Economic Challenges and Opportunities of the Prabowo-Gibran Government

Even though the economic outlook is still promising, the challenges ahead will not be easy, especially rising food prices.

Part of building a new nation means building a spirit of tolerance, love and respect among the people of this country. This message from Nelson Mandela feels relevant to reflect on.

After successfully passing the presidential election safely, it is time for the Indonesian people to strengthen ties of brotherhood and eliminate differences. The decision of the Constitutional Court regarding the results of the 2024 Presidential Election on April 22 2024 (the victory of the Prabowo Subianto-Gibran Rakabuming Raka pair is legal) should be responded to wisely and judiciously.

The Prabowo-Gibran administration (the inauguration of the elected President and Vice President is scheduled for October 20, 2024) needs to be given the opportunity to work as tough economic challenges are already looming. What are the economic challenges that will be faced? What policy priorities will be worked on for the next five-year period?

Also read: Global Economic Prospects and Challenges 2024

As a country with an open economy, Indonesia is not immune to global dynamics. The world economy is not doing well. A number of international financial institutions predict that the global economy will slow down in 2024.

The economy of Indonesia's trading partner countries, especially China, is also losing momentum. China's economy is predicted by the International Monetary Fund (IMF) to grow by 4.6 percent in 2024, slower compared to 5.2 percent in 2023.

Geopolitical challenges continue to fuel uncertainty. Geopolitical tensions increased triggered by Iran's drone attack on Israel. As a result, oil prices have the potential to creep up, thereby pushing up inflation again. This condition will trigger central banks in developed countries to be reluctant to reduce interest rates more quickly.

Various factors will have an impact on developing countries. The world's demand for the exports of developing countries will slow down, while the increasing prices of oil and global food can trigger domestic inflation through import channels.

Household consumption

Amidst these various challenges, Indonesia still has promising economic prospects. Indonesia's Gross Domestic Product (GDP) is estimated to increase by around 5 percent in 2024. This figure is better than the economic prospects of other developed and developing countries in the world.

Indonesia should be grateful because the national GDP is supported by household consumption, which has a significant contribution, around 53 percent. Indonesian household consumption also has relatively good resilience and becomes a mainstay during a non-conducive global condition.

This focus on domestic consumption has allowed Indonesia to grow quite high even though the global economy is slowing down. In 2023, the Central Statistics Agency (BPS) stated that household consumption will be the engine of growth and will grow 4.82 percent (year on year/yoy). This quite high achievement was supported mainly by the consumption expenditure of 53.6 million middle class citizens and 114.7 million middle class citizens.

In the midst of these various challenges, Indonesia still has promising economic prospects.

In 2024, the ability of household consumption to support economic growth will be tested. The main challenge comes from the rise in food prices, especially rice. Rice has a significant contribution to inflation. According to BPS, Indonesia's inflation in March 2024 reached 3.05 percent (yoy) and rice played a significant role, which reached 0.74 percent (yoy).

The rise in rice prices is triggered by several factors. Limited supply due to the delayed harvest caused by El Nino is one of the reasons. The price increase is also due to structural factors that lower rice productivity. Data from BPS suggests that rice production from January to April 2024 is estimated to reach 10.71 million tons of rice, a decrease compared to the same period in 2023, which reached 12.98 million tons of rice.

If the challenge is not immediately addressed, it will push rice prices to remain at high levels. This is because demand for rice will always increase with Indonesia's growing population. Currently, Indonesia's population has reached 278.69 million people, an increase from 255.58 million people in 2015.

Also read: Rice Limbung

Rising rice prices amidst increasing demand will increase the public's expenditure on food needs. This condition, in turn, will erode people's purchasing power, thus limiting their expenditures on non-primary goods.

The delayed expenditure of the community for non-primary goods is starting to become apparent, among others, in the sale of cars. Citing data from Gaikindo, car sales in January-February 2024 decreased significantly by 22.64 percent (YoY). Declining purchasing power is also indicated to occur at the farmer level, at least seen in the indicator of the farmer exchange value (NTP) in March 2024, which recorded a 1.31 percent decrease compared to the previous month.

The weakening of purchasing power will, in turn, reduce the drive for consumption. This has been seen in the growth of household consumption in 2023, which slowed down to 4.82 percent (yoy) from the previous 4.94 percent (yoy) in 2022.

Economic policy priorities 2024-2029

The challenges above emphasize the importance of efforts to maintain the momentum of Indonesia's economic growth. A number of steps need to be taken by both the incumbent government and the next government. In the short term, efforts to maintain household consumption are carried out by controlling food inflation, especially rice.

Taking into account that rice production this year is expected to decline, amidst demand that continues to increase along with population growth, rice imports are a solution. Despite the surrounding controversy, rice imports are a feasible option to maintain the availability of domestic rice supplies. Therefore, this year's rice import plan by Bulog of 3.6 million tons needs to be realized in a timely manner.

Indonesia's diplomacy with rice-producing countries to secure rice supply certainty is crucial amidst the protectionism measures of several countries. In addition, it is necessary to ensure that rice imports are not hindered in the port process.

Another effort to maintain household consumption is by preserving the purchasing power of the community. The target is to maintain the purchasing power of the middle-class society and move towards the middle class that has not been reached by social protection. This group of people needs to be given social protection because they are also affected by the increase in food prices.

In the short term, efforts to maintain household consumption are carried out by controlling food inflation, especially rice.

In the medium to long term, there are at least five homework assignments that need to be completed. First, realizing food security by targeting rice self-sufficiency.

A revolutionary step is needed to overcome structural problems, including the utilization of potential land for rice farming, accelerating the completion of targeted dam and irrigation development, developing agricultural technology to produce weather-resistant rice seed varieties and fertilizers that can restore soil nutrients. Equally important is to improve the welfare of rice farmers to prevent job switching and cultivate interest in farming among the community.

Secondly, to build energy independence by promoting investment in the renewable energy sectors (EBT). Efforts to reduce dependence on fossil fuels need to be continuously encouraged to reduce the pressure from world oil prices. Indonesia has a significant potential for EBT.

According to data from the Ministry of Energy and Mineral Resources (ESDM), Indonesia's EBT potential reaches 3,686 gigawatts (GW), and only 12.54 GW or 0.3 percent of the EBT potential has been utilized. This means that opportunities are still wide open. Therefore, investment towards renewable energy needs to continue to be encouraged, especially solar renewable energy which has a potential of 3,295 GW or around 90 percent of the renewable energy potential.

Third, gain foreign exchange from the tourism sector by holding various events in super-priority destinations featuring famous figures, such as Taylor Swift. This artist from "Uncle Sam's country" is able to bring great economic benefits to anyone who invites him.

Taylor Swift's world tour in 2023 has generated gross revenues of 1 billion US dollars. In addition, Taylor Swift's concerts in a number of cities in the United States have boosted the local economy, mainly sourced from fans' spending on accommodation, food, transportation and merchandise.

This phenomenon became known as Swift-nomics. If the effects of Swift-nomics can be combined with the beauty of tourist attractions in super-priority destinations, the opportunity to gain foreign exchange will be greater and can provide positive benefits for the local economy.

Also read: “Swift-nomics”

Fourth, encourage potential MSMEs to export, especially to non-traditional countries. Potential MSMEs need to continue to be encouraged, especially in non-traditional countries that still have promising economic prospects, including South Africa.

Mapping potential demand from non-traditional countries and efforts to bring together MSMEs with potential buyers is one of the priorities that needs to be worked on. This effort requires close synergy between regional and national stakeholders, as well as representatives of the Indonesian Government abroad, such as the Indonesia Trade Promotion Center (ITPC) which acts as the spearhead of marketingIndonesian MSME products abroad .

Fifth, strengthening structural reforms to support Indonesia's competitiveness. Reform efforts need to be continuously directed towards facilitating investment, improving high-quality infrastructure, especially to support the smooth distribution of logistics, and enhancing the quality and skills of human resources.

The various efforts above need to be carried out immediately while the opportunity is still available. John F Kennedy once said, "The time to fix the roof is when the sun is shining." If this can be realized, the Indonesian economy will have increasingly bright economic prospects.

Firman Hidayat, Deputy Director of Bank Indonesia East Java Province