Vaccines will free people from the tyranny of Zoom. Economic activities will recover, marked by in-creased spending and velocity of money, which in turn will push inflation up in 2021.
By
A Prasetyantoko
·4 minutes read
KOMPAS/TOTOK WIJAYANTO
A Prasetyantoko
Vaccines will free people from the tyranny of Zoom. Economic activities will recover, marked by increased spending and velocity of money, which in turn will push inflation up in 2021.
This prediction is written by The Economist magazine edition December 12. The magazine reminds us of the threat of inflation, which also occurred in 2008 following aggressive monetary easing.
Nevertheless, particularly for developed economies, the challenge of rising inflation cannot be subsided. Rising interest rates as a policy response to rising inflation will hurt the government budget because the government has larger debt burden.
There are three factors that could accelerate inflation: the impact of fiscal stimulus to mitigate the COVID-19 pandemic, demographic change, and geopolitical shifting. Fiscal stimulus has filled the economy with excessive liquidity to prevent a drop in purchasing power. When the situation is under control, spending will climb.
Meanwhile, production is projected to be overwhelmed by a surge in demand, as developed nations, which already face serious demographic issues, adopt protectionist measures limiting the movement of foreign workers. This rigidity will contribute to a surge in global inflation.
Developing nations like Indonesia face different problems but similar complications. Although developing nations are not facing worker shortage, they have strong external dependency to accelerate production.
Kompas/Priyombodo
Medical officers conduct swab tests on residents at the Genomic Solidaritas Indonesia Laboratory (GSI Lab), Cilandak, South Jakarta, Monday (14/12/2020).
Moreover, this country also faces political rigidity in fiscal policy. Although Indonesia’s debt-to-gross domestic product (GDP) and fiscal deficit-to-GDP ratios are moderate compared to neighboring countries, there is a clause in the law that mandates the country to push down fiscal deficit to below 3 percent by 2023.
Therefore, a balance between macro-monetary and fiscal policy is needed. The introduction of the omnibus finance bill in the 2021 National Legislation Program (Prolegnas) indicates the need for balancing.
The prospect of vaccines
Indonesia is among countries proactively procuring vaccines. On December 6, 1.2 million doses of the Sinovac vaccine arrived in the archipelago, indicating a new era in COVID-19 mitigation.
In January 2021, 1.8 million Sinovac vaccine doses will arrive. After that, there will be waves of vaccine arrivals in the form of intermediate as well as final goods. This program is managed under a deal between China’s Sinovac and state-owned pharmaceutical company PT Bio Farma.
Health Minister Decree No. HK.01.07/Menkes/9860/2020 determines six vaccines to be used in Indonesia, produced by Bio Farma, Britain’s AstraZeneca, China’s Sinopharm, United States’ Moderna as well as Pfizer and BioNTech, and Sinovac. The vaccination procedure is still waiting for approval from the Food and Drug Monitoring Agency (BPOM). After receiving approval, Indonesia will immediately implement mass vaccinations like the first batch of countries to do so, including the United Kingdom, the United States, Canada, Bahrain, Saudi Arabia and Mexico.
A nurse administers the Pfizer-BioNTech COVID-19 vaccine at Guy\'s Hospital in London, Tuesday, Dec. 8, 2020. U.K. health authorities rolled out the first doses of a widely tested and independently reviewed COVID-19 vaccine Tuesday, starting a global immunization program that is expected to gain momentum as more serums win approval.
The COVID-19 Mitigation and National Economic Recovery road map mentioned vaccine distribution during the first half of 2021 will determine the future direction and transformation of the economy. Bank Indonesia also suggests a gradual reopening of the economy in two stages.
The first stage include six economic sectors, including food and beverage industry; chemical, pharmaceutical, and traditional medicine sector; forestry and logging sector; horticulture sector; and metal mining. These sectors contribute 16.8 percent to GDP. The second stage involves 21 sector with 21.6 percent GDP contribution.
On the one hand, the arrival of COVID-19 vaccine sparks a new hope. Nevertheless, vaccines do not fully eliminate the risks. Therefore, vaccine arrival will not automatically return the economy to pre-pandemic conditions in terms of size and growth rate. Change in preferences and spending behavior will determine which industry will survive or decay.
Economic recovery will be marked by a surge in import of raw materials and intermediary input, creating deficit pressure on the current account. With a high reliance on external financing, monetary policy cannot be separated from exchange rate fluctuations. Hence, mass vaccinations need to be supported by structural policy that aims to boost national competitiveness. Otherwise, the economy will still be trapped in the same condition, or even worse than that.
Economics is always about balance and dilemma.
This is a dilemmatic situation. On the one hand, we need accommodative monetary policy to sup-port economic growth and fiscal sustainability, especially when facing the mandate to cut the fiscal deficit to below 3 percent in the next three years. On the other hand, we are reliant on external financing in which independent monetary policy becomes an important variable.
Economics is always about balance and dilemma. Economic policy is about a method to deal with the dilemma while creating balance. One of them is BI independency – which is also faced by central banks in other country. Post-vaccination, we will not have a shortage of problems needing solutions.
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