Going the fiscal distance to save Indonesia’s economy from COVID-19


Author: M Chatib Basri, University of Indonesia

The COVID-19 outbreak recalls Albert Camus’s novel The Plague. While Camus was not writing about COVID-19, those who have read The Plague can see in it the anxiety and confusion currently gripping those isolated throughout the world.

A worker sprays disinfectant in the bus, to prevent the spread of coronavirus disease (COVID-19) in Surabaya, East Java Province, Indonesia, 22 March 2020 (Photo: Antara Foto/Zabur Karuru via REUTERS).

Doctors in Italy are being forced to choose which patients to prioritise for treatment based on who has the best chance of survival. COVID-19 is a humanitarian problem and presents true moral dilemmas. Its impact is tremendous. It’s now visible on the streets in Indonesia.

COVID-19 has caused both a demand and supply shock to economies. In terms of demand, the slowdown of the Chinese and global economy will impact the Indonesian economy through falling commodity prices and demand for mined goods.

On the supply side, the disruption to China’s economy will lead to a lack of parts and components, and capital goods needed by many countries including Indonesia. This is disrupting the production of goods and services.

Under these conditions, unleashing fiscal stimulus and monetary expansion to stimulate aggregate demand, without addressing the problem posed by the supply shock, will only increase inflation. The Indonesian Ministry of Finance predicts that the economy will only grow between 0–2.5 per cent this year. That may be optimistic.

The rapid spread of the virus has led many countries to introduce health lockdown measures. On 15 March, the Indonesian government called for social distancing, which will impact 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. But there are many jobs that cannot move online, such as ride-sharing drivers with GoJek or Grab, day labourers, small traders, shop staff, waiters, and others.

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 decreasing its spread. Indonesia has a large population and COVID-19 spreads quickly. The government must plan for scenarios where the outbreak spreads uncontrollably, as many other countries have experienced.

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 significant 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 the 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, increasing the risk of urban residents 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 reprioritisation 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, but as Albert Camus wrote, ‘to state quite simply what we learn in time of pestilence: that there are more things to admire in men than to despise’.

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 an EAF special feature series on the novel coronavirus crisis and its impact.

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