Indonesia counters coronavirus with interest rates cuts

Bank Indonesia (BI) has cut its benchmark interest rate to address the economic impact of the coronavirus. 

The Indonesian central bank cut its benchmark interest rate, the BI seven-day reverse repo rate, by 25 basis points to 4.75 per cent.

“The monetary policy remains accommodative and consistent with the projected inflation rate and is a preemptive measure to maintain the momentum of domestic economic growth amid a stagnated global economic recovery caused by the coronavirus,” said BI governor Perry Warjiyo.

China is Indonesia’s biggest trading partner and a major source of investment and foreign tourists. 

Economists have projected that the virus could lower Chinese economic growth by up to 1 percentage point during 2020. 

“A drop of 1 percentage point in China’s economic growth will result in a drop of 0.3 to 0.6 percentage points in Indonesia’s [growth],” said Finance Minister Sri Mulyani.

Indonesia is yet to record a case of the virus. But the shutdown of Chinese has disrupted supply chains and travel restrictions have hammered Asean’s tourism sector.

In Indonesia, booking cancellations by foreign visitors have reached tens of thousands, while some Chinese investment projects face disruptions due to travel bans. 

“We expect a significant impact on Indonesia’s trade, tourism foreign exchange earnings and GDP growth from the global outbreak of the coronavirus,” said economist Satria Sambijantoro at PT Bahana Sekuritas in Jakarta. The BI was responding with “front-loaded economic stimulus”, he said.

The Philippines, Thailand and Sri Lanka have cut interest rates in recent weeks and Singapore is planning significant fiscal investment packages to stimulate its trade-dependent economy. 

The government’s growth forecasts for this year were 5.3 per cent but that is now under threat because of the coronavirus. 

Growth will also depend on crude oil prices, which have been hammered by the coronavirus and the trade war between the US and China. 

The Indonesian government in 2018 earned US$17.8 billion from exports of palm oil. 

The palm oil sector, which contributes around 3.5 per cent to Indonesian gross domestic product and sustains an estimated 6 per cent of the population, is under international scrutiny because of its devastating environmental footprint. 

Indonesia produces the third-highest greenhouse-gas emissions after China and the US.

The Jakarta authorities have promised approximately US$9.2 billion for villages and schools. But government revenue reportedly fell by 4.6 per cent in January from 12 months earlier as corporate tax collection dropped by 29 per cent.  

Inflation is also hitting the population. Garlic prices rose by nearly 70 per cent in Jakarta after shipments from China were blocked. China accounts for approximately 80 per cent of the world’s garlic and it supplies about 90 per cent of Indonesia’s demand.



Mount Bromo in Java. Indonesian tourism is suffering from the coronavirus. Picture credit: Flickr