Money and finance |

The Indonesian Economy: Where Is It Heading? 

MONEY AND FINANCE | 27 August 2021

Indonesia lost its prized upper middle-income status after only a year, as Southeast Asia’s largest coronavirus outbreak reversed gains in poverty and employment in the region’s largest economy. 

The World Bank downgraded Indonesia to lower-middle income status as of July 1, with the slippage of gross national income per capita down to $3,870. The country had graduated to upper-middle income status last year with a GNI per capita of $4,050, its first time in that band since rankings going back to 1988.

“The pandemic has created negative economic growth in almost all countries, including Indonesia in 2020. Thus, the decline in Indonesia’s per capita income is an unavoidable consequence,” WB fiscal policy chief Febrio Kacaribu said in a statement Thursday. Gross domestic product shrank 2.1% last year as the economy endured its first recession since the Asian Financial Crisis more than 20 years ago. Of course not all sectors of the economy suffered with the new digital businesses thriving against the drastic collapse of the tourism , travel , retail and hospitality sectors. 

Against this background the government has revealed the draft 2022 State Budget (APBN) under the theme “Continuing Economic Recovery and Structural Reforms.” The government projects Rp 1,840.7 trillion in state revenue, with Rp 1,506.9 trillion coming from taxes and Rp 333.2 trillion coming from non-tax revenue sources. State expenditures are projected to reach Rp 2,708.7 trillion or 15.1 percent of Indonesia’s Gross Domestic Product (GDP), consisting of central government expenditures of Rp 1,938.3 trillion and village funds for cash transfers of Rp 770.4 trillion. 

The macroeconomic assumptions used were:
Economic growth: 5.0-5.5 percent (YoY)
Inflation: 3 percent (YoY)
Exchange rate: US$1 = Rp 14,350 
The interest rate of government bonds (10 years): 6.82 percent
Unemployment rate: 5.5-6.3 percent
Poverty rate: 8.5-9.0 percent 
Gini ratio: 0.376-0.378
Human development index: 73.41-73.46.

The budget deficit is set at 4.85 percent of GDP or Rp 868 trillion. To put this in context, the budget deficit outlook set in 2021 was 5.7 percent of GDP; and currently, the deficit is at 5.8 percent. Minister of Finance Sri Mulyani Indrawati said the 2022 deficit projection is already a steep reduction, in line with the government’s plans to get it back to 3 percent of GDP by 2023. To meet the target, Sri Mulyani said she would remain cautious in issuing either local or global bonds.

The government, none the less, is sure it can regain the upper-middle income band by the end of 2021, but we wonder which of the troubled sectors will be the ones to help that recovery as international tourism will continue to be very restricted with for example Bali’s largest market, Australia still closed, and the retail sector depends on a return to normal working patterns to take place , neither of which are likely in the immediate future. Perhaps we should not be thinking too much about the macro-economy and whatever status is accorded by the “ middle income” ranking , and stick to thinking about the micro and the sectors that desperately need support now who may not survive to enjoy a return to world rankings.