The global economy is expected to expand 4 percent in 2021, assuming an initial COVID-19 vaccine rollout becomes widespread throughout the year - Photo: Special

JAKARTA (TheInsiderStories) – The World Bank sees Indonesian economy will contraction around 1.6 percent to 2.0 percent in this year due to the COVID-19 pandemic. Earlier the multilateral body predicted the country’ economic growth at zero percent.

In 2021, the agency is projecting a more optimistic growth of around 3.0 to 4.4 percent for the Southeast Asia largest economy. The Fund also projects that economies in the East Asia and Pacific (EAP) region still grow positively around 0.9 percent in 2020.

The Bank assesses that various factors due to the escalation of the COVID-19, such as restrictions on mobility, increased health risks, and the weakening of the global economy have put pressure on domestic demand, both consumption and investment activities. The World Bank also shows an assessment of welfare indicators, particularly the extreme poverty rate which is projected to rise again for the first time since 2006. Extreme poverty has increased from 2.7 percent in 2019 to 3.0 percent in 2020.

Commenting on the World Bank predicting, head of the fiscal policy office at the finance ministry, Febrio Kacaribu stated, “In general, the outlook for the World Bank is still in line with the latest government assessment which estimates that Indonesia’ economic growth will be in the range of -1.7 to -0.6 percent.”

While for the poverty rate, Kacaribu revealed, majority of the lowest income has received government support through the national economic recovery program (ERP), either in the form of a Social Safety Net, assistance, as well as electricity subsidies. The government has allocated a budget of Rp203.9 trillion (US$13.78 billion) or around 0.9 percent of gross domestic products (GDP).

East Asia Pacific

At the same day, World Bank reported COVID-19 has delivered a triple shock to the developing East Asia and Pacific (EAP) region. The pandemic itself, the economic impact of containment measures, and reverberations from the global recession brought on by the crisis.

Swift action will be needed to ensure that the pandemic does not hamper growth and increase poverty for years to come, according to the report. Domestic economic activity is reviving in some countries that have so far contained the spread of the virus.

But the region’ economy, said World Bank, is heavily dependent on the rest of the world, and global demand remains subdued. The region as a whole is expected to grow by only 0.9 percent in 2020, the lowest rate since 1967.

While, China is forecast to grow by 2.0 percent in 2020 – boosted by government spending, strong exports, and a low rate of new COVID-19 infections since March, but checked by slow domestic consumption – the rest of the EAP region is projected to contract by 3.5 percent.

Prospects for the region are brighter in 2021, with growth expected to be 7.9 percent in China and 5.1 percent in the rest of the region, based on the assumption of continued recovery and normalization of activity in major  economies, linked to the possible arrival of a vaccine. However, output is projected to remain well below pre-pandemic projections for the next two years.

The outlook is particularly dire for some highly exposed Pacific Island Countries where output is projected to remain about 10 percent below pre-crisis levels through 2021. Poverty in the region is projected to increase for the first time in 20 years: as many as 38 million people are expected to remain in, or be pushed back into, poverty as a result of the pandemic (based on the upper-middle income poverty line of $5.50 a day).

In the wake of COVID-19, EAP governments have, on average, committed nearly 5 percent of their GDP to strengthen public health systems, support households, and help firms to avoid bankruptcy. However, several countries have found it hard to scale up their limited social protection programs, on which they previously spent less than 1 percent of GDP, and continued support will put pressure on government revenue bases.

COVID-19 is not only hitting the poor the hardest, it is creating ‘new poor.’ The region is confronted with an unprecedented set of challenges, and governments are facing tough choices,” said Victoria Kwakwa, VP for East Asia and the Pacific.

She continued, “But there are smart policy options available that can soften these tradeoffs – such as investing in testing and tracing capacity and durably expanding social protection to cover the poor and the informal sector.”

The report warns that without action on multiple fronts, the pandemic could reduce regional growth over the next decade by 1 percentage point per year, with the greatest impacts being felt by poor households, because of lower levels of access to healthcare, education, jobs, and finance.

School closures due to COVID-19 could result in a loss of 0.7 learning-adjusted years of schooling in EAP countries, according to analysis in the report. As a result, the average student in the region could face a reduction of 4 percent in expected earnings every year of their working lives.

Public and private indebtedness, along with worsening bank balance sheets and increased uncertainty, pose a risk to public and private investment, as well as to economic stability – at a time when the region urgently needs both. Large fiscal deficits in EAP are projected to increase government debt on average by 7 percent of GDP in 2020.

The report calls for fiscal reform to mobilize revenue through more progressive taxation and less wasteful spending. In some countries, the stock of outstanding debt might already be unsustainable and require greater external support.

At the same time, the crisis is accelerating pre-existing trends in trade, including regionalization in EAP, a relocation of some global value chains away from China, and faster growth in digitally-delivered services, but also increasing pressure to revert to protectionism.

“Many EAP countries have been successful in containing the disease and providing relief, but they will struggle to recover and grow. The priorities now should be safe schooling to preserve human capital, widening narrow tax bases to avoid cuts in public investment, and reform of protected service sectors to take advantage of emerging digital opportunities,” said Aaditya Mattoo, Chief Economist for East Asia and the Pacific.

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