Jokowi takes his first shot at economic reform

Indonesian President Joko Widodo (Jokowi) has announced a comprehensive package of reforms aimed at reducing inflation and stabilising the exchange rate, stimulating demand through ‘deregulation’ and direct support, with a special focus on creating more jobs in small and medium enterprises (SMEs) and across urban and rural communities. The reforms will come into effect this Tuesday 15 September 2015.

The package is enormous in scope and encompasses many existing government initiatives. It is to be part of a series of packages, so may be only the icing on the cake. But one thing is clear: it is a different package of ‘deregulation’ reforms from that first announced in the second half of the 1980s when the economy appeared similarly to be on its knees. Now the focus is more on public sector support and increasing demand, rather than market oriented reforms to improve competitiveness.

The reforms need to be placed in context. Indonesia is not suffering a major economic meltdown. Growth is lacklustre but steady, inflation relatively high but under control and there’s been no major shock to the labour market. But economic growth is slower than under Jokowi’s predecessor Susilo Bamabang Yudhoyono and the macroeconomic situation is weaker than when Jokowi came to power almost 12 months ago.

Growth is running at around 4.5 per cent, not the 5 to 6 per cent of earlier years. Annual inflation of almost 7 per cent in August 2015 is higher than almost all Indonesia’s neighbours and trading partners, thus undermining the potential competitive gains from the rupiah’s 12-month depreciation. The fall below 14,000 rupiah to the US dollar in August has reminded people of the trauma of the 1998 Asian financial crisis, the last occasion when the rupiah hit such levels.

To reduce inflation and stabilise the exchange rate, Bank Indonesia proposed a wide range of reforms. This included more collaboration with regional governments in seeking to control local prices, controlling beef prices and seeking to reduce rupiah instability through secondary and bonds markets. The import bans and controls of a range of basic food commodities — which have recently had the main impact on inflation — were not addressed directly in the reform package. To improve the domestic supply of foreign currency, foreign nationals will no longer need special permission to open bank accounts in foreign currency up to a limit of US$50,000.

The ‘deregulation’ program announced appears massive, mostly aimed at reducing regulatory overlap. Many of these measures have been in the pipeline for several months. One test will be how quickly they can come into operation given the time taken to draft new legislation in Indonesia.

Other direct government intervention is mooted to come from accelerating and extending existing national strategic projects through administrative reforms and boosting government investment in the property sector.

New efforts to stimulate spending and create more jobs are welcome, but it’s unclear that the anticipated reforms will help solve layoffs in industries affected by declining international prices or loss of competitiveness. By mid-2015, signs of a rapidly weakening labour market were emerging. After years of falling unemployment and recovering formal sector jobs, employment growth began to increase by less than 1 per cent annually on average in 2012–14, compared with labour force growth of closer to 2 per cent annually. There have been substantial layoffs in the coal industry and also manufacturing near Jakarta.

A short-term boost to demand can be expected from raising the tax free threshold from 2.4 to 3.6 million rupiah, which is likely to now cover almost all unskilled workers. Jobs and incomes will also receive a boost through subsidised government credit to SMEs and exporters and subsidies to companies threatening lay-offs.

At the community level, cash-for-work schemes are to be funded through the large new Village Subsidy Fund (Dana Desa), recently proposed by former finance minister Chatib Basri. Pro-poor initiatives include an extra two months subsidised rice for poor households. The government has also promised schemes to lower the cost of fuel for fishermen and government support for the suffering shipbuilding industry.

The disarray in currency and stock markets on 24 August 2015 undoubtedly spooked the government after months of stop-start policies. The new reforms are ostensibly to improve both confidence and lure more investment. Yet there is so far little evidence that the reforms reflect the government’s commitment to more openness and deregulation rather than more of a knee jerk reaction to short-term problems of financial instability.

What can this first package be expected to achieve? It will give money markets and investors some confidence in the new cabinet after the August reshuffle, especially the economics team under Darmin Nasution. But there are worries. Efforts to improve international competitiveness seem absent, for now. Old, popular remedies that have not been easy to implement in the past have also resurfaced, such as subsidised credit for SMEs and support for cooperatives.

The government has been stronger on announcements than implementation, so this will be the thing to watch. Investors will need more signs of a committed and consistent program of reform if the government is to begin to turn things around in the medium to longer term. It has tended to buckle in the face of criticism, such as backsliding on its plan to undertake regular price adjustments of fuel in line with international price movements in early 2015. Other examples are wildly fluctuating quotas for beef imports, and chopping and changing regulations on foreign workers and mineral ores. Hopefully, Jokowi’s first package is just the beginning, as the government gears up to turning things around in Indonesia.

Chris Manning is former head of the Indonesian Project and adjunct associate professor at The Australian National University.