Indonesia’s Joko Loses the Economic Plot

Against the symbolic backdrop of a week-long international summit marking the 60th anniversary of the 1955 Asia-Africa Conference, one of the landmarks of developing world nationalism, Indonesia has taken a series of measures  that could isolate the country from investors, alienate long-term trading partners and drive growth rates down.

Jakarta is delivering a mixed message at best.  At the same time as the Asia Africa summit, some 700 business leaders from 40 countries were in town early in the week to attend the World Economic Forum on East Asia in Jakarta. At that gathering, President Joko Widodo said Indonesia is “an incredible place to invest” and invited the participants “to join our incredible people on an incredible journey and make incredible profits.”

But mounting protectionist policies have ruled Indonesian economic policy for the past several years and they are not going away. Investors complain that it is getting harder not easier to invest in “incredible” Indonesia.

From moves to force banks and other companies to place their data centers onshore to making dollar transactions illegal and even banning the sale of beer in mini markets, a number of often capricious and confusing policies have foreign investors and others wondering if Indonesia wants to withdraw from the world. The beer ban — which affects about 70 percent of retail outlets nationwide and hits international and local brands — may be extended to cover all spirits if some religious lawmakers get their way. There was a recent attempt by the Manpower Ministry to force all expatriates to pass a high-level proficiency test in Bahasa Indonesia, the national language, but it was withdrawn after protest.

 

Retreat from globalization?

“I heard a presidential advisor in a top-level meeting say globalization has been bad for Indonesia,” said one businessman with good political connections. “This is being taken seriously.”

The recent decision to ban dollar transactions and invoicing by July 1 is an example. Seemingly designed to shore up the weakening rupiah, trading at lows not seen since 1998, it threatens long-standing contracts, insurance policies and investment tenders. It has businesses scrambling to understand what to do now.  The rupiah is the worst-performing currency in Asia this year, and foreign exchange reserves dropped by almost $4 billion in March as the central bank stepped in to support the rupiah.

Eko Yulianto, acting director of money management at Bank Indonesia, told Reuters that with the new regulation, the bank aims to reduce current demand of at least $6 billion each month for domestic transactions. 

“We don’t want a dollarized economy so we need to uphold the sovereignty of the rupiah,” Eko told reporters at a briefing. “There are still a lot of transactions using foreign exchange and that has added to the pressure on our exchange rate.” He cited as examples the textile, pharmaceutical, chemical and oil and gas sectors where companies often use the dollar for domestic payments. Cash transactions in foreign currencies have been banned since 2011

“We have no idea yet how to respond. There was no consultation. We are just trying to figure out what to do,” said one multinational company executive. 

Other companies worry about a staggering 40 percent target to increase tax collections for 2015 over the previous year. The drive has resulted not in an increase in the small number of Indonesians who actually pay taxes but still more actions against companies who suddenly find routine logistic deductions and other charges denied. In the first quarter, tax collection did not even reach levels from a year earlier.

 

 Asia-Africa symbolism

Some see the Asia-Africa summit as a symbol of what may be going wrong. The landmark 1955 event was the first gathering of what became the non-aligned movement. The leaders of that generation of newly independent countries were overwhelmingly socialist in orientation and countries like China and India eventually gave up on inward-looking economic prescriptions.

But the 1955 summit was a high point for Indonesia’s founding President Sukarno and the week-long commemoration taking place in both Jakarta and Bandung is an opportunity for Indonesia to celebrate nationalism and underscore current feelings.

Jokowi, beset by domestic political problems, seemingly has little control over ministries and little strategic sense of where the economy is going.  One very senior former cabinet minister said recently, “Nobody has a big picture. There is no strategy at work in guiding economic policies.”  Jokowi may be good at solving some problems and identifying things to manage in a city, the former official said, “But there is nobody with a vision of where the country is going or how policies fit together.”