Indonesia will finish 2020 experiencing its first recession in two decades, but signs of recovery are increasing, driven by a pick-up in consumption and a significant increase in public spending, according to the World Bank’s latest Indonesia Economic Prospects report, Towards a Secure and Fast Recovery.
The economy is expected to contract by 2.2 percent this year, revised downward from a projected contraction of 1.6 percent in September, due to persistent mobility restrictions and social distancing amid rising COVID-19 cases. However, growth is expected to rebound in 2021, with the economy expanding by 4.4 percent if mobility restrictions are gradually eased and the wide availability of an effective and safe vaccine helps improve consumer and business confidence.
The report notes that such projections are still highly uncertain, given the dynamics of the pandemic in Indonesia and abroad, and stresses that the country’s medium-term performance will depend on taking steps to mitigate the negative impacts of the crisis on investment, productivity and human capital.
“The Indonesian government has taken decisive action in response to the COVID-19 crisis that has saved lives and livelihoods,” said Satu Kahkonen, World Bank Country Director for Indonesia and Timor-Leste. “Further steps to improve the effectiveness of crisis response and advance structural reforms will build on these efforts, and ensure a secure recovery.”
The report points to public health as the top priority to allow the economy to recover and to move towards a safe full reopening. This requires continued improvement in testing and contact tracing, and other public health measures as well as preparation to procure and widely administer an effective and safe vaccine once it is developed and approved.
Support to affected households and firms will need to be maintained until the crisis is under control, coupled with stronger mechanisms to ensure the adequacy of programs and to identify and enroll the poor and vulnerable. Without adequate social assistance, 8.5 million Indonesians could be pushed into poverty this year due to the COVID-19 crisis.
The report also recommends prioritizing reform in the tax system as a way of easing fiscal pressure and freeing up resources to support Indonesia’s recovery process. This could be accomplished by increasing income taxation among top earners and raising excises on products with negative health and environmental externalities – such as fossil fuels, tobacco, sugar-sweetened beverages and plastic bags.
This edition of the report also looks at Indonesia’s food security policies and includes possible strategies to strengthen the country’s agriculture and food systems. Food prices in Indonesia are among the highest in Asia, and the main challenges in this sector relate to improving the affordability and nutritional value of foods, especially for the poorer segments of society. Among the recommendations in the report are shifting from a focus on increasing output to increasing productivity of crops and livestock, increased crop diversification, and moving away from protecting the domestic market with import restrictions to supporting the improved competitiveness of agriculture.
“The pandemic has brought an opportunity to transform Indonesia’s agri-food system. Achieving this will require shifting the focus on food security beyond self-sufficiency of rice and staple foods to a more balanced consideration of the availability, affordability, and quality of food for all, supported by new policies and improved public spending,” said Ralph Van Doorn, World Bank Senior Economist for Indonesia.
The Indonesia Economic Prospects report is supported by the Australian Department of Foreign Affairs and Trade.