Indonesian Government Releases 'Emergency Plan' to Support Economy
As had been announced previously, today (23/08) the government of Indonesia released an 'emergency plan' that aims to improve the financial sector while restoring confidence in the country's fundamentals as turmoil emerged on Indonesia's stock exchange, bonds market and the rupiah. Economic minister Hatta Rajasa said that this plan consists of four packages. These four packages cover the current account deficit, rupiah performance, economic growth, purchasing power, inflation and investments.
The government feels the packages are needed as the rupiah weakened about four percent and the main stock index (IHSG) 8.7 percent during the first four days of the week. Panic emerged because of the looming end of the Federal Reserve's quantitative easing program (which will reverse the money flow to emerging economies), Indonesia's widening current account deficit as well as higher inflation. Moreover, economic growth in Q2-2013 slowed to the slowest pace since 2010.
In sum, the plan, which was presented today, aims to limit imports, while stimulating exports and investments. Below is a short summary of the packages:
• Current Account Deficit and Weakening Rupiah
In order to limit the current account deficit and support the rupiah, Indonesia will stimulate exports through tax deductions for labor-intensive industries that export at least 30 percent of their production. It will also increase tax for imported luxury items such as completely built car units (CBU) or branded products from the current 75 percent to 125-150 percent.
The government also plans to lower imports of oil and gas by increasing the mandatory position of biodiesel used in diesel. Exports of minerals are stimulated by relaxing procedures related to quotas.
• Foster Economic Growth and Purchasing Power
The government will provide incentives through keeping its fiscal deficit around 2.38 percent.
• Purchasing Power and Inflation
The government will revise the trading system for food products (such as beef and horticultural products) from a quota system to a price mechanism-system. Close cooperation with Bank Indonesia should result in lower inflation.
The fourth package involves the simplifying of permits to speed up realization of investments. A revision of the “negative investment list” will be conducted to make the list more investor-friendly. Tax holidays and tax allowances as incentives will be given to investments in crude palm oil, cocoa, rattan, metal, bauxite, nickel, and copper.
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