Alarm of Economic Recession
Statistics Indonesia (BPS) has announced that the economy contracted in the third quarter by 3.49 percent year-on-year (yoy), meaning that Indonesia has entered a recession.
Statistics Indonesia (BPS) has announced that the economy contracted in the third quarter by 3.49 percent year-on-year (yoy), meaning that Indonesia has entered a recession.
This is the first recession in Indonesia since the 1998 monetary crisis. The current recession is part of a global recession that has also hit almost all countries.
Th recession happened due to a drop in demand for goods and services as a consequence of restrictions on human movement and mobility due to the Covid-19 pandemic. Weakening demand has also triggered a decline in production (supply shock) or investment, which have been one of the engines of national economic growth.
Not end of the world
The economic recession is not the end of everything. On the other hand, we must face the recession with wisdom and calmness so that we do not feel scared and confused.
Indirectly, we have actually lived in the shadow of an economic recession since the first quarter of 2020, when the economy contracted 2.41 percent compared to quarter IV-2019 (quarter-to-quarter). Furthermore, our economy continued to contract until there was the real recession in the third quarter of 2020.
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Thus, we have been living under the umbrella of recession since the pandemic occurred in early March 2020, so we don\'t have to worry about living the next life in the following months.
After recession hit, the next question we need to think about is when will the recession end or can we stop it so the economy can return to normal.
Policy response
Research conducted by Kannan, et al (2009) shows that an economic recession accompanied by an economic crisis has a profound impact, therefore recovery will be slow.
The majority of economists from a number of countries have argued that the only way to deal with the effects of a recession in a time of panic is to prioritize the humanitarian crisis first. Thus, efforts to save humans from the transmission of the coronavirus outbreak are a prerequisite for the ongoing economic recovery.
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Furthermore, economists are of the opinion that countercyclical macroeconomic policies to stop recessions are usually only effective in providing solutions in a short span of time. Nonetheless, this countercyclical policy is still needed to counter the current economic slowdown.
Without a fast, precise and integrated macroeconomic policy, it is feared that the recession will extend until the fourth quarter of 2020, or even until 2021. If we only focus on efforts to save people and let the economy run on its own, perhaps the economic conditions of our country will get worse and harder to revive.
It is hoped that the discovery of vaccine to combat Covid-19 will be one of the main factors to drive economic recovery to a faster path. However, until now there is no discovery of vaccine that is truly effective and tested to fight the coronavirus. Therefore, inevitably, we still need an integrated macroeconomic policy that is countercyclical to stop the recession and mitigate its impact.
Fiscal policy
The countercyclical policies that the government needs to do from a fiscal perspective can be focused on six things. First, increasing people\'s purchasing power and consumption by extending the social safety net policies, such as direct cash transfers, subsidized salaries and electricity subsidies. This subsidy policy can be expanded further into several sectors that can drive the economy directly, such as providing fertilizer subsidies for farmers.
Second, revitalizing the economic engines in the form of micro, small and medium enterprises (MSMEs) which are the backbone of the Indonesian economy and absorb millions of workers. In addition to capital assistance of Rp 2.4 million, which so far has only been allocated for micro businesses, it is also necessary to think about a capital assistance scheme to mobilize small and medium enterprises (SMEs) that have been affected by the pandemic. This is important considering they have a greater production capacity and employ more employees than micro-business activities.
Third, accelerate government spending, whose realization is currently not optimal so that the money can be absorbed directly into the real sector. One of them is by accelerating the realization of the national economic recovery budget (PEN), which has only reached Rp 361.5 trillion as of 26 October 2020, which means that Rp 333.7 trillion or 48 percent remains to be spent in about two months.
Fourth, the need to expand tax incentives for certain sectors that can drive the economy directly. One of them is the trade sector, namely by providing a reduction or exemption from the final income tax (PPh) for business space rental in order to drive the retail sector and extend the application of the final PPh for SMEs in the form of limited companies.
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Fifth, tax incentives for the property sector, considering that this sector is a strategic industry linked to 174 other industries and absorbs around 30 million workers.
Sixth, to increase the final tax rate on public savings in banks, which currently stands at 20 percent for a limited period of time in order to reduce interest in saving and boost the level of public consumption.
Monetary policy
The countercyclical policies that need to be taken from the monetary side to stop the economic slowdown can be done in several ways.
First, continue to carry out expansionary monetary policy by increasing the money supply with the aim of increasing people\'s purchasing power and reducing unemployment. Second, to reconsider the reduction in the benchmark interest rate in order to spur demand for credit, which has been stagnating so far.
Third, to maintain the rupiah exchange rate so that it remains stable and does not fluctuate very sharply. The stable value of the rupiah will make it easier for businesses to calculate production costs, ease trade and increase investor confidence in doing business and investing in Indonesia.
Prudential micro policy
The Financial Services Authority (OJK), which plays a role in prudential micro-policies in the financial services sector, is urgently needed to maintain the stability and health of all financial service institutions operating in the midst of an economic recession.
First, the OJK\'s commitment to extend the credit restructuring policy until March 2022 is expected not only to help the real sector move the business world slowly, but also to assist banks to reduce a larger ratio of bad loans.
Second, encouraging banks to start disbursing loans which have been experiencing a credit crunch. Gradually, credit flows need to be disbursed back into the business world in order to finance economic machines to be able to operate again.
Agus Sugiarto, Head of OJK Institute