Exports have always been the engine of the Indonesian economy, actually the largest of South-Asia, spurring the growth of the country right from when it gained independence in 1945. Indonesia has a commodity-based economy which mainly relies on exports of oil, gas, in addition to animal and vegetable fats and oils. It produces most of the world’s palm oil, as well as large shares of its rubber, cocoa, coffee, gold and coal.
Up to when the world was willing to buy Indonesia prospered thanks to trade with its major partners: USA, China, Japan, India and Singapore. However, recent years’ economic growth has been dampened by a series of factors. First among all the decline in exports, which lost 20.72% year-on-year reaching USD 10.50 billion in January 2016, due to soft external demand and falling commodities’ prices. In addition to this also household consumption fell in response to tighter consumer credit and higher inflation. Consumer prices in Indonesia rose 4.42% in February 2016, accelerating from a 4.14% increase in January. The whole surrounded by a substantial lack of sufficient investment in fixed assets which made the economy strongly reliable on external forces.
Decisive measures to restore the Indonesian economy have now started to be implemented by the newly elected president Joko Widodo, known as Jokowi. His economic objective was that of bringing back Indonesia to its bright times, aiming at an annual GDP growth rate of 7% and promoting an economy not anymore based on commodities but on high-value manufacturing and services. An expansionary fiscal policy was implemented with the attempt of recovering the economy. The Indonesian GDP acquired 5.04 percentage points in the December quarter of 2015, as compared to a 4.74% expansion reported in the previous quarter and beating market expectations of a 4.80% growth. Considering full year of 2015, the GDP grew by 4.79%, fractionally above expectations of 4.75 percent expansion but marking the fifth consecutive year of slowing growth.
The increase in government spending was able to offset the negative consequences of restricted exports and moderate household consumption but at the same time increased the budget deficit. The debt burden grew steadily over the last periods and it is predicted to match or even outpace its revenues. The situation is even worsened by the limited tax capacity of the government; the obsolete taxing system only records 27 of 255 million Indonesians as taxpayers and of them, in 2014, only 900,000 paid what they owed. Moreover, declining revenues due to a dramatic drop in global oil prices has put pressure on the government, much concern has been placed on the issue and has led to the decision of changing the cards of the game. The Indonesian Finance Minister states that now the country is oriented towards tightening government spending. The pledge to boost investment on infrastructure by promoting new roads ports and airports is still there with the difference that the government now aims at a more efficient allocation of resources. Cuts will only regard non-priority spending leaving the areas of major interest for the country untouched.
Indonesia is placing a great effort in trying to restore its economy, and rebuilding it up from the beginning by changing those that have always been the pillars of its growth and that now, following the latest economic development, cannot anymore serve as such. The decision on whether to cut government spending or not can be crucial in the determination of the future of the country, but above all there is the need to efficiently employ resources to spur the economic growth while at the same time not causing too much harm to the budget deficit.
Fiammetta Galzerano
Up to when the world was willing to buy Indonesia prospered thanks to trade with its major partners: USA, China, Japan, India and Singapore. However, recent years’ economic growth has been dampened by a series of factors. First among all the decline in exports, which lost 20.72% year-on-year reaching USD 10.50 billion in January 2016, due to soft external demand and falling commodities’ prices. In addition to this also household consumption fell in response to tighter consumer credit and higher inflation. Consumer prices in Indonesia rose 4.42% in February 2016, accelerating from a 4.14% increase in January. The whole surrounded by a substantial lack of sufficient investment in fixed assets which made the economy strongly reliable on external forces.
Decisive measures to restore the Indonesian economy have now started to be implemented by the newly elected president Joko Widodo, known as Jokowi. His economic objective was that of bringing back Indonesia to its bright times, aiming at an annual GDP growth rate of 7% and promoting an economy not anymore based on commodities but on high-value manufacturing and services. An expansionary fiscal policy was implemented with the attempt of recovering the economy. The Indonesian GDP acquired 5.04 percentage points in the December quarter of 2015, as compared to a 4.74% expansion reported in the previous quarter and beating market expectations of a 4.80% growth. Considering full year of 2015, the GDP grew by 4.79%, fractionally above expectations of 4.75 percent expansion but marking the fifth consecutive year of slowing growth.
The increase in government spending was able to offset the negative consequences of restricted exports and moderate household consumption but at the same time increased the budget deficit. The debt burden grew steadily over the last periods and it is predicted to match or even outpace its revenues. The situation is even worsened by the limited tax capacity of the government; the obsolete taxing system only records 27 of 255 million Indonesians as taxpayers and of them, in 2014, only 900,000 paid what they owed. Moreover, declining revenues due to a dramatic drop in global oil prices has put pressure on the government, much concern has been placed on the issue and has led to the decision of changing the cards of the game. The Indonesian Finance Minister states that now the country is oriented towards tightening government spending. The pledge to boost investment on infrastructure by promoting new roads ports and airports is still there with the difference that the government now aims at a more efficient allocation of resources. Cuts will only regard non-priority spending leaving the areas of major interest for the country untouched.
Indonesia is placing a great effort in trying to restore its economy, and rebuilding it up from the beginning by changing those that have always been the pillars of its growth and that now, following the latest economic development, cannot anymore serve as such. The decision on whether to cut government spending or not can be crucial in the determination of the future of the country, but above all there is the need to efficiently employ resources to spur the economic growth while at the same time not causing too much harm to the budget deficit.
Fiammetta Galzerano