Rupiah in dire need of “plastic surgery”

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Harryadin Mahardika
Economic Observer from University ofIndonesia (UI)

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.