The Challenge of Maintaining the Economic Recovery
Indonesia\'s economic recovery seen over the past months is expected to continue this year. In 2020, the country suffered a full-year contraction of 2.07 percent.
By
kompas team
·5 minutes read
Indonesia\'s economic recovery seen over the past months is expected to continue this year. In 2020, the country suffered a full-year contraction of 2.07 percent. Controlling Covid-19 case numbers is Indonesia\'s toughest challenge in maintaining economic growth.
JAKARTA, KOMPAS — Statistics Indonesia (BPS) reported a 2.07 percent contraction in the country’s economy in 2020.
However, despite the contraction, there was a sign of recovery in the fourth quarter of 2020, as reflected in a decline in the year-on-year (yoy) contraction rate. Indonesia faces serious challenges in coping with the Covid-19 pandemic.
BPS head Suhariyanto said during a press conference on Friday (5/2/2021) that, although it was still contracting, the decline in economic growth had slowed from a minus of 5.32 percent yoy in the second quarter of 2020 to minus 3.49 percent yoy in the third quarter and minus 2.19 percent yoy in the fourth quarter. A number of economic sectors and public expenditure were still affected by the pandemic.
The manufacturing, trade and transportation industries, for example, still suffered contraction, despite signs of recovery in the last three quarters. Meanwhile, household spending, the main contributor to economic growth in Indonesia, shrank by 3.61 percent yoy in the fourth quarter of 2020.
Only China and Vietnam recorded positive growth in 2020, at 2.3 percent and 2.9 percent, respectively.
According to Suhariyanto, Indonesia\'s main trading partners also still experienced economic contraction in 2020, such as the United States with minus 3.5 percent, Singapore with minus 5.8 percent, South Korea with minus 1 percent, and the European Union with minus 6.4 percent. Only China and Vietnam recorded positive growth in 2020, at 2.3 percent and 2.9 percent, respectively.
Reverse direction
Suhariyanto said the contraction in Indonesia\'s economic growth last year was the deepest since 1998, which was minus 13.13 percent. The key challenge for reversing the direction of economic growth this year is controlling the Covid-19 pandemic. If the pandemic cannot be controlled, the economy will remain sluggish. "All parties are optimistic that the economy in 2021 will be better than 2020. However, only with the vaccination program and public compliance (in health protocols), will the economic wheels be able to move again," he said.
Separately, PT Bank Danamon Indonesia Tbk economist Wisnu Wardhana said that several major indicators showed that there would be a sustainable economic recovery in 2021. The Purchasing Managers Index (PMI) for the manufacturing sector, for example, increased from 51.3 in December 2020 to 52.2 in January 2021.
However, Wisnu estimated that economic growth in the first quarter of 2021 would remain negative, partly due to the imposition of social restrictions, especially in Java and Bali. The restrictions will limit people’s mobility and economic activities.
According to PT Bank Permata Tbk economist Josua Pardede, almost all components of economic growth are still contracting, even though there is a decline in the contraction rate. The increase in the people’s mobility following the relaxation of the large-scale transitional social restrictions (PSBB) late last year led to an increase in household spending and investment.
Josua said that the improvement on the demand side, especially household consumption, could still be further pushed up by optimizing the government’s financial incentives for the economic recovery. Meanwhile, investment is expected to further grow thanks to the improving business climate and the establishment of the Investment Management Institution as part of the implementation of the Job Creation Law.
Teuku Riefky, an economist at the University of Indonesia\'s Institute for Economic and Social Research (LPEM UI), said that the economic contraction of 2020 was generally caused by ineffective and inefficient measures in handling the health crisis.
In addition, the PSBB were not enforced properly in numerous regions. The spread of Covid-19 was uncontrollable if health protocols were not strictly implemented. Inconsistency in the implementation of the PSBB exacerbated economic conditions. "In theory, the implementation of the PSBB is the right policy, but its implementation is weak, so that the desired impact cannot be achieved," he said.
Government strategy
According to Coordinating Economic Minister Airlangga Hartarto, the improvement in the economic recovery is inseparable from government intervention. Government spending was the only positive contribution to the gross domestic product (GDP) last year as it grew 0.15 percent.
"Government spending in the fourth quarter of 2020 grew by 1.76 percent, supported by the realization of budget allocations for handling Covid-19 and the national economic recovery, which reached Rp 579.78 trillion," Airlangga said in a virtual press conference on Friday.
According to him, the economic recovery will be maintained by improving the supply and demand side. The government has prepared several measures focused on maintaining the purchasing power of the lower middle class through social protection and on increasing the productivity of micro, small and medium enterprises.
The enforcement of health protocols will also involve security forces at the central and regional levels.
To maintain the growth momentum, the government will carry out a vaccination program according to schedule and aim to better control the Covid-19 epidemic. The enforcement of health protocols will also involve security forces at the central and regional levels.
"The government will involve babinsa (village supervisory non-commissioned officers) kamtibnas (resident security and order), the Public Order Agency (Satpol PP) and the military and National Police in health protocol raids," said Airlangga.
The government expects economic growth in the range of 4.5 to 5.5 percent in 2021. The economy in the first quarter of 2021 is expected to grow at between 1.6 and 2.1 percent yoy thanks to an expected increase in household spending and investment.