The results of economic policy packages

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Abra Talattov Institute for Development of Economics and Finance (INDEF) Researcher

IO – Nearing the start of Jokowi’s second term, a raft of debilitating issues still burden the national economy. 16 Economic Policy Packages were produced by the President to resolve his disappointment in our investment and exports’ performance.

Before entering into a detailed discussion of the entire Economic Policy Package, let us refresh our memory of the economic situation, and the background, purpose, and expectations from Economic Policy Packages related to investments and exports.

The first Economic Policy Package was launched in September 2015. Our economy suffered great pressure at the time, triggered by the recovery of the US economy and the drop of commodity prices in global markets. The implication is that the wheels of commerce in the first year of Jokowi-Jusuf Kalla’s rule ground slowly: economic growth in 2014 was extremely low (5.02%) The trend continued in Q1 and Q2 of 2015, with growth rate being 4.72% and 4.67%, respectively. Exports grew a negative -0.85% in Q1 of 2015 and -0,13% in Q2 of 2015. Private investments worsened from 4.29% (Q1 of 2015) to 3.55% (Q2 of 2015). The Rupiah exchange rate shook rather badly, depreciating 12.6% from 1 January to 21 August 2015.

In response, on 9 September 2015 Government released Economic Policy Package I with the noble mission of pushing the national economy by improving industrial competitiveness. This is achieved through deregulation and de-bureaucratizing. 134 ministerial/agency level regulations were identified for deregulation. This move was expected to accelerate industrial capacity, free industrial distortion, and eliminate regulatory and bureaucratic burdens for industry, which would enable it to withstand the attack of imported products and even enter export markets.

The next step was to accelerate direct investment (Foreign Investments and Domestic Investments) through Economic Policy Package II (29 September 2015), which promised speedy service for investment permits (permits can be issued within 3 hours) in industrial areas. However, this service is only available for investors with a minimum investment of IDR 100 billion and/or a plan to absorb more than 1,000 Indonesian workers. The speedy permit processing incentive in industrial areas should be a magnet for investments in comparison with normal permit processing, which may take 8 days for business entity permits or 526 days for construction permits.

Economic Policy Package III on 7 October 2015 was an incentive for the industry by reducing the price of gas and electricity, and by simplifying land permits for investment activities. This is followed by Economic Policy Package V on 22 October 2015, which provided tax incentives on asset revaluation.

The next investment breakthrough was the development of 8 Special Economic areas with their incentives through Economic Policy Package VI on 5 November 2015. In December 2015, two Economic Policy Packages, which basically accelerate the process of land certification, tax incentive for work-intensive industry for two years (extendable), one-map policy, incentives for the construction and development of oil refineries, and incentives for airplane maintenance and repair companies.

Throughout 2016-2017, eight new Economic Policy Packages were issued. They were focused on the improvement of the logistic sector’s efficiency by integrating payment for harbor fees electronically, implementing an integrated goods movement system in ports, an export-oriented People’s Enterprise Credit (a facility for funding exports at a 9% interest without subsidies through the Export- Import Funding Agency), risk management to help with the flow of goods in ports in order to decrease dwelling time from 4.7 days (in 2015) to 3.5 days, development of pharmaceutical and health equipment industry in order to reduce dependence on imports, e-commerce roadmap, and relaxation of the Negative Investment List.

In conclusion, all of these efforts are meant to improve the ease of doing business (EoDB) in Indonesia in order to improve investment performance. Even though Indonesia’s EoDB improved from the 120th rank in 2015 to 72nd in 2018, the performance of our investments is still lower than expected. After all, realized investments in 2018 was only IDR 721.3 trillion or growing only 4.1%. Worse, it is only 94.3% of the target. Foreign Investment growth actually even went a negative -9.8%.

This year’s investment target was set ambitiously at IDR 792.3 trillion, or a 9.8% growth from realized investments in 2018. Realized direct investments per Q2 of 2019 was IDR 395.6 trillion or 50% of the target. This seems to be easier to achieve in Semester 2 of 2019. However, in view of the worrisome political and defense stability lately, this hope is but a slim one.

Amid such economic reforms and policies, it is only natural that the Government sets high investment targets, especially with the certainty of investment and industrial relocations caused by the US-China trade wars. However, instead of getting a windfall of investments, our President’s frustrations increased when the World Bank reports that none of the 33 Chinese companies that relocate their business in June-August 2019 selected Indonesia as their new location. The country most chosen is Vietnam (23 companies), with the rest variously distributed among Cambodia, India, Malaysia, Mexico, Serbia, and Thailand. Worsening trade deficits also shows that our fundamental economic problems are not yet solved. We can conclude that all of these Economic Policy Packages have not become the panacea for various competitiveness issues. In its second term, the Government must immediately evaluate the Economic Policy Package in order to map out the causes of investment obstructions and resolve them.