Fiscal and monetary policies in Indonesia

Abstract

In running the country’s economy, cooperation from the government as a fiscal policy maker and the central bank as a monetary policymak-er becomes necessary. The purpose of this paper is to analyze the Indonesian state’s fiscal and monetary policies in overcoming inflation, reducing unemployment and strengthening the rupiah exchange rate. This research uses descriptive and literature review as the analysis. The variables of this research are the fiscal and monetary policy measured by Indonesian Energy Subsidy, Inflation, Unemployment, and exchange rate. Based on the analysis the research found that in the short term, a gradual reduction in fuel subsidies can also be made, provided that the government can also overcome social impacts for the poor.

Keywords: Fiscal policy, monetary policy, inflation, unemployment, exchange rate.

Introduction

Fiscal and Monetary Policy is a government tool to control the economics in a country. The government decision will be based on the business cycle which will influence the government to decide through contraction and expansion phases especially action from fiscal policy.

Indonesia’s economic growth in the second quarter reached 5.27% (yoy), the highest achievement in the last two quarters. The increase in household consumption was influenced by seasonal factors, such as Eid al-Fitr with holiday allowance /Tunjangan Hari Raya (THR) for civil servants include pensioners, as well as special 13th-month salary this year, which pushed the household consumption expenditure component to increase + 0.04% compared to the previous quarter (www.bi.co.id). As we all know, the most significant source of economic growth comes from household consumption expenditure, then followed by the investment portion.

According to the International Monetary Fund (IMF) report entitled Capital Account Crises: Lesson for Crisis Prevention, Indonesia was vulnerable to crisis in 1997/1998, because government debt from the external sector was high and concentrated in the Banking sector (IMF, 2003). This is particularly true of property loans and corporate loans that are higher than capital. So when the Rupiah falls and depreciates, foreign currency debt maturing in the short term fails to pay, and makes the Indonesian economy very difficult to get out of the abyss of trouble.

Some of the problems above one by one began to be overcome. But one that cannot be removed is the matter of currency. Recently, events in Turkey can be a warning, that the weakening of the currency that continues to make the country’s economy becomes very difficult; economic growth fell, inflation rose, consumption weakened.

The exchange rate of the Rupiah had reached its best level in the mid-2000s, before finally definitively continuing to weaken since 2011 until now. When the Rupiah weakened in 2011, the current account began to show symptoms of widening deficits since 2010.

Although Indonesia’s inflation has been declining since 2016, it does not necessarily make the Rupiah strengthen, given that the increase in benchmark interest rates in the United State (US) since 2016 has created new problems for the Rupiah. As we all know, rising interest rates make hot money flows towards a country that provides high returns, in this context the US.

So far, Bank Indonesia (BI) has made monetary anticipation by increasing the benchmark interest rate by 125 basis points (bps). Although the weakening of the Rupiah was a little restrained after the policy, the Rupiah did not succeed in strengthening significantly because the potential of the Fed’s benchmark interest rate increase would still be going forward.

At present, Indonesia position is focused on the Current Account Deficit (CAD), which has continued to expand since 2010. In the second quarter of this year, CAD reached the biggest minus at – $ 8 billion. The wider CAD means more import demand than exports. If Indonesian Government imports, of course, they have to prepare money in foreign currency to pay for imported goods. The effect is the demand for foreign currencies rises and decreases the value of the Indonesian currency, and the higher the demand for foreign currency caused the value of the domestic currency becomes weaker (supply-demand). Recently, conditions have become less pleasant, because a negative Current Account will make a currency fall and trigger an increase in the price of goods.

Based on the problem above, this study purpose is to describe the Indonesian macroeconomics problem and quick suggestion regarding to the problem.

Theoretical Review

Macroeconomics

The Macroeconomic theory is a theory that studies and explores all events, phenomena or problems related to the economy as a whole or in a large scope. Macroeconomics is also part of economics that focuses on the study of the working mechanism of a nation’s economy as a whole (Mankiw, 2013). In macroeconomic studies, the increase in output can be analyzed as short-term and long-term. In the long term, the increase in output can be influenced by technology and input of production factors, such as capital and labor. The investment will increase the amount of capital. So that the additional capital, of course, will increase the availability of employment which can then trigger an increase in national output. However, the key factor that most influences the increase in national output is technological progress.

In the short term, changes in output can be influenced by aggregate demand through the goods market and the money market. The increase in aggregate demand can be controlled by a fiscal policy through government taxes and expenditures and monetary policy through the money supply and interest rates. From the fiscal side, there is a decrease in tax at the level of investment and government expenditure that is constant, causing the disposible income to increase, thus driving the level of consumption. The high level of consumption causes aggregate demand to increase, which affects the increase in output (Samuelsen and Nordhaus, 2010). Because macroeconomics has macroeconomic objectives is to understand and understand events or events surrounding the economy and try to make a formula that is a solution to improve existing economic policies. As a controller of the national economy, the government must issue pro-people policies to achieve national development goals. In order to advance and regulate the national economy, the government uses various policies. Among the policies that the government uses are fiscal policy and monetary policy.

Fiscal Policy

Fiscal policy is another name for the budget policy. Fiscal policy is a policy or rule taken by the government regarding expenditure and government income to improve conditions, especially economic conditions. Fiscal policy refers to policies made by the government to direct the economy of a nation through government expenditure and income in the form of taxes (Mankiw, 2013). Fiscal policy is carried out by the government by designing the state budget / Anggaran Pendapatan dan Belanja Negara (APBN) and changing the numbers to obtain a situation such as that which is in the purpose of preparing the APBN. The main instruments of fiscal policy are taxes and expenditures.

There are various objectives in the issuance of fiscal policy, but broadly the objectives of fiscal policy include the following (Case, Fair, and Oster, 2012):

1. Improving the economy in general, is a vital goal of fiscal policy. This is in accordance with the development objectives of the government.
2. Fiscal policy is used so that the economic situation improves. With good economic conditions, it is expected that the business sector will progress and employment opportunities will increase.
3. To Control prices and to overcome the problem of inflation, the government can use fiscal policy (budget). This policy is used to stabilize prices in general which rise when inflation.
4. Distributing and equalizing income in all regions of the country to create social justice for all citizens

Monetary Policy

The definition of monetary policy is the government’s efforts to control or direct the macroeconomic towards the desired condition (which is better) by regulating the money supply. The better situation referred to here is when balance output increases and or price stability is maintained (controlled inflation).

Another definition of monetary policy can be understood as a policy of the monetary authority or central bank in the form of controlling the monetary amount with the aim of achieving the development of desired economic activities (Case, Fair, and Oster, 2012). This monetary policy is part of the policy of the central bank or monetary authority carried out in the form of controlling monetary quantities, which aims to achieve the development of desired economic activities.

In Indonesia, the government can take monetary policy to maintain, increase or reduce the amount of money circulating in the market, as an effort to maintain the economy’s ability to continue to grow, as well as to control inflation. In practice, the government hopes that the development of economic activities in the form of macroeconomic stability can be reflected, among other things, price stability (low inflation), improvement in the development of real output (economic growth), as well as sufficient field/employment opportunities.

Monetary policy can be divided into expansive monetary policies and contractionary monetary policies. Expansive monetary policy is when the government increases the money supply, on the contrary, the monetary contractive policy is when the government reduces the amount of money in circulation. Contractive monetary policy is also referred to as a tight money policy (Mankiw, 2013).

The Indonesian government also carried out military policies to achieve the objectives of national interests, especially in the economic sphere. The purpose of this monetary policy is outlined in the law in the form of Law No.3 of 2004, which places BI as a monetary policymaker. The purpose of monetary policy in Indonesia is to achieve and maintain the stability of the rupiah (Howawrd  et al, 2002). The stability of the rupiah value referred to the ongoing stability of the prices of goods and services that can be reflected in the low and stable inflation rate and price stability reflected in the stability of the Rupiah exchange rate with the currencies of Indonesia’s trading partner countries.

To achieve the objectives of monetary policy, this, the government stipulates that there are three main BI tasks related to this, which include:

• establish and implement monetary policy,
• regulate and maintain the banking system,
• control and keep a smooth payment system.

It can be seen that monetary policy is closely related to the financial system of a country. A sound financial system in a country can support the effectiveness of monetary control. This is because the transmission mechanism of monetary policy has a significant influence on real economic activities that take place through the banking system (Hastiadi, 2018).

DISCUSSION

Inflation in Indonesia

The peaks in Indonesia’s inflation volatility correlate with adjustments in prices set by the government (Lewis, 2007). Inflation some time lead to uncertainty (Payne, 2008). The prices of energy (fuel and electricity) are determined by the Government and therefore do not move in accordance with market conditions, meaning that the deficit produced must be absorbed by the Government or State-Owned Enterprises/Badan Usaha Milik Negara (BUMN) Pertamina and the National Electricity Company / Perusahaan Listrik Negara (PLN). The decades-old program places serious pressure on the balance sheet of the Government’s Budget (APBN) and also limits public spending for long-term and productive projects, such as infrastructure development or social development. However, since Joko Widodo became the head of this country, the Indonesian government has succeeded successfully in reducing energy subsidy funding and increasing funding allocations for infrastructure development and social development. (Tabke 1.)

Fiscal Policy

Fuel subsidies under the Susilo Bambang Yudhoyono (SBY) Indonesian President for the 2004–2014 period. At the end of 2005, after shaking about one year, the SBY government decided to cut fuel subsidies by increasing the price of subsidized fuel more than doubled. This decision was made because international oil prices increased rapidly between 2002 and 2006 (Anwar, 2015). However, due to significant disputes between market prices (actual) and subsidized fuel prices in Indonesia, this step immediately caused inflation to hit double digits – between 14 and 19 percent (year to year – until October 2006. Meanwhile, core inflation – which excludes items that are vulnerable to temporary price volatility, namely food prices and administered prices – is also volatile because of the effect of the second round of incoming energy price adjustments to a wider economy (through increased transportation costs).

As international oil prices continued to rise – touching a record high in June 2008 – and therefore the SBY government needed large funds to keep the price of subsidized fuel at a level that was half the market price, cutting fuel subsidies was needed again. Another problem that arises is that cheap fuel has helped increase car sales to a record high and therefore the demand for fuel subsidies continues to increase. SBY’s decision to raise the price of subsidized fuel in 2008 was welcomed with demonstrations. However, in 2009, when international oil prices declined during the global financial crisis, SBY cut prices on subsidized fuel again. However, one year later (in 2009), SBY changed direction when international oil prices dropped dramatically during the global financial crisis. SBY decided to cut the price of subsidized fuel in Indonesia, an action favored by the people. Aside from the significant drop in international oil prices, it is assumed that SBY is also happy to reduce the price of subsidized fuel ahead of the 2009 election because it will certainly increase the possibility of being re-elected as head of state.

When international oil prices surged again between 2009 and 2012 (due to the emergence of major concerns about Iranian exports) and resulted in a swelling of the budget deficit, the SBY government (now in its second term) wanted to raise the price of subsidized fuel again. However, several prominent political parties opposed the plan. Therefore, the plan to increase fuel prices was postponed.

But when the government budget deficit nearly exceeds the maximum limit of 3 percent of GDP in the midst of high world oil prices and government fuel subsidies in 2013, the SBY government again decided to increase the price of subsidized fuel. In June 2013, premium prices rose 44 percent to IDR (Rp/Rupiah) 6,500 per liter, while diesel fuel rose 22 percent to Rp 5,500 per liter. This step triggered popular protests and was also applied at the wrong time about one year before the legislative elections (in the 2014 legislative elections popular support for the SBY party fell dramatically but must be informed that this decline was also the result of several major corruption scandals that emerged in the Democratic Party the fact that SBY himself could not participate in the 2014 presidential election because the presidential term was limited to only two periods).

To support the poor segment of the community, the government continued the program to provide direct cash. However, inflation rose to 8.4 percent at the end of 2014

A reform-minded president is needed to do that. After Joko Widodo won the 2014 presidential election and was inaugurated as Indonesia’s seventh president in October 2014, one of the first steps he took was increasing the price of subsidized fuel. The negative side effect was the country’s inflation rate, which had just begun to recover towards BI ‘s target of 4.5 percent (after the subsidized fuel price increase in 2013), had no time to recover further, and instead accelerated again to 8.4 percent (y/y) at the end of 2014. This is a difficult decision but is needed for long-term structural economic growth.

In early 2015, President Jokowi was very fortunate because global oil prices had dropped dramatically since mid-2014 amid weak global demand, while oil supplies were strong due to high oil production figures in OPEC countries and the US shale gas revolution. Therefore, Jokowi decided to implement a bold policy. He removed most of the premium subsidies while setting a subsidy of Rp 1,000 per liter for diesel fuel. A new policy is also applied related to subsidized fuel prices. The government will determine the price of premium and diesel every quarter, and these prices will fluctuate in line with international oil prices. However, because global petroleum is recovering carefully.

Jokowi was aware of the importance of implementing unpopular reform measures immediately after becoming President of Indonesia (the seventh). The problem is, the longer the delay, the less likely it will be to be re-elected in the next election (because it takes time to recover from the reform steps). In November 2014, almost a month after taking office, Jokowi cut fuel subsidies by 31 percent for premiums and 36 percent for diesel fuel. But this decision only resulted in little protest. Why? Because when Jokowi cut fuel subsidies, the price of global crude oil was meager. After cutting fuel subsidies. The dramatic fall in global crude oil prices that began in August 2014 in combination with subsidized fuel prices that did not change according to market prices resulted in a paradoxical situation namely: buyers of subsidized fuel subsidizing the government because the price of subsidized fuel has become more expensive than market prices. This action is important to maintain the output growth (Valera et al., 2018).

But despite global oil prices being low, the decision to cut fuel subsidies at the end of 2014 pushed Indonesia’s monthly inflation rate to 1.50 percent and 2.46 percent in November and December 2014, respectively. This very high monthly inflation rate could have pushed some of the population living just above the poverty line to fall below that line. Therefore, a government social assistance program is needed that is right on target to prevent an increase in poverty.

Monetary Policy

The stricter attitude of BI monetary policy (reflected in the increase in benchmark interest rates) in the 2013–2014 period was carried out at the expense of higher economic growth rates for Indonesia (amid higher credit costs, credit growth dropped significantly, economic activity growth downhill). But it is worthy of praise that financial stability is prioritized over higher economic growth (but which is not sustainable).

BI has the main objective of ensuring rupiah stability. BI uses instruments in a wide range to reduce inflationary pressures in the country. The bank’s interest rate policy is adjusted when the inflation target is not reached. Between February 2012 and June 2013, the country’s benchmark interest rate (BI rate) was set at the lowest level in history at 5.75 percent. After this period, inflationary pressures increased due to subsidized fuel price reforms and global uncertainty regarding US monetary policy. The capital outflows that followed it resulted in a sharp weakening of the rupiah exchange rate. Therefore, starting in mid-2013, BI adjusted its BI rate by increasing it gradually but aggressively from 5.75 percent to 7.75 percent. This action also led to a decline in credit growth in Indonesia.

Another measure to tighten monetary policy is to increase deposit requirements for both local currency and foreign currency deposits in Indonesian banks (Wimanda and Hall, 2012). Finally, BI reduces the demand of foreign investors for Bank Indonesia Certificates / Sertifikat Bank Indonesia (SBI) by extending the terms of SBI ownership requirements from one to six months, extending the maturity of SBIs issued to 9 months and by introducing deposits in contexts that cannot be traded with longer maturity (which is only available for banks). These actions aim to mitigate the flow of ‘hot money’ into Indonesia.

Starting from 2015, when the rupiah’s performance stabilized, inflation was low and the current account deficit was under control, BI was able to loosen its monetary policy and begin a rather aggressive monetary easing process, reflected in lower benchmark interest rates. BI lowered its benchmark interest rate drastically from 7.75 percent in early 2016 to 4.25 percent in September 2017 (this also includes a change from the BI rate to a Reverse Repo Rate 7-day BI as a central bank benchmark tool).

However, despite lower interest rates, there are still concerns about the weak rate of credit growth and household consumption in Indonesia (Table 2.)

Unemployment

Even though Indonesia has experienced strong macroeconomic growth since the 2000s (and Indonesia has recovered from the monetary crisis), this informal sector – both in the city and in the villages – still has a large role in the Indonesian economy (Elias and Noone, 2011). Although it is rather difficult to determine the exact number, it is estimated that around 55 to 65 percent of jobs in Indonesia are informal work. At present, around 80 percent of informal jobs are concentrated in rural areas, especially in the construction and agricultural sectors.

Being employed in the informal sector implies a certain risk because informal sector workers usually have lower and unstable income. Moreover, they do not have access to basic protection and services. Meanwhile, the flow of money in the informal sector is not subject to taxes and informal activities cannot be included in the calculation of gross national product (GNP) or GDP (Patunru and Tarsidin, 2012). Therefore, the informal sector is not good for workers and is not good for the economy.

One of the characteristics of Indonesia is that the high unemployment rate faced by young workers aged 15 to 24 years is much higher than the national unemployment rate. Newly graduated students from universities and vocational and middle school students have difficulty finding employment in the national job market. Nearly half of the total workforce in Indonesia only has an elementary school diploma. The higher the education, the lower the participation in the strength of the Indonesian workforce. Nevertheless, in recent years there has been a trend change: the share of higher education diploma holders is getting bigger, and the share of holders of basic education diplomas has diminished. (Table 3.)

This trend was disrupted by Indonesia’s economic slowdown (2011–2015) when the commodity boom of the 2000s suddenly ended amid a global economic slowdown. This is another sign that the Indonesian economy is too dependent on commodity prices (which are volatile). Therefore, President Joko Widodo’s efforts to reduce Indonesia’s dependence on (raw) commodity exports are valued and must lead to a structurally stronger economy in the future. This should also have a positive impact on unemployment in Indonesia.

Indonesia is experiencing a rapid urbanization process. Today more than half of Indonesia’s population lives in urban areas. On the one hand, this is a positive development because urbanization and industrialization are needed to grow into a middle income country. On the other hand, this process needs to be accompanied by the creation of adequate employment in cities. Therefore, investments (both domestic and foreign) need to increase in existing urban areas or new urban areas. Thus, the Indonesian government must make the investment climate more attractive to generate more investment.

Important issues (which are the responsibility of the government) are strengthening of Indonesia’s human resources (human resources refers to the knowledge, experience, and skills of an employee). The quality of local human resources can be improved by improving the quality of education and health services. At present many companies complain that Indonesia’s human resources are too weak. This means that investors prefer to invest in other countries (where the quality of workers is higher), resulting in a loss of opportunities regarding job creation in Indonesia.

Indonesian Currency

Nowadays, Indonesian Rupiah (IDR) is Rp 14,555 (per 18 Dec 2018) against USD. For small open economy, there are two policies used by central banks to maintain exchange rates, namely the fixed exchange rate and floating exchange rate. In Indonesia using the floating exchange rate type. Before the reform era, Indonesia used the fixed exchange rate and the two policies through a market approach. The difference is in determining exchange rates, the first type of why exchange rates can be stable because the government issues foreign exchange reserves to maintain equilibrium points at certain values (ms = md). For the current era, Indonesia maintains exchange rate stability through monetary policy, namely an open market that will affect interest rates. Even though inflation targeting framework has been adopted by Bank Indonesia (BI) since 2005, BI should not disregard the monetary aggregate variable, especially M1. This is because the growth of money is still matter to influence inflation in the short run (Wimanda, 2014).

Unlike China, the Chinese exchange rate uses a fixed exchange rate (but it is different from Indonesia. If the Chinese exchange rate is undervalued against the dollar). The Chinese government aims to keep its export products cheap. In the Indonesian case, before the reform of the rupiah exchange rate remains (but overvalued) because Indonesia issues foreign exchange reserves (dollars) to keep it fixed. When it was unstoppable, and the reserves thinned, the rupiah exchange rate finally collapsed at that time

Since the beginning of 2018, the movement of the Rupiah has continued to weaken or experience significant depreciation against the US Dollar (US). At the beginning of the year, the Rupiah was in the position of IDR 13,542 and weakened to IDR 14,927 as of September 5, 2018, or depreciated by around 10.23%. The decline in the Rupiah exchange rate was the highest since the period of the “1998 monetary crisis” where the US Dollar touched an all-time high at Rp. 16,650. The weakening of the rupiah exchange rate was caused by external and internal factors (Michael, 2018; Hastiadi, 2018):

External Factor:

1. Tightening of US monetary policy by implementing the Tapering Off Quantitative Easing policy.

The Federal Reserve Bank (Fed) has implemented an increase in interest rates or the Federal Reserve Rate since December 2015 of 0.5%, December 2016 by 0.75%, December 2017 by 1.5%, to widen to 3% in June 2018 and last up to now. Furthermore, there is a policy of President Donald Trump who gives more incentives to US fiscal policy. It has an impact on the increase of capital or investment that goes into the US so that the economy increases and the value of the US currency. On the other hand, capital flows or investments that enter other countries, especially developing countries such as Indonesia, are decreasing and resulting in weakening currency values. The Morgan Stanley report, an international financial institution, in 2013, placed Indonesia in The Fragile Five group with South Africa, Brazil, India, and Turkey. These countries are classified as fragile apart from the large current account deficit, also due to the significant dependence on short-term investment.

2. The biggest two-commerce trade war today, the US and China.

It needs to be underlined that the two countries are included in the category of Indonesia’s biggest trading partners. The US and China have implemented a policy of increasing import duties by targeting various goods from both countries. This polemic increases the uncertainty of the global market which will have an impact on the economies of other countries, so that power is strengthened domestic financial market competitiveness is very vital.

3. China’s economic growth has experienced a slowdown in recent years.

Then what is the impact on the pace of the Indonesian economy? China imports many raw or semi-finished goods from various countries, including Indonesia. With the slowdown in China’s economy, this has an impact on reducing Indonesia’s exports. The Head of the Central Statistics Agency (BPS) said that Indonesia’s non-oil exports to China in April 2018 amounted to the US $ 1.82 billion, down 22.81% compared to the previous month.

4. The economic crisis that occurred in Argentina and Turkey also contributed to negative sentiment towards the economy in other developing countries.

Since the beginning of 2018, the Argentine Peso has depreciated against the worst US Dollar by 51.85% as of August 31, 2018. The Turkish Lira currency value as of August 13, 2018 has depreciated by 66% since the beginning of the year. Both of these currencies have strengthened, although not yet significant. As a result, this phenomenon brought negative sentiments in the form of fears of investors withdrawing their money out and decreasing global confidence in other emerging markets including Indonesia.

Internal Factor:

1. The emergence of the Twin Deficits phenomenon experienced by Indonesia, namely the current account deficit and the state budget.

The current account deficit was caused by high domestic activity which triggered an increase in investment and demand for imports without coupled with adequate export growth. According to BI data, the current account deficit in quarter II-2018 was recorded at 3% of GDP or as much as USD 8 billion. This deficit rate is greater than the same period in the previous year of 1.96% or quarter I-2018 of 2.6%. The risk of weakening the rupiah will continue to occur as long as the transaction continues to experience a deficit

2. The current account deficit was triggered by the poor performance of Indonesia’s trade balance.

According to BPS data, in the January-August 2018 period, Indonesia’s trade balance deficit reached USD 40.86 billion. The primary income deficit was the leading cause of the current account deficit and often missed the discussion in the media. This primary deficit is triggered by the massive outflow of funds or repatriation for payment of profits or dividends to investors or foreign investors, as well as foreign debt interest. Based on BI data, the primary income deficit has occurred since 2010, and in the first and second quarters of 2018 is in a deficit of USD 16.06 billion. All items in the calculation of primary income suffered a deficit including labor compensation income deficit of USD 726.5 million, direct investment income deficit of USD 9 billion, investment income portfolio deficit of USD 5.3 billion and other investment income of 1.08 billion.

3. The APNB deficit illustrates that state revenues are unable to compensate for state expenditure or financing.

Taxes as the main source of state revenues are not sufficient to pay for state expenditure so other options must be taken, among others, through state loans or debt.

One of the things that became a frightening specter for the people of Indonesia was the 1998 Monetary Crisis in which the prices of primary and secondary needs experienced touching hyperinflation to the point of 78.2% (Kartasasmita, 2001). Furthermore, the rupiah currency fell depreciated by Rp. 16,650 with a percentage of 254%. Although there is a tendency for the rupiah exchange rate has touched the level of IDR 15,000 and attributed these conditions to the Monetary Crisis in 1998, the fact is that Indonesia’s current macroeconomic conditions are inversely proportional to the conditions of the 1998 crisis period (Howard et al, 2002). It can be seen that Indonesia’s economic condition is fundamentally well categorized. Indonesia’s inflation of 3.2% is still in line with BI’s expectations coupled with the current depreciation, which only touches 11–13%. BI applies a floating exchange rate policy where before the crisis in 1998 it still used a fixed exchange rate policy so that BI did not need to use a lot of foreign exchange reserves to intervene in the rupiah exchange rate (Kompas Online, 2018).

On the other hand, the impact caused by the rupiah exchange rate is Indonesia’s foreign debt in principle increases due to the exchange rate gap. The weakening of the rupiah will be more pronounced if it is due. However, the current condition of Indonesia’s foreign debt is not like before when the debt was dominated by the dollar.

According to the Ministry of Finance through the Directorate of Funding Management and Risk explained that Indonesia’s foreign debt is 60% using the rupiah currency. Although there are internal factors, especially the twin deficit, it can be said that the current condition of Indonesia cannot be equated with the monetary crisis of 1998.

The government has taken quick steps as a short-term solution to stabilizing the value of the rupiah. The BI Board of Governors’ Meeting (RDG) decided to raise BI

7-Day Reserve Repo Rate (7DRRR) of 25 bps to 5.50%, Deposit Facility interest rate of 25 bps to 4.75% and Lending Facility rate of 25 bps to 6.25%. When compared with the beginning of the year, the BI 7-Day Reserve Rate Repo Rate (7DRRR) has increased by 125 bps. The increase in BI’s benchmark interest rate is crucial to maintain the attractiveness of the domestic financial market and increase the flow of funds or investments into Indonesia.

The government also stipulates the mandatory expansion of the use of Biodiesel 20 percent (B20) starting September 1, 2018 on subsidized vehicles or public service obligation (PSO) and Non PSO through the issuance of Presidential Regulation Number 66 Year 2018 concerning Second Amendment to Presidential Regulation Number 61 of 2015 concerning Collection and Use of Oil Palm Plantation Funds. Biodiesel (B20) is a type of diesel fuel oil that is mixed with 20 percent of the components of palm oil. The B20 mandatory program is the government’s strategy to save foreign exchange and reduce diesel imports to nourish the balance of payments and stabilize the value of the rupiah (Suharyadi and Hadiwidjaja, 2011).

The government also imposed an increase in the article 22 income tax rate (PPh) on 1,147 imported commodities regulated in the Minister of Finance Regulation Number PMK 110 / PMK.010 / 2018. The tariff policy varies starting to increase 30 percent to four times. This policy certainly has an impact on economic growth. Based on the Ministry of Finance study, any increase in import duties of 2-4 percent will reduce imports by one percent. This step needs to be taken to stabilize the value of the rupiah which is the main priority of the current government.

CONCLUSION AND RECOMMENDATION

Addressing the problem of inflation, unemployment and the rupiah exchange rate in Indonesia requires cooperation and coordination between the government and BI through integrated macroeconomic policies is very necessary. In this regard, at the policy-making level, BI and the Government routinely hold a Coordination Meeting to discuss the latest economic developments. On the other hand, BI is also often invited at Cabinet Meetings led by the President of the Republic of Indonesia to provide views on macroeconomic and monetary developments related to achieving the inflation target, the money supply, and several other monetary indicators. The coordination of fiscal and monetary policies was also carried out in the joint compilation of Macro Assumptions in the State Budget (APBN) which was jointly discussed in the DPR. In addition, the Government also coordinates with BI in managing State Debt.

There are several other policies that must be taken in order to keep pace and maintain the stability of the rupiah exchange rate. In the long term, there needs to be more effective policy coordination in the Ministry related to the economy and people’s welfare, as well as the revision of the Law on Foreign Exchange Traffic and Exchange Rates.

In the short term, a gradual reduction in fuel subsidies can also be done, provided that the government can also overcome social impacts for the poor.

At the technical level, coordination between the Government and BI has been realized by establishing an Inflation Targeting, Monitoring and Control Coordination Team or in Indonesian known as TPI, at the central level since 2005. TPI members, consisting of BI and related technical departments in Governments such as the Ministry of Finance, Offices Coordinating Minister for Economic Affairs, National Development Planning Agency, Ministry of Commerce, Ministry of Agriculture, Ministry of Transportation, and Ministry of Manpower and Transmigration. Recognizing the importance of this coordination, since 2008 the formation of TPI has been extended to the regional level. In the future, coordination between the Government and BI is expected to be more effective with the support of the TPI forum both central and regional so that low and stable inflation, low unemployment rates, and increasingly stronger exchange rates can lead to sustainable and sustainable economic growth.

In the long term, the implementation of effective coordination between government ministries/institutions needs serious attention. The problem of weakening Rupiah is not only the domain of BI but also other related ministries. For example, a polemic of rice import licensing cases between the Ministry of Trade (Kemendag) and the Public Logistics Agency (Bulog). The Ministry of Trade gave 500 thousand tons of rice import permits in February, an additional 500 thousand tons in May, and again issued 1 million tons of rice import permits in August 2018, with a total potential volume of rice reaching 2 million tons. In contrast, Managing Director of Bulog, Budi Waseso, confirmed that Bulog’s rice warehouses were full (Tirto, 2018). Why is this significant? When the rupiah weakened which was responded to by the implementation of monetary stimulus by BI, the emphasis on the number of imports generally also needs to be elaborated related to the use of the exchange rate in trade transactions. Furthermore, effective coordination between stakeholders will bring positive sentiment to increase investor confidence to invest.

Still, in the context of a long-term strategy, need policy concerning Foreign Exchange Traffic and Exchange Rates need to be done. nowdays there is no policy/rules where there is no obligation for foreign export to be converted into rupiah denominations and there was no minimum time limit for foreign investment funds to be held in the country. Investors and foreign speculators are free to play around with the rupiah exchange rate through sudden reinvestment of capital without the need to pay attention to certain time limits. Indonesia can also learn from Malaysia and Thailand in terms of preventing foreign exchange leaks. For example, Malaysia sets rules that require changing 75 percent of foreign export to a ringgit denomination. In a different context, Thailand which requires foreign export to be deposited for 6-9 months in domestic banks. With the revision of this law, it will be easier for the government to maintain the stability of the rupiah while effectively managing foreign exchange into the state treasury.

In the short term, Hastiadi (2018) believes that the reduction in subsidies on fuel oil (BBM) can be a short-term strategy that can be taken by the government. The current oil and gas balance deficit is quite large which is stimulated by rising domestic demand due to price imbalances caused by the application of these subsidies. When compared with the imposition of 22 PPh tariffs of an average of 8% for imports of consumer goods, it has the potential to reduce output by up to 0.18% or Rp 47.23 trillion and reduce household income by 0.26% or Rp 5.36 trillion. Conversely, the contraction in output with the scenario of reducing fuel subsidies by 10%, the maximum will touch 0.042% or equivalent to IDR 11 trillion where people’s income will only decrease by 0.05% or equivalent to IDR 1 trillion. However, this policy can only be taken if the government can minimize the social impacts that might occur, such as decreasing the purchasing power of low-income people.

References

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Johan Reineer Tumiwa
University of Debrecen, Hungary
E-mail: johan.tumiwa@econ.unideb.hu