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Please don't stop the spending!

Jakarta Post Editorial - May 14, 2024

Jakarta – Once again, our economic momentum has been saved by private consumption, as the country's latest GDP report shows.

That consumption was partly underpinned by generous handouts around the February general election, and it also helped that a greater chunk of Ramadan – when household spending traditionally rises – fell in the first quarter of this year as compared to last year.

Those two factors certainly played a role in lifting year-on-year (yoy) GDP growth to 5.11 percent in the January-to-March period of this year, marking the highest first-quarter GDP growth rate since 2014.There is more to the story than that, however.

The details presented by Statistics Indonesia (BPS) in last week's report show that private consumption accounted for almost 55 percent of the country's GDP in the first quarter and that that share has steadily grown since 2022.

This shows how important we consumers are for propping up economic activity in the country, especially when demand from foreign markets is feeble. Consumers were also the ultimate beneficiaries of increased spending by the state and other institutions.

Government spending rose 19.90 percent yoy in the first quarter, driven partly by the election and social aid, while spending by nongovernmental organizations, though only accounting for a small share of total GDP, was up a whopping 24.29 percent yoy.

Such strong reliance on domestic demand lends our economy a degree of resilience that can keep the wheels turning even when external circumstances are unsupportive.

The growing purchasing power of a growing population is a powerful combination for Indonesia's economy, and that second part distinguishes our country from many advanced economies that must contend with shrinking populations.

Indeed, the large domestic market is a selling point for Indonesia, and the government has begun to use it as a bargaining chip for investment, notably in the automotive industry, where foreign brands are offered the opportunity to sell imported electric vehicles as long as they build local factories.

On the flip side, reliance on the domestic market means not benefiting as much from global demand and missing out on foreign exchange earnings.

Also, foreign firms can, in principle, benefit from domestic spending as much as local ones, especially if they offer goods and services not supplied at competitive prices by domestic firms.

This is borne out in the BPS figures showing that exports were up just 0.50 percent yoy in the first quarter, while imports rose at a much faster rate of 1.77 percent. As a result, the net exports component of GDP cost us 0.23 percentage points of overall growth in the first quarter.

Meanwhile, the fact that gross fixed capital formation, the GDP component measuring net investment into fixed assets like machinery or buildings, grew only 3.79 percent yoy does not bode well for industrial activity going forward.

Furthermore, the BPS breakdown by sector shows that manufacturing underperformed with annual growth of 4.13 percent in the first quarter. Only the sector of agriculture, forestry and fishing did worse, shrinking 3.54 percent yoy.

Not to sound alarmist, but those two are the very sectors that need to develop for Indonesia to become less dependent on imports. It's all good and well to rely on domestic demand as a source of economic growth, but that demand will be less effective in stimulating domestic economic activity if many of the goods consumed are shipped in from other countries.

Structural reforms are needed to increase Indonesia's competitiveness in both manufacturing and agriculture.

The problem is that more efficient farming and fishing would make redundant a large part of Indonesia's enormous agricultural workforce, which means an overhaul of these primary sector industries needs to be accompanied by massive job growth in the secondary and tertiary sectors.

No doubt, this is a herculean task, so the next administration has its work cut out for it. Until then, please don't stop the spending!

Source: https://www.thejakartapost.com/opinion/2024/05/14/please-dont-stop-the-spending.htm