TIG S2/#5: Blessing in Uncertainty: The Miracle of Indonesia’s Economic Recovery

The soaring prices and global supply chain crisis have made the world fall into a hard situation. Amid the instability, Indonesia succeeded to maintain the disruptions in previous quarters and is projected to strengthen in the coming periods.

Sixty countries will experience economic collapse and 42 are predicted for sure. The President of Indonesia, Joko Widodo, expressed his concern about the declining world economy in his speech at the National Coordination Meeting for Government Internal Control, on June 14, 2022 (Handayani, 2022). The world economy is taking a ‘painful blow’ with stagflation — economic growth tends to decline as prices soar. It is inevitable that the shocks of the financial, food, and energy crisis have slowed world economic growth.

Based on the outlook by the United Nations (UN) at the beginning of the period, the economic growth of the world economy in 2022 is expected to increase by 4 per cent compared to the previous year. However, the reality is the opposite. In the latest Global Economic Prospects Report, global growth is only in the range of 2.9 per cent, a significant decrease of 4.1 per cent from 5.7 per cent (World Bank, 2022). As one of Asia’s developing countries and the largest economy in Southeast Asia, what is Indonesia’s strategy to maintain this condition?

Indonesia is optimistic to recover quickly. Micro, Small and Medium Enterprises (MSMEs) are one of the important backbones of the Indonesian economy as a means of surviving Indonesia’s economy from crisis. Reflecting on the crisis that occurred in 2008, MSMEs could contribute around 57.12% of GDP (Handayani, 2022). Seeing this, several private companies have followed their strategy to expand their market inside the country. However, the COVID-19 outbreak that has occurred since March 2020 can still disrupt its resilience. Therefore, in 2020, the government made a policy to financially support MSMEs and companies affected by the pandemic by providing a) immediate provision of credit and liquidity guarantees; b) loan extension and exemption from penalties for late payments; c) ut in future borrowing rates; d) some incentives such as tax incentives and interest subsidies (Gunandi etc, 2022). Those policies actually have a good impact on Indonesia. Government spending increases the productivity of many businesses so workers can fulfill their daily needs from the wages they obtained. Therefore, the level of public consumption in 2021 also dominated the total GDP, which is 64.8% (World Bank, 2022). Followed by the strengthening of the economy in the fourth quarter which is also projected to strengthen further in 2022 and 2023.

On the other hand, Indonesia remains a part of the international community so interdependence is something that cannot be avoided by any country in this globalized world. The war that is happening between Russia and Ukraine has a dire impact on world supply chains, especially because of the blockade of energy supplies from Russia due to increased support to the West. The ongoing war also disrupts economic activities, such as investment, trade, and others so that the fulfillment of demand and supply is disrupted. The capacity of world oil refineries that do not meet market demand disrupts global supply and makes gas prices soar which also leads to higher inflation in other commodities. Commodity importing countries from Russia, such as European Union countries (like Germany, Italy, and the Netherlands), have started looking for alternatives to scarcity, one of which is coal.

Indonesia as one of the largest coal producers can also benefit from this. Irwandy Arif, Expert Staff to the Minister of Energy and Mineral Resources, sees the potential for increasing coal exports as a substitute for hampered energy supplies — including coal — from Russia, like China as an importer of Russian coal is 17% and the European Union which imports 31% of the total production (Setiawan, 2022). Indonesia can be seen as an alternative to this, along with the improved relations between China and Indonesia. This has made Indonesia’s trade balance surplus over the past 26 months and enhanced foreign exchange reserves up to S$135 billion.

On July 17 2022, Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), said Indonesia would not be caught in a recession (Arbar, 2022). He assessed that Indonesia had managed to record a good economic performance during the Covid-19 pandemic and to prevent a significant decline in economic output which is not as deep as in many other countries. Indonesia with economic growth of more than 5%, inflation of 4%, and good government spending is considered capable of handling the shocks of the pandemic and war well (Arbar, 2022). Compared to other countries, Indonesia’s recession potential is quite low, only 3% (Putri, 2022). Airlangga Hartanto (2022), Coordinating Minister for Economic Affairs, believes that the Indonesian economy is doing well, with a debt-to-GDP ratio of around 42%, while in some countries is at 100%.

From the data stated above, I believe that there are two mitigations that the government can do. For short-term mitigation, giving subsidies through fiscal policy is the best way. Indonesia’s government has been implementing this and I think that the target recipients of subsidies is also appropriate. It focuses more on the poor than the whole community because the setting of excessive subsidies to all groups has the potential to lead to higher inflation. Financial support from the government is important to increase people’s purchasing power so that GDP can be maintained. For the long-term, policies should be undertaken to strengthen the country’s energy supply by using renewable energies.

Indonesia is indeed affected by the current Russo-Ukrainian war, but the negative impacts are not as severe as in other countries. In my opinion, Indonesia should still be aware of the future impacts. Many institutions, such as Asian Development Bank, predicts that Asia’s developing countries economy prospects would be disturbed due to the soaring oil prices (Schröder, 2022). Even though Indonesia has a good strategy to maintain this unstable condition, the government should still keep an eye on this threat. Nevertheless, I also see this war has certain economic opportunities for Indonesia rather than a complete disaster. Indonesia’s export commodities benefit from encouraging exports in larger quantities. Indonesians should seek this opportunity to increase Indonesia’s economy.

About the Author

Passionate in international studies, global social-political issues, and economic development issues, Dewi Aulia Maharani is currently studying International Relations at the University of Indonesia as an undergraduate student. Her ambitions, aspirations, and perspective in life encourage her to delve deeper into her field interests.

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