Problems in Indonesia's economic policy

(Baonghean.vn)- Concerns are growing that the Jokowi administration does not have a clear direction.

Indonesian President Joko Widodo appears to have yet to provide a clear direction for his country's economic policy. Photo: Internet.

News this week that Bank Indonesia will ban the use of foreign currencies in domestic transactions has added to concerns among analysts and investors about the country’s weak economy and President Joko Widodo’s economic policies. As the Wall Street Journal reports, the law banning the use of foreign currencies in domestic transactions was actually passed years ago, but like many other Indonesian laws, it has not been implemented for years—until now.

The volume of transactions in Indonesia conducted in foreign currencies is huge—the Wall Street Journal reports that “intra-country transactions in currencies other than the rupiah account for about $73 billion a year,” in a country with a GDP of about $900 billion. Many transactions are conducted in foreign currencies because companies—particularly Indonesia’s big investors in mining and other resources—do not want to hold large amounts of rupiah, which has been volatile since the Asian financial crisis of the late 1990s. Instead, they prefer to conduct transactions in dollars, euros, yen, or, in some cases, the Chinese yuan. This spring, the rupiah fell to its lowest level against the dollar since the Asian financial crisis of the late 1990s, and Indonesia’s central bank clearly hopes that the new rules will help stem the rupiah’s slide.

Whether or not the measure is effective in stemming the rupiah’s decline, it could add to concerns that Indonesia’s leaders lack a clear path toward economic policy. Some companies are uncomfortable with the new rules, which would make them take on greater risk in their financial transactions, although the new laws are unlikely to prompt major investors to flee the country. But they also add to Jokowi’s confusion about his policy direction. President Jokowi has floated a vision of upgrading Indonesia’s physical infrastructure—roads, ports, power plants, and other critical infrastructure—and attracting foreign investment commensurate with the size of Indonesia’s consumer market and labor force.

But growth has stalled under Jokowi and much-needed investment has yet to materialize. Indonesia’s growth fell to a six-year low in the first quarter of this year. Consumer spending also appears to be slowing, perhaps in response to a weaker economy and a faltering job market.

While Jokowi was often seen as decisive as Jakarta governor, he and his administration have been indecisive at times since becoming president, and his policy direction on economic issues has fluctuated most markedly. Forcing companies to use only the rupiah may have been a necessary move, but it came after other measures were not welcomed by investors. The president has also renegotiated bilateral investment treaties with several countries, including Singapore, Indonesia’s top investor in 2014. He has actively championed the idea of ​​large-scale, state-run manufacturing projects, such as creating a “national brand car” like Malaysia’s Proton. But there is little evidence that such a national car project would ultimately be profitable; Indeed, despite massive state subsidies, Proton has struggled to stay afloat. Meanwhile, the Jokowi administration has failed to sufficiently liberalize the Negative Investment List, a list of sectors in Indonesia where foreign investment is banned or severely restricted. Jokowi has used high-profile speeches, such as his speech to the APEC CEO summit last fall, to promote Indonesia as a place free of red tape—that now is the time to invest in Indonesia. “We are waiting for you to come to Indonesia,” Jokowi told potential investors.

In his first year in office, Jokowi may simply be feeling his way through economic policy, as well as trying to navigate a legislative system in which his Indonesian Democratic Party of Struggle (PDI-P) is not dominant and where he must keep a lid on factions that don’t always get along. Jokowi is a natural politician who understands that nationalist restraint and protectionist rhetoric have always been present in Indonesian society and remain strong today. But Indonesia cannot upgrade its infrastructure, position itself as a transportation hub, produce reliable electricity, or add value to its manufacturing industries without massive investment, both from domestic and large foreign companies.

Thu Giang

(According to The Diplomat)