TEMPO.CO, Jakarta - The government should abandon its makeshift policy in response to the ongoing weakening of the rupiah exchange rate to the US dollar. A series of overhasty policies could lead to the rupiah falling further and take this country to the brink of a financial crisis.
Of course, Bank Indonesia is the one who responsible for trying to prop up the rupiah. But the government also needs to play its part to protect the national currency, especially since in the last week, it dropped further. At the close of trading on Friday, the rate was Rp14,665 to the US dollar. This is the lowest since September 29, 2015, when it stood at Rp14,728.
So far, the Bank Indonesia Governor Perry Warjiyo has been trying to calm the markets. He has said that the pressure on the rupiah is not like that on the Turkish lira. And the fall in the exchange rate is only 7 percent. This is less than the depreciation in countries such as South Africa, where it is at 13.7 percent, and Brazil, at 18.2 percent. And there are countries such as Argentina or Turkey whose currencies have plummeted by 40 percent this year.
Despite all that, we can’t divert the looming danger of the government’s current account deficit. In the first semester of 2018, this was at US$13.7 billion. Bank Indonesia estimates that the 2018 deficit will reach US$25 billion. This is far higher than last year’s figure of US$17.3 billion.
It seems like the government is in a state of confusion about how to stop the deficit from growing larger. President Joko Widodo has held repeated meetings with selected groups of ministers. One result is the issuance of a regulation that limits imports of non-strategic goods. There is also the reduction in fuel and gas imports due to the regulation obliging diesel fuel to be mixed with 20 percent palm oil. Anyone breaking this regulation can be fined Rp6,000 per liter. Another regulation obliging the addition of 20 percent B20 vegetable oil will come into force on September 1.
Once again, the government has been hastily issuing regulations without considering the wider impact. Take import restrictions, for example. We are highly dependent on imported raw materials and capital goods. They cannot simply be stopped. A total of 75 percent of raw materials and 15 percent of our capital goods are imported. Arbitrary import bans could lead to rises in domestic industrial production costs.
Production of goods for export could also fall, especially since certain products are highly dependent on imports. For example, 80 percent of the ingredients of milk products, which are vital for the food and beverage industry, are imported.
The government has long known that the source of the import deficit is oil and gas. When world oil prices soared, President Jokowi did not have the nerve to increase fuel prices. This was for no reason other than political calculations in the run-up to the 2019 presidential election.
Perhaps President Jokowi could learn from his predecessor. In 2013, President Susilo Bambang Yudhoyono increased the price of fuel by 40 percent. This happened nine months before an election because of a circumstance like now: an urgent need. This was much more effective than regulations obliging the addition of B20. Don’t forget that palm oil is our export prima donna. If sales are diverted to the domestic market, Indonesia could lose 20 percent of exports. And this is even before we consider the uncertainty of palm oil supplies to oil refineries.
In conclusion, the government should not only consider short-term solutions, but also the longer term: fixing the bottom line so Indonesia can generate a current account surplus. The rupiah’s problems could last a long time, given that the US Federal Reserve is predicted to increase interest rates by 3.5 percent within the next two years. If this is not anticipated, the rupiah could weaken even more.
Read the full article in this week's edition of Tempo English Magazine
