JAKARTA – The importance of a new spending package is growing by the day as the Indonesian government seeks to head off potential unrest on the streets and prevent Jakarta’s unemployed from drifting back to their towns and villages in the Java heartland, taking the coronavirus with them.
Finance Minister Sri Mulyani Indrawati is reportedly working on an US$8 billion plan to shore up the health care sector, provide salaries to laid-off employees for five months and also dish out handouts to informal sector workers, who make up about half of the capital’s labor force.
That will require the government to seek parliamentary approval for an emergency presidential regulation in lieu of law, raising the authorized limit of the 2020 budget deficit from 3% to 5% – or perhaps even higher.
That only requires the prior approval of House of Representatives Speaker Puan Maharani, but it must be enacted into law by a plenary session of Parliament within three months of going into force.
“This is the time when we should go out of the box,” says Chatib Basri, president Susilo Bambang Yudhoyono’s finance minister between 2013 and 2014. “We have to forget economic growth for now and come up with a huge stimulus to deal with this crisis.”
“This is not a normal time, so a traditional fiscal pump-priming policy is not going to work,” the normally conservative Australian-trained macro-economist told Asia Times. “We can only worry about that when things get back to normal.”
While President Joko Widodo has so far resisted calls to lock down Jakarta, the epicener of the virus in Indonesia, the government is working on measures that will limit access and egress to and from the capital and allow authorities to seal off neighbourhoods and generally restrict freedom of movement.
Jakarta Governor Anies Baswedan has ventured as far as he can legally go in declaring a state of emergency, urging residents to stay and work from home and directing the temporary closure this week of 18 of the city’s largest shopping malls.
Widodo’s security advisers have warned of the threat of social unrest if the crisis is not handled carefully and say it would be disastrous if the government allows millions of city dwellers to spill out into the countryside, either now or during next month’s post-Ramadan holiday.
Mudik, the traditional pilgrimage, would potentially spread the virus into areas outside of Jakarta into densely-populated Java where it has yet to take a firm hold and where medical facilities are often limited to rudimentary health clinics.
Indonesians understand that Covid-19 is an act of God and not a market failure, but Jakarta’s traditional markets and other commercial centers are as crowded as usual in a worrying sign that many people still don’t understand how easily the virus is spread.
More than 1,000 of Indonesia’s 1,285 recorded infections so far are on Java, and half of those are in Jakarta; about 220 of the rest are in West Java and Banten, the two provinces surrounding the capital. With 114 deaths, the country has one of the highest Covid-19 mortality rates worldwide.
Only on March 28, authorities quarantined 183 Muslim worshippers who had attended a mass gathering at a West Jakarta mosque two days earlier after three of them tested positive for the virus. Among them are 78 foreign nationals.
The episode served as a slap in the face for former armed forces commander General Gatot Nurmantyo, who has earned scorn on social media for urging Muslims to go to their mosques to show that they are not breeding grounds for Covid-19.
Parliament is due to return from recess on April 3, but the current physical distancing policy means there may be a delay. Remote voting isn’t allowed, so when the House does resume business, plenary sessions may have to be staggered with only a limited number of MPs in the chamber at one time.
Politicians were reminded they are not immune from the disease with the death last week of the first parliamentarian, ruling Indonesian Democratic Party for Struggle (PDI-P) legislator Imam Suroso, 56, ironically a member of the House health commission.
The only member of Widodo’s Cabinet to be infected, Transport Minister Budi Karya Sumadi, is still recovering in the military’s Gatot Subroto Hospital; the president is conducting most of his meetings by video conferencing from his palace in Bogor, south of Jakarta.
The current 3% deficit limit, laid down in the 2003 Finance Law, followed the lead of the European Union and, according to some sources, was based on advice from the International Monetary Fund (IMF), which was then led by managing director Horst Kohler, a German economist.
The government plans to pay for the new spending package through the issuance of bonds, intended to be bought largely by the country’s banks, insurance companies and other financial institutions.
Banking sources say with lending slowing late last year to its weakest pace in three years, many of the large banks have an excess of liquidity. Reporting a loan-to-deposit ratio of 80%, one bank executive remarked: “You can’t force demand for loans.”
Economists say it is unlikely Bank Indonesia, the central bank, will print money to buy the so-called recovery bonds because of the risk of setting off galloping inflation at a time when prices for foodstuffs and other basic necessities are already on the rise.
Basri believes strengthening the response can be done through a combination of both bonds and loans from the World Bank and Asia Development Bank (ADB), but he said the government will have to move fast because other countries will be considering a similar course of action.
Targeting recipients for the handouts will involve a careful examination of the Unified Database for Social Protection Programmes (UDB), a registry of 25 million of the country’s poorest households developed since the aftermath of the 1997-98 financial crisis.
The UDSB is managed by the National Targeting Unit for Poverty Reduction, part of the secretariat of the National Team for the Acceleration of Poverty Reduction (TNP2K) which ensures that names, addresses and socioeconomic data can be accessed for just such a time as this.
With estimates of first quarter growth already sinking to 4.5% and the pandemic unlikely to peak in Indonesia until at least the second quarter, mounting unemployment is inevitable, particularly in the informal sector.
The good news, according to Golkar Party chairman Airlangga Hartarto, is that all the political parties have agreed to support Widodo’s Omnibus Bill, a cure-all measure designed to remove regulatory roadblocks to future foreign investment.
But under the current circumstances, the legislation won’t have any effect until mid-2021 or later. Indeed, with domestic consumption the main driver of the Indonesian economy, it will not be foreign investment but everyday commerce that will lead the post-crisis recovery when it does finally come.
Even then, critics worry about the piece-meal nature of the reforms, covering problematic areas in at least 70 different laws, and the fact that they still have to be accompanied by implementing regulations that always take time to craft and implement.
Sri Mulyani still hopes this year’s economic growth will reach above 4%, but if the Covid-19 outbreak lasts more than six months, with a resulting impact on international trade and the airline industry, she warns it could also descend as low as 0%.
Business leaders agree. As one Jakarta-based business consultant told his clients last week: “Indonesia is facing its greatest economic challenge since the Asian financial crisis blew out the economy — and blew away the Suharto government in 1998.”
The government’s first $725 million stimulus package, which it rolled out in February before the first confirmed case of the virus was reported, included a 4.56 trillion rupiah ($285 million) allocation to about 15.2 million of Indonesia’s poorest households to help them with the crisis.
But offering airlines and travel agents $27 million in joint promotions was meaningless when the entire tourist trade was already on the point of drying up, leaving tens of thousands out of work and the resort island of Bali now in economic strife.
The government later announced a second $8.1 billion assistance package, which excludes workers in the manufacturing sector from paying taxes and gives manufacturers a discount on corporate tax payments for the coming months.
While Indonesia’s growth could start to stabilize in the second half of the year as fiscal and monetary policy kicks in, it is unlikely to return to pre-crisis levels. Commodity prices will take time to recover and virus containment measures will have a damaging impact on household consumption and investment.
Mobility restraints are already having a severe impact on the informal sector, which has served as a safety valve during past economic crises. While the real economy is largely intact so far, security officials worry about the workers who live hand-to-mouth.
Much of what the government has been doing has been ad hoc. “The Indonesian government is always reactive,” says one economist, who worries about the eventual disruption of supply chains. “It needs to come up with a proper backup plan that will calm fears in the business community.”