FKP 19 March 2015 Survey of Recent Developments in Indonesia

Yose Rizal Damuri

Reported by Bayu Tegar Perkasa

In the second session of FKP on 19 March 2015 hosted by the Fiscal Policy Agency (Ministry of Finance), Yose Rizal Damuri (CSIS) talked about Indonesia’s recent developments in the fourth quarter of 2014. He discussed quite a wide range of topics ranging from the global and domestic economies to the Indonesian government’s current policies, namely removal of the fuel subsidy and social assistance reform. This talk was based on a paper by Yose and Creina Day (ANU) which will be published in the April edition of the Bulletin of Indonesian Economic Studies (BIES).

Yose highlighted the decreasing price of commodities and crude oil which has had mixed effects on the domestic economy. On the one hand, as an exporter, Indonesia is faced with decreasing revenues from exports given the decreasing prices of its main exported goods such as rubber, coal, CPO, copper and crude oil; on the other hand, as an importer Indonesia benefited from the weakening rupiah. In addition, monetary tightening in the US caused significant capital outflow from Indonesia and pushed up the value of the rupiah against the dollar.

With this global economic condition as a background, Indonesia economy recorded 5% growth (year-on-year) in fourth quarter, down from 5.6% in the same quarter in 2013. Private consumption will still be the main driver of this growth, while government expenditure, Yose claimed, has failed to be a driver due to fiscal tightening in this period. In order to grow stronger, Indonesia will have to increase its investment expenditures. Moreover, this growth was accompanied by moderate—with increasing trend—inflation, a weakened rupiah in terms of the dollar, and down from the third quarter in overall balance of payments, though still with the current account deficit.

In terms of policies, Yose covered fiscal, trade and investment policies that have been applied since the outset of 2014. Government revenue during 2014 was significantly below the target, mostly because tax revenues failed to reach the target. Similarly, the realization of spending side was also lower owing to the reduction of the fuel and electricity subsidies in November 2014 and other budget tightening acts. While in trade and investment policies, Yose argued that there were at least three new major policies, such as: new negative investment list (DNI), launching of Law on Trade, and law on standard and conformance. All three policies inhibit trade and restrict foreign investment. The question is, he asked, will Jokowi continue this type of policy? So far, the signals are mixed: on many occasions Jokowi emphasized the importance of foreign investment; while at other times he stated that Indonesia might pursue stronger import substitution strategies and restrict trade.

One bold policy that government of Indonesia applied in the 2014 fourth quarter was the removal of fuel subsidies which long has been a burden on the state budget. On 17 November 2014, the government announced a 31% and 36% price increase in subsidized gasoline and diesel, and will adjust the price every month. Inflation of food and transportation prices was an inevitable effect of this policy, though this effect was expected to subside after three or four months. To mitigate the impact of higher fuel prices on vulnerable households, the government has taken immediate steps, e.g. cash assistance in the form of electronic money via mobile phones. Yose expressed his appreciation of this government policy which not only helps the poor but also teaches them about the banking system.

Watch the video: Part 1, Part 2

Presentation File: Damuri & Day Survey of Recent Developments