Tuesday, 20 August 2024 – In this hybrid seminar, Dr Chatib Basri discussed the global economic and geopolitical trends, as well as domestic challenges, and their direction of the Indonesian economy under the incoming Prabowo Subianto administration.
REGIONAL ECONOMIC STUDIES PROGRAMME AND INDONESIA STUDIES PROGRAMME HYBRID SEMINAR
ISEAS – Yusof Ishak Institute (ISEAS) invited Dr Chatib Basri, former Minister of Finance; currently Senior Lecturer at the Department of Economics, University of Indonesia, to share his insights on major challenges facing the Indonesian economy under the incoming Prabowo Subianto administration. Dr Siwage Dharma Negara, Senior Fellow of the Regional Economic Studies Programme at ISEAS, moderated this seminar.
President Joko Widodo’s announcement of the draft state budget for the fiscal year 2025 on 16 August has numerous implications for the country’s short-term economic outlook. It will be an essential foundation in achieving the long-term Golden Indonesia Vision of being a developed economy by 2045 and achieving Prabowo’s five-year target of 8% annual economic growth. As such, a thorough understanding of the key components of the budget and the expected changes in the fiscal policy measures under the new administration could beget insights into Indonesia’s economic outlook.
Dr Basri began his presentation by laying out a broad overview of the global macroeconomic environment. Current global economic projections are largely stable as it is expected to grow by 2.7% while advanced economies are expected to achieve a growth rate of 1.7%. The source of the anticipated global growth may stem from emerging Asian countries, excluding the Indian and Chinese economies, where Southeast Asia could play a pivotal role. The position of the Federal Reserve (Fed) will also have implications on how the Indonesian central bank will respond. In addition, sensitivity analysis has indicated that a 1% fall in China’s economic growth will have a 0.3% negative impact on the Indonesian economy due to declining energy and commodity prices. Geopolitical fragmentation may also threaten food security and clean energy transition as trade restrictions slowly rise and economic cooperation becomes more vulnerable.
Dr Basri then proceeded to expound on the challenges that Indonesia faces – namely, the faltering middle class, avoiding the middle-income trap by growing faster, and the challenges presented by Indonesia’s current fiscal position. Recounting the Chilean crisis, Dr Basri reflected on the tendency for policymakers to focus on the bottom 20% of the population while overlooking the expectations of and policies to support the middle class. Studies on Indonesia’s growth from 2014-2023 has also shown that Indonesia’s growth incidence curves have exhibited a worrying pattern, meaning the population in the 50th-83rd percentile (the middle class) experienced negative growth from 2021 to 2023 while the bottom 29% and top 20% of the population experienced positive growth. Often, issues of quality of public services, fairness and justice – rather than affordability – are the common themes of the middle class’s dissatisfaction. One possible area which could provide some relief is the creation of jobs that support the middle-class way of living, including in the manufacturing and creative industries.
Analysing Indonesia’s objective of achieving economic growth of 8% by the end of President-elect Subianto’s administration, Dr Basri reflected on Indonesia’s available policy options. One is to boost investment. Indonesia is reporting an incremental capital output ratio (ICOR or investment to GDP ratio) of 6.8, which means a high level of inefficiency in the economy. Thus, to grow by 8%, investment needs to grow much faster from the current rate. In addition to attracting more foreign direct investments (FDIs), Indonesia needs to improve human capital and governance to lower the ICOR.
In terms of fiscal management, Indonesia’s major challenge is to increase the tax revenue to support Prabowo’s iconic programs such as providing nutritious meals for students (which is a priority for the next administration), providing free health checks, and establishing integrated excellent schools. With such a low tax-to-GDP ratio, Indonesia’s fiscal space is limited. A majority of the budget has been allocated for education, village funds and the General Transfer funds to the regions, energy subsidies, as well as civil servants’ salaries. To increase its fiscal space, Indonesia should consider increasing tax rates, reducing tax exemptions, and imposing administrative reform. However, while increasing tax rates will have a direct impact on tax revenue, it may not be politically feasible. The second option is to reduce tax exemptions, which have not been very effective in increasing investment. This is because investment climate cannot be substituted with lower tax rates. Administrative reform can be realized in different ways such as shifting more of the burden of tax monitoring to middle and large tax offices from small tax offices, reviewing the effectiveness of subsidies such as fossil fuel subsidies, and focusing on the quality of spending through conditionality terms.
This hybrid seminar drew 239 participants from Singapore and abroad. During the Question-and-Answer session, a participant asked about the feasibility of the new capital project. Dr Basri believes that the project will continue although at a slower pace, given the varying priorities of the incoming administration. Another question raised was on the new government and its receptiveness towards fuel subsidies. Dr Basri proposed to rationalise the targeted subsidy such as adopting a price discrimination policy. A participant also asked about the effectiveness of increasing tax rates in the short run which Dr Basti suggested as an innovative financing idea. He said that in areas where increasing the tax rate is not feasible, the government can address the administrative issue with the help of digital technology. The last question was on the possibility of removing the fiscal deficit ceiling. Dr Basri explained that such action will not ensure the quality of spending. It is important to not only list down priority programs, but also to rearrange the scale, the ministries involved, and the urgency of the programs proposed by various ministries.
Download the speakers’ slides here.
