Jean-Claude Trichet on the Indonesian Economy; New Policy Packages
Jean-Claude Trichet, president of the European Central Bank (ECB) from 2003 to 2011, says the strategy of Indonesian President Joko Widodo to boost overall economic growth (and social development) in Southeast Asia's largest economy through infrastructure development is the correct strategy. Although this strategy requires time, it will result in structural long-term growth. Trichet spoke at an international seminar in Jakarta, themed "Challenges to Global Economy", organized by the Indonesian Deposit Insurance Company (LPS) to mark its 11th anniversary.
Generally, Trichet regards the economic policy reforms that are conducted by the Indonesian government under the leadership of Widodo as key strategies to enhance inclusive economic growth on the long-term, even though it can hurt on the short-term (for example the scrapping of fuel subsidies). In particular infrastructure development will resolve existing logistics bottlenecks that are giving rise to a high-cost economy.
As the private sector is hesitant to engage in long-term and costly investments (especially when the investment climate is somewhat fragile and changes in government composition - after elections - can imply significant changes in government support for specific projects), the central government needs to take the initiative.
The Widodo-led government showed its commitment to lead infrastructure development. Whereas in the years 2009-2014 the government's infrastructure budget rose by an average of IDR 30 trillion per year, under the first year of Widodo the budget rose by nearly IDR 90 trillion (approx. USD $6.8 billion) to IDR 290 trillion in the 2015 State Budget. Unfortunately, given weak government revenue (primarily due to weaker-than-estimated tax revenue) the government needs to create debt in order to realize part of its infrastructure development plans.
Indonesia's Infrastructure Budget:
Trichet complimented Indonesia on the journey it has made since the late 1990s when the Asian Financial Crisis not only caused a financial crisis, but also a social and political one. Prudent fiscal policies as well as political reforms (democracy and decentralization) created a new future for Indonesia. Meanwhile, Trichet added that the huge population of Indonesia (>255 million people) constitutes a great pool of human resources.
Trichet reminded Indonesia that the country's economy should not remain dependent on the monetary sector but has to become reliant on the real sector through the establishment of a stronger industrial sector. This would also make the Indonesian rupiah less vulnerable to depreciation in times of global uncertainty. Through stable exports of manufactured goods the country can collect foreign exchange earnings in a more stable manner. When remaining dependent on volatile commodity prices, the rupiah will remain volatile as well.
In relation to the global economy, Trichet emphasized the crucial role of credit dynamics analysis and banking surveillance in Indonesia to prevent systemic bank failure. Such failure could worsen the already negative impact of the global economic slowdown.
Two New Policy Packages before the Year-End
The Indonesian government plans to release two new policy packages before the end of 2016. Indonesian Chief Economics Minister Darmin Nasution informed that the 14th package will focus on Indonesia's e-commerce industry. He added that this package had in fact already been completed but President Widodo decided that another package - regarding deregulation for residential property projects (for low-income families) - had to be implemented first. The government released the 13th package (property) on 24 August 2016.
Nasution did not inform when the 14th package will be launched. However, he did inform that the package aims at making online business easier in Indonesia.
Economic Stimulus Packages of the Indonesian Government:
| Package | Unveiled | Main Points |
| 1st | 9 September 2015 |
• Boost industrial competitiveness through deregulation • Curtail red tape • Enhance law enforcement & business certainty |
| 2nd | 30 September 2015 |
• Interest rate tax cuts for exporters • Speed up investment licensing for investment in industrial estates • Relaxation import taxes on capital goods in industrial estates & aviation |
| 3rd | 7 October 2015 |
• Cut energy tariffs for labor-intensive industries |
| 4th | 15 October 2015 |
• Fixed formula to determine increases in labor wages • Soft micro loans for >30 small & medium, export-oriented, labor-intensive businesses |
| 5th | 22 October 2015 |
• Tax incentive for asset revaluation • Scrap double taxation on real estate investment trusts • Deregulation in Islamic banking |
| 6th | 5 November 2015 |
• Tax incentives for investment in special economic zones |
| 7th | 4 December 2015 |
• Waive income tax for workers in the nation's labor-intensive industries • Free leasehold certificates for street vendors operating in 34 state-owned designated areas |
| 8th | 21 December 2015 |
• Scrap income tax for 21 categories of airplane spare parts • Incentives for the development of oil refineries by the private sector • One-map policy to harmonize the utilization of land |
| 9th | 27 January 2016 |
• Single billing system for port services conducted by SOEs • Integrate National Single Window system with 'inaportnet' system • Mandatory use of Indonesian rupiah for payments related to transportation activities • Remove price difference between private commercial and state postal services |
| 10th | 11 February 2016 |
• Removing foreign ownership cap on 35 businesses • Protecting small & medium enterprises as well as cooperatives |
| 11th | 29 March 2016 |
• Lower tax rate on property acquired by local real estate investment trusts • Harmonization of customs checks at ports (to curtail dwell time) • Government subsidizes loans for export-oriented small & medium enterprises • Roadmap for the pharmaceutical industry |
| 12th | 28 April 2016 |
• Enhancing the ease of doing business in Indonesia by cutting procedures, permits and costs |
| 13th | 24 August 2016 |
• Deregulation for residential property projects for low-income families |
| 14th | - | • Online business |