Jakarta, IO – Several institutions have anticipated a downturn in 2023 economic growth. For instance, the Institute for Development of Economics and Finance (Indef) calculated that Indonesia’s output would expand by approximately 4.9 percent in 2023. The OECD set a similar figure. Although the actual growth rate was around 5.05 percent, the 2023 economic growth was still significantly below its potential.
Meanwhile, the State Budget (APBN) projected a growth rate of 5.3 percent. The actual growth rate of 5.05 percent had hindered the economy from growing, as was expected in 2023. The GDP decline and economic growth slowdown are deeply distressing, especially given the requirement for strong growth to meet the goal of becoming a developed country by 2045, which requires a minimum growth rate of US$6.
The simultaneous tightening of monetary and fiscal policies caused a slowdown in economic development in 2023. The tightening remains up to the present day. Monetary tightening began in August 2022, by increasing the benchmark interest rate prior to the fuel price adjustment. This decision also aimed to manage the Rupiah exchange rate against the US dollar, in response to the Fed’s tightening policy. However, its impact has been highly counterproductive to economic growth.
The increase in the benchmark interest rate is intended to manage economic liquidity through banking liquidity. In theory, an increase in the benchmark interest rate raises market interest rates (Interbank Money Market/PUAB), which in turn affects deposit and loan interest rates. An increase in loan interest rates affects demand for new loans and, thus, the amount of money in circulation. Ultimately, this condition reduces aggregate demand (AD) and lowers inflation, a trend evident throughout 2023.
The following data shows how the policy interest rate hike transforms into higher banking interest rates. In July 2022, the benchmark interest rate was 3.5 percent and it rose to 3.75 percent in August. The benchmark interest rate continued to rise to higher levels. The benchmark interest rate increased in October and will reach 6 percent by the end of 2023.
The morning Interbank Money Market (PUAB) interest rate (overall) rose from 2.91 percent in July 2022 to 6.09 percent in December 2023. Meanwhile, the afternoon PUAB (overall) increased from 3.08 percent to 6.01. The foreign exchange PUAB interest rate (overall) increased from 2.53 percent to 5.39 percent. The 12-month deposit interest rate rose from 3.27 percent to 5.76 percent. The working capital loan interest rate increased from 8.42 percent to 8.86 percent, the investment loan interest rate rose from 8.13 percent to 8.81 percent, and the consumer loan interest rate declined from 10.26 percent to 10.13 percent.
Throughout July 2022 to December 2023, the increase in the benchmark interest rate reached 250 bps (basis points) or 2.5 percent. The PUAB saw a higher increase. The increase in the PUAB interest rate reflects tightening market liquidity. The overall morning PUAB and afternoon PUAB Rupiah each increased by 318 bps (3.18 percent) and 293 bps (2.93 percent), respectively. The increase in the deposit interest rate reached 249 bps (2.49 percent). The rise in the cost of funds prompted banks to channel funds into placements with guaranteed income (zero risk), such as government bonds (SBN) and Bank Indonesia Certificates (SRBI), to ensure income.
Working capital and investment loan interest rates increased by 44 and 68 bps, respectively. The consumer loan interest rate decreased by 13 bps. Due to limited demand, the relatively small increase in loan interest rates has been ineffective in stimulating larger credit growth. The slack demand results from a fall in people’s purchasing power.
Another important monetary concern is the contractionary monetary policy implemented through the issuing of various liquidity-absorbing instruments. Bank Indonesia issued Bank Indonesia Rupiah Securities (SRBI) to absorb liquidity of up to IDR 254 trillion through 2023. The presence of SRBI is particularly appealing to banks, because of the greater yield.
In fiscal terms, the government increased the value-added tax (VAT or PPN) in 2022 from 10 to 11 percent, based on Law No. 7/2021 on Tax Regulation Harmonization (UU HPP). According to this law, (i) the VAT rate was set at 11 percent, effective April 1, 2022; (ii) the rate will increase to 12 percent by no later than January 1, 2025; and (iii) the law allows for the VAT rate to be adjusted within a range of 5 percent to 15 percent.
The increase in the PPN rate raised PPN and luxury goods sales tax (PPnBM) collection to IDR 687.6 trillion, up from 24.6 percent (YoY) in 2022, and it reached IDR 764.34 trillion (growing by 11.16 percent). As the largest component of non-oil tax revenue, the domestic PPN grew by 13.69 percent (YoY) and 22.11 percent in 2022 and 2023, respectively.
In general, the PPN increase in 2022 was not very noticeable economically, as it occurred during a rise in world commodity prices. The economy still grew by 5.31 percent, as the increase in world commodity prices drove national and regional economic growth, especially for commodity-based regions. However, for the lower-middle class, the PPN increase caused a continuous decline in purchasing power, which was confirmed by the decline in core inflation.
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The 2022 core inflation, which hit 3.36 percent, went down to 1.8 in 2023. On the other hand, inflation in volatile foods surged to 6.73 percent, from an initial 5.61 percent. Society was thus hit twice, by both patterns of inflation, as purchasing power kept going down while basic necessities constantly rose.
The tightening in both sectors has implied a concerning decline in household consumption growth, from 4.93 percent in 2022 to 4.82 percent in 2023. The consumption decline was worrying, as household consumption accounts for a large share (53 percent) of output formation.
This year, the government targets a growth rate of 5.2 percent, which was expected from the Eid al-Fitr moment, regional elections, and the New Year. The continuous decline in purchasing power will put the growth target in a challenging position, particularly since global conditions have not yet revived. The ongoing monetary tightening deserves serious attention, while the economy will face a greater challenge if the government insists on increasing the PPN rate to 12 percent by next year.