Adapting to Recession

KOMPAS/TOTOK WIJAYANTO

Enny Sri Hartati

The fight against the Covid-19 pandemic cannot rely solely on logistical strength, and must also rely on the right strategy. Equally important is to consolidate and integrate all forces to focus on the “Bersama Melawan Korona” (battling coronavirus together) campaign, so that it does not become a mere slogan.

Like running a marathon, resources must be deployed not only at the start, but also be well regulated along the way to ensure a strong enough stamina to reach the finish line. Moreover, if stamina and ammunition are limited, proper management and a priority scale are needed to survive and to prepare recovery programs. As long as an antiviral drug has not been discovered, Covid-19 will remain a threat and a source of uncertainty.

The economic impact of the Covid-19 pandemic is so severe that it has exceeded the impacts of the 1997-1998 economic crisis. The pandemic has disrupted almost all business sectors and eliminated sources of incomes. Based on data from the Indonesian Hotel and Restaurant Association (PHRI), the hotel occupancy rate has dropped sharply to only about 10 percent, and more than 2,000 hotels have been forced to close.

Also read : Enforcing New Normal

According to the Indonesian Chamber of Commerce and Industry (Kadin), production in the manufacturing sector has dropped by around 50 percent. The Association of Indonesian Automotive Manufacturers (Gaikindo) projects that car sales will drop from 1.1 million cars in 2019 to only around 400,000 cars in 2020. The Electronics Producers Association (Gabel) has reported a 50-60 percent decline in production. The Indonesian Food and Beverage Association (Gapmmi) has estimated that production has dropped by between 40 percent and 50 percent.

In the retail sector, the Indonesian Retail Tenants Association (Hippindo) reported that only 50 percent of shopping center tenants were able to reopen after being closed for more than three months. In fact, during the large-scale social restrictions (PSBB), 96 percent of all shopping malls had closed temporarily. Micro, small and medium enterprises (MSMEs) and the informal sector, which had emerged as an economic backbone during the 1998 economic crisis, have also been hit hard by the pandemic.

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Even though the social restrictions have been relaxed, the resumption of economic activities must comply with the Covid-19 protocol. This means that economic activities will not be able to return to normal conditions.

Businesspeople must prepare to enter a new kind of normal. This does not mean we have to “make peace” with Covid-19, but that we must be more aggressive in fighting the disease. The most important thing is that we are able to make changes and adapt in order to win against Covid-19. The economy will not recover fully during the “new normal” phase.

Also read: New Normal, Its Trace and Message

KOMPAS/BAHANA PATRIA GUPTA

Officers show banners encouraging people to abide by Covid-19 health protocols on Jl. Pahlawan, Sidoarjo regency, East Java, Monday (15/6/2020). Officers advised residents to remain in compliance with the health protocols, even though the large-scale social restrictions had ended. If they violate the rules, sanctions will be given, including the confiscation of ID cards.

All economic activities, including manufacturing, trade, transportation, and services, must still implement some restrictions. Operational costs will thus increase as a consequence. This means that those workers who have been laid off, especially those who have been furloughed, will not be able to return to work immediately.

Thus, an unemployment and poverty explosion is inevitable. In fact, the unemployment rate was already high even before the Covid-19 pandemic. As of February 2020, the unemployed population in Indonesia numbered 6.88 million people while the population of poor people totaled about 24.79 million as of September 2019. If the capacity of various business sectors falls by an average 50 percent, the risks of unemployment and poverty will double.

The simulations run by various institutions show the same results. Assuming that the economy grows in 2020 by minus 0.4 percent, unemployment will increase by around 6 million people. If economic growth falls below minus 1 percent, it is estimated that the number of unemployed people can increase in excess of 10 million people.

Also read : Three Phases to Recovery

According to the data reported by several business associations in June 2020, the textile industry has laid off 2.1 million workers, the land transportation sector 1.4 million workers, the restaurant sector 1 million workers, the footwear industry 500,000 workers, the hospitality industry 430,000 workers, the retail industry 400,000 workers, and the pharmaceutical industry 200,000 workers. The number of the laid-off workers does not include workers in the informal sector.

Meanwhile, the risk of job loss in the informal sector is much greater. In February 2020, the informal sector employed 74.04 million workers (56.5 percent).

Adaptability

With the potential economic contraction and unemployment explosion, we must be ready to face a recession storm. We should not give up during the recession, and should instead increase our mitigation capabilities.

A number of adaptive behaviors are needed to accomplish this. First, the efforts to break the chain of Covid-19 transmission should be more aggressive, especially in expanding mass testing and ensuring that the Covid-19 transmission curve will flatten immediately in all regions.

Also read : Economic Impacts of Covid-19 Outbreak must be Mitigated

Second is to share the burden. The government and business players should combine and share their resources in order to reduce the burden. The government should not just appeal to those companies must avoid layoffs and leave it to the people to solve the problem. The government should at least make an effort to reduce business costs by offering various incentives and easing programs.

Third, the social protection programs intended to mitigate the impacts of Covid-19 should be improved in their effectiveness. Social assistance should be distributed faster and on target so that it functions more effectively as a social safety net.

Also read : In Search of Accurate Data

Kompas/Bahana Patria Gupta

Residents crowd the Sidoarjo City Post Office in East Java on Thursday (11/6/2020), the last day before the deadline to receive cash in the first phase of a social aid program from the Social Affairs Ministry. The residents ignored Covid-19 health protocol by jostling while waiting in line. Within two days, the post office had to disburse cash assistance to 9,000 beneficiary families in Sidoarjo.

Fourth, creativity should be applied to take advantage of opportunities. The health emergency presents an opportunity to restructure the economy.

Transforming the economy can effectively accelerate economic recovery. This is certainly not about merely promoting Industry 4.0 jargon or relying solely on the implementation of the omnibus law on job creation.

An import substitution industry should be promoted to reduce our dependence on imports for manufacturing textiles, pharmaceuticals, and electronics, and imports of food commodities. There is an opportunity to take advantage of the variety of industrial investments relocating from China, but this requires fast and concrete action, including certainty in investment licensing.

Investment licensing must be fully integrated so the licensing process is simple. However, this does not mean that we have to ignore standard investment requirements, especially those related to achieving sustainable and equitable growth.

The issuance of the stimulus fund can reduce the burdens on the real sector (industry) to survive the pandemic.

Fifth, effective economic stimulus should be issued to cope with Covid-19 and to restore the post-pandemic economy.

The stimulus funds allocated through the National Economic Recovery (PEN) program continue to swell. Ironically, the budget value has changed at least four times in less than two months.

The government initially allocated Rp 330.1 trillion for the PEN program. However, over the next two months, this amount was gradually raised to Rp 566.17 trillion and then to Rp 589.65 trillion. The budget for the PEN program has been again raised, this time by Rp 18 trillion to Rp 607.65 trillion.

However, almost all business operators are still waiting for their stimulus package. At least the issuance of the stimulus fund can reduce the burdens on the real sector (industry) to survive the pandemic.

ENNY SRI HARTATI, Senior researcher, Institute for Development of Economics and Finance.