Next week Indonesia's financial and stock markets are closed for Idul Fitri (also known as Lebaran or Eid al-Fitr), the celebrations that mark the end of the holy Islamic fasting month (Ramadan). As usual, during the Ramadan month (that started in early June) business activities in Indonesia start to slow and this slowdown will reach its "peak" during the Idul Fitri holiday, a national holiday (from Monday 4 July to Friday 8 July) when some 17.6 million Indonesians who live and work in the bigger cities will return to their places of origin for a couple of days (a tradition called mudik).
During last year's Idul Fitri some 17.4 million workers and professionals returned from the bigger cities back to their hometowns in the rural areas to spend a couple of days with their families. This year approximately 17.6 million people are expected to return home for the Idul Fitri celebrations. This modest increase year-on-year can be attributed to Indonesia's economic slowdown that may have somewhat put the brakes on the process of urbanization in the country, while weaker purchasing power could be a reason for some people not to return home this year, even though workers are supported by the pay out of the "13th-month salary" while the Indonesian government subsidizes public transportation for the poorer segments of society (a policy that is actually primarily aimed at preventing severe traffic congestion on the roads around the bigger cities).
Most Indonesians will use land transportation to travel from the cities to the village (desa or kampung). In Indonesian media it is mentioned, quoting government sources, that about 2.4 million Indonesians are expected to return by car for this year's Idul Fitri, while some 5.6 million people are estimated to use a motorcycle. Up to 2 million Indonesians may opt for train transportation (the government always advises its citizens to take trains and, usually, it is free for passengers to take a motorcycle with them on the train during the Idul Fitri exodus).
The mudik tradition of Indonesia is quite unique and in fact not only the Indonesians that adhere to Islam will return back home for Idul Fitri but also the non-Muslims will return to their places of origin. As such, mudik is an example of national culture that transcends Islamic culture. For non-Muslims (and also for Muslims) the mudik is a way to pay respect to their parents or families.
In this column I want to point out three matters related to the mudik that have an impact on the economy: (1) inflation, (2) money circulation, and (3) urbanization.
Inflation in Indonesia Accelerates During Ramadan & Idul Fitri
In Indonesia there occur two traditional inflation peaks each year. Firstly, the June-August period and, secondly, the December-January period. Both these peaks occur because consumption tends to increase (other peaks in Indonesian inflation are usually caused by administered price adjustments; fuel subsidies and electricity tariffs). In the June-August period Indonesians start to spend more on items such as food, clothes and shoes during the Ramadan and Idul Fitri period, while in August preparations are made for the new school year (implying demand for bags and clothes rise). It may seem paradoxical because the Ramadan is a month characterized by self-control, but consumption of food items actually increases in this month as Indonesians organize dinner parties to break the fast in the evening (also the breakfast before dawn - known as sahur - becomes a bigger meal and event in this period).
Usually, weak government policies or weak monitoring add inflationary pressures during this period. For example, in an effort to boost domestic production of beef (becoming self-sufficient), the government limits imports of beef. However, usually beef prices have already surged significantly before the government decides to add beef imports as domestic beef supplies become insufficient. In Indonesia inflation remains a sensitive issue. Southeast Asia's largest economy - where millions of people live just above the poverty line - a relatively small inflationary shock can push many of these people into full poverty.
On Friday (01/07), Statistics Indonesia announced that Indonesia's June 2016, inflation was recorded at 0.66 percent (m/m), primarily due to higher food prices (fish, chicken meat, eggs, sugar, potatoes, carrots, rice, spinach, and apples) as well as higher air transportation tariffs. This result is actually positive and shows that prices are under control. The monthly inflation pace of 0.66 percent this June was indeed higher than last year's 0.54 percent (m/m). However, the reason is that the Idul Fitri comes earlier in 2016 (first week of July) compared to last year (in mid-July).
Inflation in Indonesia:
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Source: Statistics Indonesia (BPS)
Money Circulation in Indonesia's Rural Regions Gets a Boost
Another interesting phenomenon is that the money circulation in the rural areas of Indonesia gets an enormous boost as the millions of Indonesian workers and professionals who return back to their places of origin for a couple of days carry trillions of rupiah (hundreds of millions of US dollars) with them. Rural retailers and restaurants can expect to make good money during the Idul Fitri days. Not unoften, those who come from the cities will give some money to their parents and other family members. As such, these funds also enter the local rural economy.
Post-Idul Fitri Urbanization
The last phenomenon related to the Idul Fitri celebrations and mudik culture that I want to point out in this article, is that the number of people who return back to the cities after the Idul Fitri celebrations is usually bigger compared to the number of people that had left the cities prior to Idul Fitri. This phenomenon is particularly seen in Jakarta, the capital city of Indonesia.
It is common that an additional family member (this can be a brother, sister, nephew or wife) joins the journey back to the city in an attempt to find employment there (or in case of a wife) to live in the city. As such, urbanization shows a little peak after the Idul Fitri celebrations. However, most of these newcomers have not completed senior high school. Lacking high skills this group is bound to work in the informal sector (for example street vendors).
This column was written by R.M.A van der Schaar, the Managing Director of Indonesia Investments. He obtained his Masters degree in Southeast Asian Studies from Leiden University (the Netherlands) with a major focus on the society, history and linguistics of Indonesia.