The Coronavirus outbreak is still unfolding and humankind is caught off guard. Amidst the sea of uncertainty, everyone agrees: saving lives is the utmost priority. However, disentangling public health and economic considerations is not only difficult but also futile. Fighting the virus and saving people requires big financial resources. Any policy to contain the threat also brings disruption to the economy. Unfortunately, it is the poor that are hurt the most by economic disruption. In this FKP hosted by ANU Indonesia Project on 25 March 2020, Chatib Basri (Universitas Indonesia) and Rizki Siregar (University of California at Berkeley) discuss the challenges Indonesian policymakers have to deal with in the wake of the COVID-19 outbreak.
Dr Chatib Basri (left) and Rizki Siregar
KEYPOINTS
- COVID-19 is spreading economic suffering worldwide. The size and persistence of the economic impact is unknowable but can be projected.
- In Indonesia, we face several challenges to mitigate the significant impacts of the pandemic, which includes limited healthcare capacity and the significantly constrained financial resources
The impact to a country depends on how fast the government can implement stimulus packages and targeted policies, both in the supply and the demand side of the economy.
1. There are supply, demand, and confidence channels through which the virus can affects the economy:
- Supply: significant disruptions in the global supply chain, factory closures, cutbacks in many service sector activities,
- Demand: a decline in business travel and tourism, declines in education services, a decline in entertainment and leisure services,
- Confidence: uncertainty leading to reduced or delayed consumption of goods and services, delayed or foregone investment.
2. Coronavirus is having a profound and serious impact on the Indonesia economy. The Indonesian Ministry of Finance predicted that Indonesia’s GDP growth in 2020 is between 0-2.5 per cent. This forecast is in line with the simulation made by McKibbin and Fernando (2020), in which GDP growth may reduce to 1.3-4.7 per cent from the baseline.
3. Policymakers must support vulnerable households and small businesses to save as many live as possible and to minimize economic recession.
4. Economic policies directed to support public health goals are first and foremost priority. In terms of the healthcare capacity, there is strong indication that we are already at the limit of capacity in Jakarta and Greater Jakarta, while other parts of Indonesia are not well-equipped. The first focus is supporting all necessary spending on prevention, containment and mitigation of the virus.
5. After the health sector, the priority should be on people. The government need to support all necessary spending on prevention, containment and mitigation of the virus. Some workers and sectors are hit harder and cannot afford to adopt PH measures without safety nets: informal workers, daily wage workers, gigs economy, culinary sectors.
6. In the short run, options include providing vulnerable households with temporary direct transfers to tide them over the loss of income from work shutdowns and layoffs. Social assistance should use the existing mechanism: BLT, JKN, BPJS Ketenagakerjaan. Time is of the essence, starting from scratch is not an option.
7. Some policy responses:
- Stimulus Package 1: staple food, discount on airfare and hotel, subsidy for housing, Triple intervention by Bank Indonesia (market intervention, lower interest rate, and lower reserve requirement).
- Stimulus Package 2: relaxation on various taxes, promote net export performance by simplify the export-import procedures.
8. To achieve long-run growth, after the pandemic is over, policymaker can implement the counter cyclical monetary policy to boost aggregate demand and find a new opportunity in the global supply chain.
9. Furthermore, we need to flatten the curve by social distancing and reduced mobility. Social distancing can reduce economic activities which require physical presence. However, success in containing the virus comes at the price of slowing economic activity, regardless of whether social distancing and reduced mobility are voluntary or enforced.
10. To combat economy fallout, policymakers need more financing resources.
- Now, government allows budget deficit to reach 5 per cent of GDP.
- Financing effort should involve local, global, multilateral, bilateral cooperation and should consider use of swap lines, CMIM, or DDO.
- International support from other countries. As Indonesia has a good relationship with China, we can ask them to support our actions to overcome the coronavirus and its economic impact (e.g. in terms of paramedics).
This article is re-published from the ANU Indonesia blog.
For the complete presentation and Q&A session, please refer to the video and materials provided.
