the economy – even exports rose by 350% -, but the impact of the Covid-19 pandemic is hurting MSMEs. In addition, social restrictions to break the chain of virus transmission spreading rapidly among humans also limit the business activities of MSMEs. Therefore, it is quite appropriate, the steps taken by government to increase the National Economic Recovery budget, among others, for MSMEs, from IDR 677.2 trillion to IDR 695.2 trillion. 

Of the funds to handle the impact of the Covid-19 pandemic, IDR 123.46 trillion is an incentive for MSMEs. Many MSMEs during the Large-Scale Social Restrictions (Social Distancing) that were unable to open stalls, shops or businesses also received assistance through social protection programs, total amount IDR 203.90 trillion. Meanwhile, the economic recovery budget for the health sector remains IDR 87.55 trillion. The budget for corporate financing rose IDR 9 trillion to IDR 53.57 trillion and business incentives were set at IDR 120.61 trillion. 

For the allocation of ministries / agencies and regional governments, it has been increased by IDR. 9 trillion to IDR. 106.11 trillion. The Government through the Ministry of Cooperatives and SMEs also provides training and assistance, so that MSMEs can increase their capacity and be able to adapt to online marketplace. The reason is that e-commerce transactions of MSMEs products have increased sales by around 26%, with the number of consumers even surging 51%. 

However, up to now only 8 million MSME entrepreneurs or 13% of them can be connected online. Therefore, the government also needs to accelerate the construction of internet infrastructure to the villages, so that MSMEs can access training both for selling online and improving product quality, processing, standardization, and doing good and attractive packaging. Moreover, the government has launched Pre-Employment Card Program with certified training online, offline, and post-training incentives, to support the MSMEs human resources. 

In addition, the efforts of the Ministry of Cooperatives and SMEs to encourage government spending around IDR. 400 trillion for the purchase of local MSME products must be fully supported by other ministries / institutions and regional governments. MSME products should be able to be installed in the Electronic Catalog or E-Catalog, which is an electronic information system that lists, types, technical specifications, and prices of certain goods / services from various government goods / services providers, developed by the Goods Procurement Policy Agency. More than that, the government also needs to simplify product licensing for MSMEs in order to be able to change and adapt businesses and products that are now needed by the community, such as health permits or marketing licenses from the Ministry of Trade which are still difficult to obtain. 

Another effort is to increase the capacity of MSMEs to be partner of corporations on the principle of mutual benefit, including with private corporations. On the other hand, private corporations also need to get incentives that can encourage more partnerships with MSMEs, for example getting debt restructuring in the form of bank loans, bonds, and other debt securities. In addition, it’s also about getting new working capital loans, credit guarantees, and interest subsidies so that they no longer have to bear bank interest, which until now is still 11-12%, far higher than competitors such as Thailand, which is only 7%. 

Thus, just as in Japan that poured incentives and credit assistance as well as large-scale purchase of private corporate debt, the same can also be done by Indonesia. The reason is that it has saved MSMEs. MSMEs that grow in good partnership with private corporations and in good touch of government treatments that does not exclude anyone will makes it possible for all businesses to get back up and adapting to accelerate economic recovery while securing the implementation of health protocols. Thus, the problem of unemployment and poverty that is now increasing can be gradually overcome. 

So, the development of the national MSME is one of the main keys to the progress of the national economy going forward. For this reason, there are some notes that need to be considered in the future. First, the state still needs its role, so the government must back up and provide facilities. MSMEs were even given a stimulus because they have been considered opening up more jobs and absorbing more than 96% of the workforce, strengthening the sustainability of the national economy, supporting people’s daily lives (micro: 63 million units, 783,000 small business units), able to overcome the shortage of consumer goods, maintain people’s purchasing power , and reduce the risk of layoffs. 

Second, MSMEs must be able to rise and carry out transformation in change of appearance, both form, nature, and function. In difficult situations such as in the pandemic, MSMEs must dare to take steps to change the form and type of business. If necessary swerved and turned to several products and services that grow during the pandemic. According to AC Nielsen’s analysis, several products that grew significantly along the pandemic were 199% hand sanitizer, 285% liquid hand soap, 233% liquid antiseptic, and 151% wet tissue. Or those that grew during the pandemic, namely toiletries and cosmetics 59%; household appliances 39%; food and beverage 28%; equipment products 24%; transportation, travel, finance 22%; medicine and chemistry 12%; communication 11%; and retail and services 3%. 

So, the opportunity for MSMEs is actually big enough along with the changing challenges. Therefore, MSMEs must carry out transformation and innovation, from what was originally direct pay to online services, for example. In addition, it should also expand the promotion function through social media so that more and more products are known to the public. Nielsen’s survey results make sense to be taken into consideration. Of course Indonesia should not be fixated on certain fields, the potential opportunities are also the same for the agriculture, livestock, plantation and marine products. 

Third, solving MSME problems related to venture capital, marketing, and distribution. To overcome this, breakthroughs and collaborative efforts are needed. Namely through mutual cooperation. Partnership and consortium. Now, it is time to come together for MSMEs to work together and help each other in an emergency. What are the benefits? MSMEs are able to survive and develop a collaborative business recovery strategy, more confidence to survive and re-branding, more solid with efficient management, minimize similar business competition, form solidity on the basis of a shared sense of responsibility, not just depend on bank loans because they are able, independent, share passion for joint risk mitigation, the business should become more focused and its share broader, and able to set and achieve the expected targets. 

Fourth, it needs the support of several ministries in an integrated and collaborative manner. For example, the assistance of the Coordinating Ministry for the Economy and the Ministry of Manpower regarding the Pre-Work Card to be more functional for the MSME sector, especially for those affected by layoffs. The role of the Ministry of Cooperatives and the Ministry of State Owned Enterprises is also needed through the purchase of MSME products by SOEs, as well as the implementation of the digitalization of MSMEs that will revive the decline of MSME businesses. 

Support from other ministries is also needed. Ministry of Village Development and Ministry of Tourism can support through village cash funds and the empowerment of tourism village business potentials; The Ministry of Agriculture is expected to be able to support food security to meet domestic needs; The Ministry of Communication and Information and Ministry of Education and Culture must be able to create young digital-based entrepreneurs and help marketing and distribution of MSMEs online, etc.