Economic Stimulus to Prevent Recession

KOMPAS/AGUS SUSANTO

Business activities at Pasar Baru, Central Jakarta, Friday (28/8/2020). In the second quarter of 2020, household consumption was minus 5.51 percent, far below the average growth rate of 5 percent before the Covid-19 pandemic.

The negative impacts of the Covid-19 pandemic have devastated the world economy.

The tight restrictions (lockdowns) a number of countries have implemented to prevent Covid-19 transmission have worsened the condition of the global economy. No supply chain is functioning fully or normally and the economy has a very weak pulse in both production/supply as well as demand.

Technically, most countries in the world entered the abyss of an economic recession in the second quarter of 2020 from experiencing negative annual growth (year-on-year by percentage) over two consecutive quarters. The major nations of Europe have been among the worst hit.

Britain experienced its deepest contraction with minus 21.7 percent growth in the second quarter from minus 1.7 percent in the first quarter of 2020, followed by France, which saw growth fall to minus 19.0 percent from minus 5.7 percent in the previous quarter. Italy recorded second-quarter growth of minus 17.3 percent from first-quarter of minus 5.5 percent. Germany, the most powerful country in Europe, then recorded a contraction of 11.7 percent from minus 2.2 percent in the first quarter of the year.

Also read: 2021 State Budget Should Accelerate Economic Recovery: Jokowi

In ASEAN, the Philippines has seen the deepest recession, with growth falling from minus 0.7 percent in the first quarter to minus 16.5 percent in the second quarter. Singapore and Thailand recorded second-quarter negative growth of respectively 13.2 and 11.2 percent.

The Covid-19 pandemic has caught the world unawares, despite the Spanish flu pandemic a hundred years ago that behaved similarly to the Covid-19 pandemic. Only a few countries have not entered into an economic recession, including China, Vietnam, Indonesia, Malaysia and the United States. However, these countries (except China and Vietnam) are on the verge of a recession because they have experienced a very deep contraction in second-quarter growth; for example Malaysia (minus 17.1 percent) and the US (minus 9.5 percent).

Also read: Printing Money During Pandemic

AFP/ROSLAN RAHMAN

A man jogs along the Singapore River, as the financial business district is seen in the background, in Singapore on August 11, 2020. - Singapore\'s virus-hammered economy shrank almost 43 percent in the second quarter, in a sign that the country\'s first recession in more than a decade was deeper than initially estimated, official data showed on August 11.

Compared to other countries, Indonesia has been fortunate because it saw just minus 5.3 percent growth in the second quarter of the year from positive first-quarter growth of 3.0 percent.

According to a variety of projections, those countries that have recorded negative second-quarter growth are merely waiting for their turn to descend into a recession in the third quarter. This means that the current economic recession is almost evenly distributed throughout the world among both developed and developing countries.

Compared to other countries, Indonesia has been fortunate.

Chance to avoid recession

Is it possible that Indonesia can avoid this projection? Is there any chance for Indonesia to reverse its negative growth in the second quarter to positive growth in the third quarter and avoid a recession? This is e difficult and complicated task, considering that the pandemic has not been on a downward trend in the world and some countries are facing the threat of a second wave of infection. In addition, the pressures of the global economic downturn are projected to continue through the end of the year.

Seeing that the Indonesian economy was not in as bad a condition during the first semester as other developing countries (peers) and developed countries due to the Covid-19 pandemic, it seems that Indonesia still has hope of avoiding a recession even though the chance is slim. The Indonesian economy is unique, as the main source of its growth is household demand (particularly household consumption) and not international trade, which is highly dependent on external conditions. Indonesia has experienced relatively little of the negative impacts of the global recession compared to its neighbors like Singapore and Thailand.

It must be acknowledged, however, that the current economic crisis is larger, broader and much more complex than the 2008 global financial crisis, when the Indonesian economy still grew 4.6 percent in 2009 after recording 6.0 percent growth in 2008.

Also read : Fiscal and Monetary Synergy

KOMPAS/AGUS SUSANTO

Residents queue to pay at the cashier after shopping for daily necessities at a wholesale center in Bekasi City, West Java, Tuesday (18/8/2020). Household consumption growth as the main motor driving the national economy contracted, minus 5.51 percent.

With growth falling around 1.3 percent yoy in the first half of 2020, significant efforts must be made to accelerate growth in the remaining quarters of the year to avoid a recession. Historically and statistically, this is no easy task and requires the concerted effort of both government and industry. The only hope is to disburse the government’s stimulus package of around Rp 695 trillion in the third quarter, as soon as possible and as widely as possible.

The national economic recovery (PEN) fund is readily available, and is not just a number on paper. The PEN stimulus fund is Indonesia\'s last defense. If it is not disbursed quickly and on target, Indonesia will almost certainly descend into a economic recession. Let us therefore focus on disbursing the PEN fund with the same spirit and vigor that is required for us to face the extraordinary conditions we are facing through unusual and creative solutions, with a sense of divine urgency.

Also read: Maintain Commitment in Economic Recovery Plan

Boosting the demand

In light of the extremely sluggish economy and extremely weak demand, it would be better to use the PEN fund to first encourage demand and then boost supply/production. Therefore, the primary target should be disbursed direct cash assistance (BLT) to the poor and workers with wages below Rp 5 million per month, coupled with the labor-intensive public employment scheme.

The BLT and the labor-intensive employment scheme must target people with low marginal propensity to consume (MPC). People with low MNC, according to theory, spend only to meet their basic or primary needs whenever they have money or an income, and will have no money left to save. This will, of course, have an immediate and direct impact on boosting household demand and household consumption.

Also read : Special Liquidity Loans

Judging from the total funds of Rp 695 trillion allocated to the government’s Covid-19 response and its budgetary composition, it can be determined that the government is aware of the order of its priorities. The government intends to revive slumping demand, especially among the lower classes.

ANTARA/AKBAR NUGROHO

President Joko “Jokowi” Widodo (fifth right) presides over a limited Cabinet meeting on the COVID-19 pandemic at the Merdeka Palace in Jakarta on Monday (29/6/2020).

The composition of the PEN fund is: (1) Rp 203 trillion (29 percent) in social protection, (2) Rp 121 trillion (17 percent) in business incentives, (3) Rp 54 trillion (8 percent) in corporate assistance, (4) Rp 106 trillion (15 percent) for ministries/institutions and local administrations, (5) Rp 123 trillion (18 percent) for MSMEs, and (6) Rp 88 trillion (13 percent) towards public health. It is clear from this budgetary

composition that around 45 percent of the fund targets low-income workers who are most affected by the negative fallout from the Covid-19 health crisis. Adding the supply-oriented programs makes it increasingly clear that the government cares about its small businesses, with around 18 percent of the fund allocated for MSMEs. This is much greater than the 8 percent allocated for corporate assistance.

So, the key now is how to quickly realize the disbursement of the PEN stimulus fund, and on target. Data from 19 Aug. 2020 shows that only Rp 175 trillion of the PEN fund has been realized, far below the expectation. This is a mere 25 percent of the Rp 695 trillion budget ceiling. Budget realization by category is around 8.4 percent in health care, 45.7 percent in social protection programs, 11.7 percent for ministries/institutions and local administrations, 14.3 percent in tax incentives for businesses, 36.1 percent for the MSME sector, and 0.0 percent in corporate assistance.

The low realization of the PEN fund indicates the presence of many technical and nontechnical obstacles in the field, especially the data used as the basis for determining the targets of the stimulus package.

So, the key now is how to quickly realize the disbursement of the PEN stimulus fund, and on target.

KOMPAS/PRIYOMBODO

A worker makes tofu at a home industry in Mampang Prapatan, South Jakarta, Monday (11/11/2019). This micro, small, and medium enterprise (MSME) has not incorporated digital technology. Marketing is carried out conventionally at traditional markets in the Mampang Prapatan and Kebayoran areas.

The biggest job today is how to push the realization of the demand-side stimulus, followed by the supply-side stimulus. The data contains significant differences in the supply and demand targets. The demand-side data tend to be weaker with doubtful validity, so they are potentially off target. Who are the poor people who are entitled to the BLT? Who are the workers who make less than Rp 5 million a month? Meanwhile, the supply-side data is more complete and accurate, especially for assistance that is channeled through banks, like the MSME stimulus fund.

To save the Indonesian economy from a recession, the PEN stimulus fund must be disbursed through all channels in a spirit of mutual cooperation and the responsibility must be shared between the Finance Ministry, Bank Indonesia, the Financial Services Authority, ministries/institutions, regional governments, and banks in line with their respective portions and authorities.

Banks have been quick and responsive in restructuring loans for their customers (especially MSMEs) who have been negatively affected by the health crisis, because they have in place strong and valid data, as well as strict risk management measures, even before the PEN fund rolls in. Banks have proven successful in channeling the PEN fund through the placement of Rp 30 trillion in government funds and interest subsidies.

However, this does not mean that the biggest burden of saving the economy from a recession should be placed on the shoulders of banks. The role of banks is only limited to boosting the supply side, and not creating demand. Lending will be in vain without demand. Forcing it will only result in bad credit.

DOKUMENTASI ANTON HENDRANATA

Anton Hendranata

It is hoped that the realization of the PEN stimulus fund will be accelerated soon, especially on the demand side, so Indonesia can avoid a recession.

Anton Hendranata, Economic observer.