IO – Dramatization is no longer a monopoly of theater and those who create it. For example, over the past several weeks we have been presented a drama created by our dear decision-makers, titled “Rupiah Is Doing Fine”. The main plot theme is that the current and apparently inexorable Rupiah weakening is but temporary, so its impact on the economy is no huge concern.
This drama would ordinarily soothe the unease of an audience – the common people who are in desperate need of happy entertainment in the midst of ever-harder lives. However, the play would not bring any pleasure to a truly critical audience, i.e., market participants and policy observers, at all. After all, the ending would be a dangerous one for both scriptwriter and actors, as well as for the audience. How so? The weakening of the Rupiah over the past five years is actually the cause for our people’s welfare and prosperity to go sour and stagnate.
What is the evidence of this? Let us consider: if we consider the weakening of the Rupiah against USD, our per capita GDP over the past 5 years did not change much: It was USD 3,672.00 in 2013, rising only to USD 3,876.00 in 2017. And that value would fall 11% this year, as Rupiah has weakened to Rp 15,100.00 per USD as of this writing. It is this emergency scenario that should alert us not to underestimate the Rupiah weakening. There are at least three aspects that would turn this Rupiah drama into a real and present danger:
First, the dramatists continue to cover up the Government’s reluctance to restore Indonesia’s external balance. This is shown by the fact that the Government continues its fiscal expansion, in order to set the stage for a bigger drama, i.e. the 2019 Elections.
Second, there are efforts to convince the audience that the decisions and actions taken by the actors on the stage are absolutely independent from the intervention of the playwright. In fact, any clear-eyed audience can see that the actors are not given the opportunity to perform their optimal roles freely. This is shown in the continued cosmetic responses to Rupiah weakening taken by these actors, such as the limitation of imports on 900 types of goods. They do not dare take more drastic and unpopular decisions, even though such policies would be more strategic and effective in improving Rupiah fundamentals.
Third, the playwright of this drama is attempting to stall and delay the climax of the tale. For that purpose, new plots and characters are inserted into the tale to make the drama as long-winded as possible. For example, BI is requested to constantly intervene in order to maintain Rupiah value, even at the risk of draining foreign reserves. For this purpose, BI must “burn off” Rp 1.2 trillion of the people’s money every day. At the same time, the Government continues to create new debt in USD. As these efforts continue, an intelligent audience would be alarmed, knowing that the climax of the delayed storyline would simply be an anticlimax.
As a response to this dramatic dynamic of the State’s economic policies, the audience must express their feelings properly. They need to applaud when the action is arresting, but they must not forget to protest and boo the playwright and actors when they try to convince the audience with a silly and nonsensical storyline.
Yet despite all these factors, I still believe that the Rupiah Is Doing Fine play can still be salvaged into a story with a happy ending. There is only one requirement here: the Rupiah must undergo plastic surgery! We should stop merely applying cosmetics, to pretty up a dire situation. In other words, the Rupiah fundamentals must be totally altered, using drastic and effective policies. How do we do that?
The first priority is to perform a daring fiscal contraction. One of the methods we can use is to curb our ambitious growth in order to drastically cut deficits. We can do this by delaying non-priority infrastructure projects funded through USD-denominated debt. If we remain consistent, this will help to reduce Rupiah volatility. We can all learn from conditions in 2008, when Sri Mulyani performed an amazing feat of fiscal contraction that prevented Indonesia from falling victim to another crisis. Sri Mulyani herself admitted that Indonesia’s best budgeting occurred in 2008, when budget deficits were only 0.08% of GDP. That same year, Indonesia’s fiscal condition was able to show a surplus for several Quarters, another act which reduces external risks.
The next priority is to seriously reduce the petroleum and natural gas trade deficit, which has been exerting extreme pressure on the Rupiah for several years. Our petroleum and natural gas trade deficit in 2017 was already USD 12 billion (around Rp 180 trillion), and this figure continues to creep up. In fact, 70% our trade balance deficit originates from the petroleum and natural gas trade. We need to act fast and implement motor vehicle energy conversion policies (i.e. migrating from petroleum fuel to gas fuel, biofuel, and electricity), providing incentives for acceleration to new and renewable energy businesses. It is quite possible to enact such a policy in the short term; we simply need a sufficiently strong political will for it.
The third priority is to allow the market mechanism to determine the actual value of the Rupiah. Let the market perform organic, swift adjustments. BI should only perform minimal intervention, as BI’s current efforts only delay a natural market adjustment process in setting an actual value for the Rupiah. To repeat, merely to hold the current Rupiah rate, BI must burn off USD 12.3 billion (Rp 184.5 trillion) in foreign reserves every day and has had to since the start of 2018.
These are the three priority steps that we need to perform as “plastic surgery” on our Rupiah. Being an operation, it would naturally be painful at first. Yet after recovery, the Rupiah would look lovelier and more attractive. The audience would be happy; the State has won its victory.