IMF: Indonesia's Economic Recovery on the Right Track
The Indonesian government has done a great job during the COVID-19 pandemic. This can be seen from the statistics on the declining poverty rate.
By
DIMAS WARADITYA NUGRAHA
·5 minutes read
JAKARTA, KOMPAS — The International Monetary Fund (IMF) is certain that Indonesia's macroeconomic policies are on the right track in achieving an inclusive and sustainable economic recovery. The fiscal policy is judged credible as regards economic recovery. Bank Indonesia is also thought to be prepared for the normalization of the global monetary policy.
The optimistic outlook was conveyed by the IMF's senior resident representative for Indonesia James P Walsh in an interview with Kompas daily at Kompas Tower, South Jakarta, on Wednesday (8/6/2022). Below is an excerpt from an interview with Walsh.
What do you think about Indonesia's economic policies to accelerate recovery after the COVID-19 pandemic?
In my opinion, the agenda of the Indonesian government in terms of macroeconomic management for economic recovery has been good. It must be admitted that Indonesia is a very large and heterogeneous country so that efforts to accelerate economic recovery are not simple things. However, in general terms, the grand design of the macroeconomic policies for the recovery of the national economy has been very good.
If I can be more specific, there are three important things the government has done during the pandemic. The first is to increase the budget for the health sector so that services for testing, tracing and treating COVID-19 are more accessible to the public. Prices for COVID-19 tests are relatively cheaper here compared to neighboring countries.
The spending for the health sector not only increased but also reached the targeted recipients. Indonesia's vaccination rate is considered very good when compared to countries with a smaller population.
No less important is the decision to increase the fiscal deficit. The rationale behind increasing the fiscal deficit makes sense, considering that this is a time when there is a greater need for state spending for health, and the public also needs fiscal incentives in the form of tax cuts in the midst of an uncertain economic situation due to the pandemic.
In this case, the government strongly supports micro, small and medium scale enterprises (MSMEs) as the backbone of the economy. As a result, the household consumption can be maintained.
The third factor that drew my attention was the smart and supportive monetary policy of Bank Indonesia in supporting the financial sector to cope with the crisis caused by the COVID-19 pandemic. If we look at it, deflation occurred in many countries, including Indonesia, at the beginning of the pandemic. However, the rupiah exchange rate remained stable.
Bank Indonesia has built its credibility in the eyes of the international community during the last 10-20 years by being able to maintain inflation and exchange-rate stability.
If we go back to March 2020 when the pandemic started, there was a huge dislocation in the global financial system. At that time, Indonesia was relatively able to defend against the impacts.
Bank Indonesia and the Financial Services Authority (OJK) have been very active in ensuring that financial markets are not volatile and in ensuring that banking operations continue. This is important because the financial system is the foundation for rebuilding economic growth when the pandemic ends.
Many people lost their jobs and their lives at the start of the pandemic.
The Indonesian government has done a great job during the COVID-19 pandemic. This can be seen from the statistics on the declining poverty rate.
Many people lost their jobs and their lives at the start of the pandemic. However, the effectiveness of government programs, including cash transfers, made the recovery faster. Perhaps in the future cash transfers can be used to help the poor to implement the energy transition.
During the COVID-19 pandemic, government debt increased. Will Indonesia's debt become an obstacle to a sustainable recovery?
The IMF is not worried about Indonesia. We are worried about Indonesia's debt. We have followed and studied debt developments in many countries over the years. We know when a country's debt is at a safe level or not. In our opinion, Indonesia's debt development is still consistent and in line with economic growth.
The growing concern about Indonesia's debt is understandable given the increasing fiscal deficit throughout the pandemic. However, increasing the deficit during the pandemic is normal.
The deficit will certainly increase when state revenues are low and the government needs to increase spending to help people deal with the pandemic. It is okay to increase debt in difficult times as long as you are able to repay the debt when the economy improves. That is what I think the Indonesian government is currently doing.
A fiscal deficit target of below 3 percent of GDP on a sustainable basis is a reasonable target for Indonesia. It shows how much the government is committed to managing state finances. We believe that the government's fiscal-deficit target can be achieved. Improved tax performance will also support this achievement so that the national economic-recovery program is not disrupted by the level of debt.
This article was translated by Hendarsyah Tarmizi.