Understanding growth patterns in an era of contraction

Anthony Budiawan
Managing Director of the Political Economy and Policy Studies (PEPS)

IO – Indonesia’s actual economic growth within the first two quarters of 2019 is far below the annual economic growth target at 5.3%, i.e. at 5.07% (Q1-2019) and 5.05% (Q2-2019). This is a concern for many, because this puny growth is actually accompanied by large contractions, especially in terms of withered export and import rates. If we don’t factor in exports and imports, we might as well count our economic growth at below 4%.

In normal times, an economic growth rate of 5% would not be so bad, especially if other economic data, such as worker absorption rates, retail sales levels, manufacturing indices, etc. also rise. After all, this would demonstrate that the economy is growing. However, we need to be wary of our current economic growth rate, which most find to be miserable: there are many complaints of businesses slowing down, followed by much termination in many companies.

Some of the major shutdowns have occurred in the textile industry. It has been reported that 10 textile companies closed down this year. In fact, Bukalapak, the online startup unicorn retailer company, has also been forced to implement layoffs. Zomato, another startup unicorn in the restaurant service business, has also seen massive layoffs. This month, they terminated 540 employees after letting go 60 last month. An even bigger concern is the fact that many large retailers, like Giant, are closing down as well. Does this mean that the people are losing their purchasing power?

This unfortunate condition is compounded by the fact that Indonesia’s exports-imports in 2019 dropped sharply, at USD 8.35 billion (or 8.02%) and USD 9.66 billion (or 9.0%). Exports in January-July 2018 were recorded at USD 104.14 billion, dropping to USD 95.79 billion in January-July 2019. Over the same period, imports dropped from USD 107.34 billion to USD 97.68 billion. This was caused not just by lower prices, but also due to quantity crash. Real export contribution to economic growth in Q1 and Q2 of 2019 decreased 0.46% and 0.38%, respectively. The drop in real import contribution was bigger: at 1.62% and 1.36% to economic growth in Q1 and Q2 of 2019. These contractions in our exports and imports in 2019 mean that our economic activity this year is dull.

The above weakening also impairs State tax income. Actual tax income (including customs and excises) as of the end of July 2019 was only IDR 810.75 trillion, or a mere 45.39% of the 2019 tax income target. Domestic VAT dropped 4.68% and import VAT was down 4.52%. If this trend endures, realized tax income is predicted to hit a maximum of 80% of its target, for a short­fall of IDR 350 trillion. This is extreme.

Weakened tax income means that tax income ratio to GDP per end-July 2019 is below 9%. With this pathetic fiscal condition, it would be hard for the government to run the nation properly, as it will be hard to kick-start the economy. Therefore, the Government needs to add to its treasury. In view of the above economic condition, this is impractical. Therefore, we need to consider using the people’s money (and hopefully not money from the lower classes). In other words, there should be a plan to increase petroleum fuel prices, subsidized electricity fees, cigarette levies, health social security fees, and stamp duty fees. Or are they actually on the rise already? Hopefully, these price spikes would not place too much burden on the people and the national economy.