In the second quarter of 2020, the Indonesian economy contracted by 5,32 percent (yoy). Household consumption as the largest component of the source of Indonesia's economic growth was the biggest contributor to the decline at -2,96 percent, followed by investment at -2,73 percent. Cumulatively, the Indonesian economy contracted by 1,26 percent when compared to the first semester of 2019.
Regarding the report submitted by the Central Bureau of Statistics yesterday, Executive Director The PRAKARSA, Ah Maftuchan said "The decline in household consumption is a signal for the government to immediately evaluate social protection programs in efforts to deal with Covid-19. Universal basic income (universal income guarantee), namely unconditional cash assistance for all residents, can be an alternative in boosting household consumption. Universal income guarantee can be given to all citizens of productive age and the elderly for a minimum of 3 months with a value of IDR 500-600 thousand per month.”
In addition, the contraction in government spending growth was also quite surprising. “The fall in government spending to 6,9 percent in the second quarter of this year was the worst in a decade. This condition indicates that the current issue of fiscal policy is not yet sufficiently expansive. Ministries/Institutions and local governments and village governments must execute government spending." said Rahmanda Muhammad Thaariq, Economic Researcher, The PRAKARSA.
“The government needs to be more serious in reforming the procedures for accelerating expenditure execution at the central and regional and village levels so that economic growth does not return to negative in the third and fourth quarters. Because if economic growth is negative for two consecutive quarters, the Indonesian economy will enter a recession phase and this must be avoided. History has proven that an economic recession has always been synonymous with a decline in people's purchasing power and a massive increase in unemployment," Maftuchan added.
“Therefore, the government needs to concentrate on how to make an effective expansionary fiscal policy in leveraging Indonesia's economic growth. First, make government spending executed as early as possible and with quality. Second, direct social assistance in the form of cash and target all citizens. If the government still prioritizes the targeting approach, then the household group with middle economic income must also be included as a target. Moreover, according to the World Bank report, there are 115 million Aspiring Middle Class (middle class candidates) who are prone to falling into poverty again (Jamila). Most of this group only have an average consumption level per month between IDR 2-4,8 million rupiah. In addition, most of them are informal workers so they do not have social security and are often not covered by social assistance from the government. Appreciation for the government's plan to provide cash assistance to groups of formal workers with salaries below Rp 5 million. However, this has the potential to “exclude” informal worker groups, so the universal approach is the most appropriate solution. Third, the amount and duration of government spending or social assistance must be flexible which can be readjusted if economic activity is still not enthusiastic.” added Rahman.
From the employment aspect, the pandemic has also affected the unemployment rate in Indonesia. According to data from the OECD, the unemployment rate was at 8,4 percent in May 2020, an increase of 3,2 percent compared to February 2020. “In response to this problem, the government needs to provide social protection and increase skills in dealing with the economy in the pandemic era. Job creation through labor-intensive programs and industrialization must be increased immediately considering that every year there are around 2 million new workers in Indonesia," said Maftuchan.
"Although efforts to accelerate economic recovery need to be the government's main concern, do not let the efforts to accelerate the response to the COVID-19 pandemic become secondary. China has proven that its aggressive handling of the COVID-19 pandemic has proven to accelerate economic growth. In the third quarter of this year, China's economic growth was recorded rebound from minus 6,8 percent to positive 3,2 percent. Moreover, since March 2020, Indonesia's inflation has been relatively low and has been on a downward trend. This indicates that the economic downturn during the COVID-19 pandemic was caused more by demand shock than supply shocks. Thus, the government still has enough room to accelerate spending absorption and if necessary increase the spending budget this year," concluded Herawati, Economic Researcher at The PRAKARSA.
Contact Person
Herawati (Economic Policy Officer The PRAKARSA)
Email: herawati@theprakarsa.org
Mobile: +6285333974546
