BY: CHATIB BASRI
The pandemic’s impact on the globe is tremendous. And after weeks of confusion and denial, this is now visible on the streets of Indonesia.
COVID-19 is a humanitarian problem which presents true moral dilemmas, as witnessed in Italy and Spain where doctors have to choose who’s worth saving and who is not.
In short, the pandemic’s impact on the globe is tremendous. And after weeks of confusion and denial, this is now visible on the streets of Indonesia.
Jakarta in partial lockdown. The Indonesian government is considering plans to quarantine the capital over fears of mass movement to rural areas. Getty
COVID-19 has unleashed both a demand and supply shock to economies: in the case of the former, the slowdown of the Chinese and global economy will hit Indonesia through falling commodity prices; on the supply side, the disruption to China’s economy will deprive the world of parts, components, and other capital goods needed by many countries, including Indonesia.
Under these conditions, unleashing fiscal stimulus and monetary expansion to stimulate aggregate demand, without addressing the problem posed by the supply shock, will only fuel inflation. The Indonesian Ministry of Finance predicts that the economy will grow between zero and 2.5 per cent this year. That may be optimistic.
The rapid spread of the virus has forced many countries to introduce health lockdown measures. On March 15, the Indonesian government called for social distancing, which will hit economic activities requiring employees to be physically present at their workplace.
This will result in a drop in demand and a disruption in production. The impact can be limited if these activities can be replaced with online activities. In developing economies, however, a higher ratio of people rely on jobs that cannot move online. These include ride-sharing drivers with GoJek or Grab, day labourers, small traders, shop staff, waiters, and others.
Street vendors are schooled in the use of hand sanitisers. Many in Indonesia don’t have the luxury of working from home. AP
If both production and demand are disrupted due to a lockdown or social distancing, fiscal stimulus and monetary expansion aimed at bolstering aggregate demand will not be wholly effective. The government must instead adjust its fiscal policy to suit the situation, its priorities and respond quickly.
Until the government can control the spread of the virus, the Indonesian economy will continue to come under pressure.
The Indonesian government needs to take a number of steps urgently.
It should focus, first, on handling the outbreak and slowing its spread. Indonesia has a large population and COVID-19 spreads quickly. The government must plan for scenarios where the spread is out of control, as in many other countries.
The government must ensure that there are enough hospitals to care for patients. Sufficient test kits, medical personnel, medicine and appropriate medical procedures are also essential.
This requires huge funding. For those losing their livelihoods, monthly health insurance bills will become a burden. The government is rightly covering the healthcare costs of coronavirus patients. But on a larger scale, this policy will require a larger budget.
COVID-19 will clearly have a huge economic impact and many will lose their jobs. To mitigate this and ensure that the middle to lower classes are able to fulfil their daily needs, the government should increase and expand their cash transfer, conditional cash transfer and non-cash food aid programs.
The range of households eligible for support should be expanded beyond the poor to the lower-middle class. It might be better to focus on urban areas – they are at greater risk of COVID-19 infection due to high population density.
If the urban stimulus is insufficient, those who lose their jobs will return to villages, spreading the virus to rural areas.
It’s vital to control food stocks and pharmaceutical supplies. Price hikes due to insufficient stock will lead to panic and social unrest. Managing this is not easy, as the supply and distribution of sufficient stock must be considered.
Businesses are going to be hard hit. There is a risk that companies will face difficulty meeting their debt obligations. So it is important to take steps to relax credit restructuring.
Everything above requires funding. But with the decrease in oil and commodity prices, as well as the slowing economy, government revenue will be hit hard. The government will have to reallocate its budget from low-urgency activities to healthcare and social safety nets.
Budget re-prioritisation is important, but the budget deficit will have to rise. Budget deficit financing might be a problem. A large budget deficit will crowd out the banking sector, while financing the deficit through global bonds is expensive.
So the government has to prepare to receive international support both from bilateral and multilateral agencies.
Perhaps the Indonesian government can establish a deferred drawdown option – a contingent credit line that allows the borrower to rapidly meet its financing requirements following a shortfall in budget financing due to an unfavourable global bond market.
Fiscal stimulus measures need to focus on the health sector and social aid to handle the outbreak. Only after the outbreak is under control, and social distancing ends, can standard fiscal stimulus and monetary policy’be used to support aggregate demand.
All this may not be enough to solve the crisis, Albert Camus gives us hope with: “To state quite simply what we learn in time of pestilence: that there are more things to admire in men than to despise.”
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ABOUT WRITER
M Chatib Basri is a Senior Lecturer at the Department of Economics, the University of Indonesia, and formerly Indonesian minister of finance. This article is part of a series from East Asia Forum (www.eastasiaforum.org) in the Crawford School of Public Policy in the College of Asia and the Pacific at the ANU.
