Indonesia still struggles to reduce trade deficit

JAKARTA, Dec 30, 2019, The Jakarta Post. The government has taken a number of steps, including the issuance of fiscal incentives, to cope with the country’s widening trade deficit, but such measures have yet to bear fruit as the deficit remains, The Jakarta Post reported.

The year kicked off with a slow start, as Indonesia posted a US$1.16 billion trade deficit in January because of declining exports and low commodity prices, according to Statistics Indonesia (BPS). Exports decreased by 4.7 percent year-on-year (yoy) in January to $13.87 billion, while imports fell by 1.83 percent yoy to $15.03 billion.

The trade balance continued the negative trend of 2018, when a decline in exports, partly due to the trade war between the United States and China, contributed to an $8.6 billion trade deficit, the largest in 44 years.

“Fluctuating prices of commodities as well the general downturn in global [economic] growth have been affecting Indonesia’s trade balance,” BPS head Suhariyanto told a press briefing in January. “These factors will make 2019 a bigger challenge for Indonesia.”

Last year’s deficit has kept the government on its toes to seek trade deals to open new markets that could eventually boost export demand, authorities said in early 2019.

The Trade Ministry said in January that it had set a target to sign or at least conclude negotiations on 12 trade agreements, including the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) and preferential trade agreements (PTA) with African nations. As of November, Indonesia has concluded at least 11 trade agreements.

From January through November this year, Indonesia accumulated a $3.11 billion trade deficit, significantly lower than the $7.62 billion recorded over the same period last year, BPS data show. However, despite the decline in the deficit, it is unlikely for the country to record a trade surplus at the end of this year.

Should Indonesia book a trade deficit for the full year, the country will witness its second back-to-back trade deficit since its three consecutive yearly deficit from 2012 to 2014, which were caused by the deficit in oil and gas trade.

Throughout the year, the government has rolled out several policies to court investment, particularly for the production of goods that substitute imported raw materials for export-oriented companies. This includes last year’s revamp of tax incentives directed toward “pioneering industries”, such as petrochemical, electronic and pharmaceutical manufacturing.

To further foreign trade diplomacy and boost exports amid unfavorable conditions in the global market, President Joko “Jokowi” Widodo moved the foreign trade portfolio from the Trade Ministry to the Foreign Ministry right after his inauguration for a second term.

However, observers are wondering how far the new government might go in making fundamental structural changes to the ministry’s nomenclature and fear it may take too much precious time and energy away from more important tasks and might even increase business uncertainty.

“It is not a smart move. We can learn from what we have done [regarding nomenclature changes in other ministries] in the last period,” Yose Rizal Damuri, lead economic researcher at the Jakarta-based Centre for Strategic and International Studies (CSIS), told The Jakarta Post in October.

The president also set his eyes on the issuance of an omnibus law to cut red tape and deregulate the country’s bureaucracy to improve efficiency in investments and exports.

But while waiting for similar policies to take effect, exporters are still facing hurdles this year, both from the country’s shortcomings and international trade conditions.

Trade frictions between the US and China continue to disrupt international trade and global supply chains, with the World Trade Organization expecting international trade in goods to grow by just 1.2 percent this year, the lowest annual increase since 2009.

The European Union, meanwhile, has raised tariffs on Indonesian biofuel from 8 to 18 percent, which will remain in place for five years. The new duties followed the European Commission’s findings that Indonesian producers sold biodiesel at unfairly low prices due to government grants, tax exemptions and access to raw materials below market prices.

On top of that, logistics costs in Indonesia are still higher than in other countries. Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) chairman Wahyu Utomo said in July that 72 percent of logistic expenditure went to transportation.

For the next five years, Indonesia is betting on bilateral and multilateral trade agreements to revive the country’s sluggish non-oil exports and plans to ratify 13 trade agreements. With the signing of these free trade agreements, the Trade Ministry said in November that it was optimistic non-oil and gas exports would grow between 6.88 and 12.23 percent by 2024.

Trade Minister Agus Suparmanto also stated that he planned to increase exports of goods and services by around 4.5 to 8.63 percent, ensure food price inflation remained at less than 3 percent and implement import controls that only prioritized materials for export and investment purposes.

“We will also keep our trade balance in check and constantly expand Indonesia’s market by concluding international trade agreements,” Agus told the press last month, adding that the government would still focus on coal and crude palm oil exports, its two top export products this year.