Pseudo-Optimism

KOMPAS/TOTOK WIJAYANTO

Enny Sri Hartati

We are in an extraordinary situation during the Covid-19 pandemic; therefore, the policy and measures must also be extraordinary.

In the second quarter of 2020, at least 20 countries fell into an economic recession as a result of negative growth over two consecutive quarters. Several countries that had enjoyed positive growth in the first quarter of 2020 suffered a drastic slump in the second quarter, including Malaysia (-17.1 percent), the United States (-9.5 percent), Indonesia (-5.32 percent) and South Korea (-2.9 percent). This bitter pill is undeniably due to the restrictive policies implemented to prevent the spread of Covid-19.

However, the pandemic may not be the only major factor behind the global recession. Despite the downturn, Vietnam still grew a positive 0.4 percent. In fact, while China – the place of origin of the Covid-19 pandemic – contracted 6.8 percent in the first quarter of 2020, it avoided a recession in the second quarter by posting a sudden surge in growth of 3.2 percent.

Also read : Synergy Between Braking and Acceleration

The Covid-19 pandemic has had a far-reaching impact to cause recessions in many countries. However, global economic upheaval and uncertainty were already visible prior to the pandemic due to the trade war between two of the world\'s economic giants. Its impacts have not only disrupted the balance of trade between countries, but have also undermined the strength of financial markets and capital markets in the world. In fact, world crude prices are in a freefall. The world oil price touched US$15 per barrel in April 2020.

In the midst of this global economic uncertainty, the world was suddenly hit by the Covid-19 pandemic. Many countries have been forced to impose lockdowns or quarantines in their territories. Industrial production and their link to the global supply chain were paralyzed, causing production to stagnate in terms of supply and demand.

Kompas

Economic Growth in the Second Quarter of 2020 in a Number of Countries

Now, the global economy is being forced to change. The world must not only adapt in order to survive the pandemic, but must also find a way through various breakthroughs and innovations in order to overcome the uncertainties.

Extraordinary

President Joko Widodo has cautioned on various occasions that the current conditions are extraordinary. Therefore, all stakeholders need to execute policies and programs that reflect their sense of crisis. Formulating a national economic recovery program by widening the budget deficit more than 6 percent is useless if quarter-two government spending is minus 6.9 percent. The most important thing is to ensure the effectiveness of the government’s fiscal stimulus so that intervention is right on target.

Indonesia has a relative large chance at avoiding the recession trap. This is because the central pillar of its economic strength lays within the country, namely household consumption on the demand side form of and micro, small and medium enterprises (MSMEs) on the supply side. Moreover, Indonesia has abundant resources. The government needs to focus on just two priority programs: a social one and an economic on. The crucial point in ensuring program effectiveness is not the amount of the budget, but rather conceptual clarity as well as the speed and accuracy in program implementation.

Also read : Adapting to Recession

Social protection programs are demand-side interventions, namely to prevent purchasing power from falling. Therefore, the target of the intervention is to restore purchasing power among the poor and the vulnerable. It is enough to focus on a single social assistance or subsidy scheme that specifically targets these two groups.

The world must not only adapt in order to survive the pandemic, but must also find a way through various breakthroughs and innovations in order to overcome the uncertainties.

Kompas

Economic Growth Development (Annual in Percent)

Meanwhile, the economic recovery program should focus on MSMEs, which contribute 99 percent to the economy. Businesses need liquidity assistance programs ranging from restructuring, relaxation and new capital assistance, to fiscal relaxation. However, the most important thing is that the program revives economic activity.

Data shows that commercial banks recorded 1.49 percent credit growth to June 2020, and 7.95 percent growth in third-party funds. People are saving instead of borrowing. This means that relying on loan repayment relaxation and liquidity facilities alone will not necessarily be effective amid the sluggish demand.

Pseudo-optimism

Indonesia still grew positive 2.97 percent in the first quarter of 2020, and its 5.32 percent contraction in the second quarter was among the lowest in ASEAN. However, Indonesia does not necessarily have a better condition than those countries that have now descended into the abyss of recession. This is because aside from being unable to not bring Covid-19 transmission under control, Indonesia’s main engine of economic growth is highly vulnerable and has a direct correlation to the Covid-19 health crisis.

Also read : Speed of Recovery

Quarter-two economic contraction has caused unemployment and poverty to increase. Investment also contracted 8.61 percent. As a matter of fact, these two variables are the main contributors to economic growth. Indonesia cannot replicate the performance of China, which posted immediate, accelerated growth. Indonesia posted a trade surplus in the last three months more because of the “blessing” of the rise in precious metal prices, and not because of a surge in productivity and competitiveness of its export commodities.

Therefore, targeting economic growth of 4.5 to 5.5 percent in 2021 amidst its awareness of the worsening crisis only shows the government’s inability to spot and mitigate economic problems. Do not allow the delusive growth target cause further market distrust in the Indonesian economy.

ENNY SRI HARTATI, Senior researcher at the Institute for Development of Economics and Finance (Indef).