Was Indonesia’s economic growth in 2018 really 5.17%?

Anthony Budiawan
Managing Director Political Economy and Policies Studies (PEPS)

IO – “Strange but true”. That is how I would describe Indonesia’s economic growth in 2018. Statistics Indonesia (Badan Pusat Statistik – “BPS”) announced that our economy grew 5.17% in 2018. Strangely enough, the figure for our consumption was only 4.4%. Then I wonder what became of the remaining 0.77% of our production?

In early February 2019, BPS announced that economic growth in 2018 was 5.17%, higher than 2017 economic growth at 5.07%. The figure for 2018 economic growth was in fact rather surprising, as many factors pointed to the Indonesian economy as actually depressed.

The 2018 trade balance recorded its worst deficit rate at USD 8.57 billion. This was worsened by the fact that the non-petroleum and natural gas trade balance only had a surplus of USD 3.84 billion, while the non-petroleum and natural gas trade balance in 2017 was USD 39.47 billion in the black – the lowest surplus level we have ever experienced. Such a drastic decrease in the surplus is worrying, because it reflects the fact that Indonesia’s products have low competitiveness in the international market, while non-petroleum and natural gas products are the backbone of the Indonesian economy. Furthermore, the 2018 current transaction balance has also worsened, with a record deficit of USD 31.06 billion. The deficit in Quarter IV of 2018 even reached 3.57% of GDP. This is in fact the highest quarterly deficit ever, in terms of both nominal value and the percentage of GDP.

Such a deficit depresses the Rupiah exchange rate, even to over Rp 15,200.00 per USD. Even though it has recently strengthened to Rp 14,481.00 (as of end-2018), it had still depreciated compared to end-2017 when it marked Rp 13,548.00 per USD. Oddly enough, despite all this pressure, the Indonesian economy in 2018 actually grew 5.17%.

The economy can be viewed from two angles. First, production, which is defined as “the supply of goods and services”. Second, “consumption”, or demand. In the BPS report, production is also categorized as “business opportunity”. Consumption is called “expenditures”. According to BPS, in terms of production, the Indonesian economy grew 5.17% in 2018. However, consumption or expenditure in the Indonesian economy only grew 4.40%. That means that there is a difference of 0.77% in production not absorbed as consumption, and is still stored in inventory.

Oddly enough, inventory continued to rise from Quarter I to Quarter IV of 2018, while the amount of inventory normally fluctuates. This is because when inventory piles up, companies will reduce production until inventory is down to an acceptable level. It is nearly impossible that companies will continue full production when goods remain unsold and inventory piles up, as keeping inventory requires a huge amount of working capital. This oddity is also apparent in BPS data. According to BPS data for the 2010–2018 period, the amount of inventory in Quarter IV every year continues to decline. That means that there has been a negative change in inventory, except in 2018.

The question is, “Is the 2018 BPS data accurate?” “Is the data on the fluctuation of inventory correct?” “Is the amount really that big?” “Do the goods really exist?” Maybe the amount produced was not that big after all. Maybe the economy did not grow 5.17% in 2018. Could it be the amount of inventory was exaggerated? We need to question this, because there was a mix-up of rice and corn production data, which caused a furor in the mass media. The data mix-up even gave rise to a polemic between Ministries.

The Ministry of Agriculture stated that production was abundant. A production surplus signified that we need not import either rice or corn. Unfortunately, however, rice and corn prices continued to climb, indicating an actual scarcity of goods. The increase of food prices pushed the Ministry of Trade to issue a permit for imports amid a general consensus that there is a production surplus.

This production data mix-up caused Vice President Jusuf Kalla to intervene. He immediately held a coordination meeting on 22 October 2018, concluding with the discovery that production data hitherto published did not match reality in the field. In other words, there is a glaring error in production data. For 2018, BPS corrected production data shows that there is a difference of 32.5% with actual conditions. The Ministry of Agriculture estimated rice production at about 48 million tons, but BPS stated that the actual amount was only about 32.42 million tons.

What about the production data of other food products? Are corrections of production data reflected in the calculation of 2018 economic growth? In other words, was BPS’ statement that 2018 production economic growth was 5.17% accurate or not? Or is it still part of the overly large error rate of production data?

One thing for sure: consumption growth, comprising household consumption, consumption of non-governmental and non-household agencies (Lembaga Non-Pemerintah Rumah Tangga – “LNPRT”), Government consumption, capital goods consumption or Establishment of Fixed Domestic Capital (Pembentukan Modal Tetap Domestik – “PMTD”) and net exports (difference between exports and imports) in 2018 was only 4.4%.