President Widodo’s 3rd Year: Need More Sweeteners On Real Sector

Photo by Kadin

JAKARTA (TheInsiderStories) – In the last three years, President Joko Widodo has implemented 15 economic reform packages, many aimed at easing investment in the country and doing away with troublesome and redundant regulations. Yet it is puzzling: has he already put things in motion regarding Indonesia’s economic growth target?

During his presidential campaign, he predicted the country would be growing at 7 percent rate at the end of 2019 (his term of office). However, in the first quarter of 2017, the economy couldn’t muster 5.01 percent. The apparent culprit was stagnant domestic consumption, a factor that contributes more than 55 percent of Indonesia’s gross domestic products (GDP).

But there were other factors: the President pledged a major push to develop infrastructure, which was unmatched by slow investment growth, still below 6 percent per year against an ideal rate of 10-12 per cent a year.

Meanwhile, on the fiscal side, over the past three years, Indonesia – on average – only achieved 83 percent of its annual tax revenue target. Last year government put in motion a tax amnesty program to expand its tax base and increase tax-to-GDP rate, still standing at around 10 percent, below an ideal rate of 15 percent.

The program, which encourages Indonesians to declare untaxed assets by offering very low tax rates, succeeded in bringing in nearly US$330 billion to the Indonesian treasury. The government also collected more than $11 billion in penalty payments. Yet there was still no significant leap in term of revenue.

Tax revenue realization reached $57 billion (around Rp770 trillion) up to the end of September 2017, or a modest 60 percent of the full-year target Rp1,283.6 trillion. Analysts are increasingly questioning whether his piecemeal stabs at reform are sufficient, especially at a time when the economy continues to grow below expectations.

On the monetary side, Indonesian Central Bank (BI) has already cut its BI-7 Day Reverse Repo Rate to 4.25 percent, having left the anchor rate unchanged since October 2016. The odd thing is, why the real sector (reflected by domestic demand on such commodity) has not pick up yet, while there have been so many fiscal and monetary stimuli.

In a recent dialogue with Indonesia Chamber of Commerce (KADIN) the President suggested that people’s purchasing power hasn’t slowed down. He pointed out such data as PT Pos Indonesia and courier provider JNE Express orders, which rose 130 percent on an annual basis per September.

Also added value tax revenue rose 12.14 percent in September, industry sector revenue rose 16.63 percent, trade rose 18.7 percent, mining 30.1 percent, agriculture rose 23 percent.

“Yes, there are offline stores that shut down, but building rents rose 14.7 percent. This indicates trade is shifting from offline to online. People are now selling their merchandise through social media, including Facebook and Instagram,” he said recently.

More Real Sector Sweeteners

Rosan Roeslan, Chairman of Kadin, expressed his appreciation of the President’s economic programs over the last three years, defined as “very action-oriented”. But there is much more left to do to make economy run faster.

Despite Indonesia’s current ranking of 91 in terms of ‘Ease of Doing Business’, The Worker Act (Number 13/ 2003) has undercut investor appetite, as it act stipulates too much compensation for workers, has outsource uncertainty and does not guarantee safety concerning worker rallies.

“It makes no sense when we have to pay 31 times wages to our laborers when a business/ company shuts down,” he said.

Against this, the government approach to collection of taxes from business players could be gentler and more consultative. While he expects the government to cut the income tax rate to 17-18 percent rate, he also hopes authorities will not hunt any business player that has already participated in the tax amnesty program. Such tax rate deductions should bring in more investment and create jobs.

In term of real sectors, the Government should channel state budget expenditures to labor-intensive sectors, such as manufacturing. It should remove any non-tariff barriers that interfere with product exports. The Association proposes free trade agreement guidance in 70 sectors to the government.

In terms of agricultural sectors, the government should develop more farmers’ cooperatives with off-take agreements, as well as financing schemes. Kadin appreciates the government’s farmer insurance program to help farmers avoid losses from their agricultural activities. The farmer insurance, managed by PT Asuransi Jasa Indonesia, was part of the government’s commitment to improving the welfare of farmers, said Amran, and also will help increase production in the agriculture sector.

Writing by Yosi Winosa, Email: yosi.winosa@theinsiderstories.com