Indonesia Announces Higher Tax On Imports To Halt Rupiah’s Slide

By Ahmad Syamsudin

Indonesia will raise import taxes on more than 1,000 mostly consumer goods, officials said Wednesday, as the government took steps to shore up the nation’s battered currency, the rupiah, which dropped this week to its lowest level since the Asian financial crisis two decades ago.

Tax on 1,147 imported items, ranging from coffee to luxury cars, would be raised to between 7.5 and 10 percent – up from the previous 2.5 to 7.5 percent, Finance Minister Sri Mulyani Indrawati said.

“The government must take action to curb vulnerabilities in the balance of payments,” Sri Mulyani told a news conference. She said the government’s move was necessary after imported goods spiked more than 50 percent in July and August this year.

President Joko “Jokowi” Widodo, who is seeking a second term in an election scheduled for next year, has come under increased pressure to intervene after the rupiah slumped to almost 15,000 against the U.S. dollar. The Indonesian currency has lost about 9 percent of its value this year.

Jokowi blamed the weakening rupiah on “a barrage of external factors,” including Washington’s decision to hike interest rates as well as financial-market meltdowns in Turkey and Argentina, which have spread through emerging markets in Asia.

“Investment and exports must increase, so that we can resolve the current account deficit” Jokowi told reporters Wednesday. “If those things are addressed, the rest will be resolved.”

Indonesia’s current account balance – the broadest measure of the country’s international trade – showed a deficit of U.S. $5.5 billion, equivalent to about 3 percent of its Gross Domestic Product, in the first quarter of this year, economic analysts said. Those numbers contributed to the financial mayhem, they said.

Bank Indonesia, the central bank, has spent billions of dollars and raised interest rates four times since May to halt the rupiah’s fall. Its repeated interventions in the foreign exchange market had depleted its foreign exchange reserves by more than $13 billion from January to July, analysts said.

Reviewing, postponing big projects

The government also stepped up its efforts to stabilize the currency by deciding to review and reschedule major infrastructure projects, including power plants, which require large amounts of imported materials.

Jokowi has touted his government’s drive to upgrade the country’s dilapidated infrastructure, such as roads, airports, sea ports and power plants as one of his successes since taking office in October 2014.

Some analysts, however, said it would be too early to say whether the rupiah rout would hurt Jokowi’s re-election chances.

“So far the rupiah situation has not significantly affected the overwhelming majority of Indonesians, at least not for now,” Mohammad Faisal, research director at Center for Reform of Economics, told reporters.

“Subsidies and social safety assistance are also helping cushion the poor from the impact of any price increase,” he said. “As long as the prices of staples are under control, we won’t see widespread panic.”

But, Faisal said, the government should refrain from controversial moves that could have political repercussions.

“I think as long as the government isn’t doing anything counter-productive, there will be no significant impact on Jokowi’s popularity,” he said.

Not like 20 years ago: Minister

Chief Economic Minister Darmin Nasution said there was no reason for alarm because the country’s economic fundamentals remained sound.

“Don’t compare the current situation to the 1998 crisis,” he said, referring to the 1997-1998 Asian financial crisis that crippled Indonesia’s economy and led to the downfall of then-president Suharto after 32 years of iron-fisted rule.

In 1998, the rupiah dropped from 2,800 to the dollar to 14,000, a 400-percent fall, and inflation hit 77 percent then, compared with the current rate of about 3 percent, Darmin said.

Officials said the new policy posed no risk of violating World Trade Organization (WTO) commitments since the new policy would not single out countries but would, instead, target types of products, including big foreign luxury cars.

Trade Minister Enggartiasto Lukita told reporters that his office would stop import permits this month for luxury vehicles, including stretch limousines, with engine displacements of 3 liters or greater.

Among the products that would be affected by higher import taxes are cosmetics, clothing, soap, some construction materials and consumer electronics. Imports of the 1,147 items cost U.S. $6.6 billion in 2017, but reached U.S. $5 billion in the first eight months of this year alone, officials said.

Indra Fajar, who makes a living selling used electronic goods, said he had not seen a drop in sales but was worried about the future.

“If the government raises import taxes, prices of imported goods will be more expensive and that means fewer sales,” he told BenarNews. “I’m not sure what’s going on, but it doesn’t look good.”