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The Threat of the 2023 Global Recession, a Series of Economists Ask the Government Not to Hurry about IKN

The Threat of the 2023 Global Recession, a Series of Economists Ask the Government Not to Hurry about IKN

A number of economists have responded to the government's plan to continue to build the National Capital ( IKN ) of the Archipelago despite the threat of a 2023 global recession ahead. They mostly asked the government not to rush about the construction of the new capital city, which is located in North Penajam Paser, East Kalimantan.

They also explained the reasons why the construction of the IKN needed to be postponed to suggest that they should focus more on dealing with the threat of a global recession. Following are the responses of several economists regarding the development of IKN amid the threat of a recession next year:

1. Better focus on social instability

University of Indonesia senior economist Faisal Basri asked the government not to rush to build a new capital city and suggested that it focus more on social instability. "It is not a disgrace to move the capital city. But there is a fundamental problem that we face is the sense of urgency . The urgency is not to move the capital city," Faisal said

According to him, Indonesia will face tough challenges, although there is a possibility that it will not experience a recession . Because, he said, based on experience, it shows that if the world economy is in recession, then Indonesia will not. The reason is that Indonesia's relationship with the world economy is relatively small.

Faisal gave an example of the 2008 global financial crisis, when the world experienced a recession with economic growth of -1 percent, Indonesia's figure was 4.6 percent, even the third highest in the world. However, the current challenges are formidable. One of them is the weakening of the rupiah against the US dollar—it's already Rp. 15,500—the effect of which is to pay debts in foreign currencies, too. 

“So the debt burden has increased, interest has not been added, the installments have not been added. The installments can be paid with debt again, dig a hole to cover the hole, but you can't pay interest, "said Faisal.

In fact, he predicts that interest payments could increase by more than 20 percent of total central government spending. "It's been heavy." So, Faisal added, it will create less 'space' for the community. Because paying interest on debt is mandatory, if not, Indonesia can get a penalty.

According to the economist who graduated from Vanderbilt University, United States, the increase in interest rates is caused by rising inflation. Indonesia currently, he said, is already at almost 6 percent (5.95 percent), and will continue to climb, possibly even reaching 7 percent. Faisal said this was caused by the ongoing Russian invasion of Ukraine.

"In a year, next year the war could be even more terrible, which causes global uncertainty to remain very high," said Faisal.

Another challenge, Faisal said, is climate change that is getting crazy. The impact could affect food prices, due to extreme floods and droughts. Food production fell, even each country reduced its exports and increased the supply of reserves. 

"Thankfully, our rice harvest continues to be good. But rice is good, how about wheat, it's the second staple food after rice," said Faisal. "If everything goes up, in the end it will raise interest rates, interest rates will increase, the debt burden will increase again."

The current condition of companies is still difficult due to the impact of the Covid-19 pandemic. He explained that it could be seen from the flight conditions which were still far from recovering. Even Faisal told of flights to Semarang that were previously dozens of times, now only twice a day. "That's why I have to stay when I go out of town."

Faisal explained that the business world has not yet recovered and as a result tax revenues are still low while spending continues to rise. "Tax issuers are 'meat', debt is growing, the debt burden has increased," he said.

The poverty rate in Indonesia is also a challenge. As Faisal recalls, the number of people with a daily expenditure of less than Rp. 35 thousand is more than 60 percent, which is the category of vulnerable to poverty. In stark contrast to Malaysia, where the vulnerable population is only 2 percent and Thailand is only 6 percent.

With current conditions and the challenges of a global recession, said Faisal, the number of vulnerable poor people in Indonesia could also rise to 70 percent. In addition, young people aged 15-24 years in Indonesia who are looking for work but can't get 17 percent. "The highest in ASEAN," he said.

According to Faisal, all the conditions mentioned are   social instability, plus the gap between rich and poor is widening. So he suggested, if you get a fortune, it is better not to use it for non-essentials, but save it to face an increasingly clear possibility that a recession will occur. "So social instability is dangerous. If not (can) collapse, "said Faisal.

The Threat of the 2023 Global Recession, a Series of Economists Ask the Government Not to Hurry about IKN

2. Do not rush to offer to investors

Director of the Center of Economic and Law Studies (Celios) Bhima Yudhistira also advised the government not to rush to build IKN, including offering it to investors. He said that in deciding investment, investors need to take a valuation from the demand side. 

Although the government confirmed that in the first stage a number of civil servants (PNS) would move to IKN, Bhima saw that the certainty regarding the availability of basic infrastructure was not clear.  

"Commitment, please commit yourself, but we'll see that big commitments like Soft Bank are back. Because the clarity of the residents who will move cannot be ascertained," said Bhima

Bhima suggested that instead of building IKN, the government should first improve the fundamental competitiveness of the domestic industry and increase the capacity of human resources. Moreover, the country is facing the threat of a recession. 

“This is something that should be addressed so that our fundamentals are strong. IKN doesn't answer that fundamental thing," said Bhima.

Faisal Basri also added that companies only want to invest in IKN if there are at least 5 million residents in 10 years in the new capital city. “No company wants to lose. Everyone knows that it will only be economical if the population there is 5 million for 10 years, then it will only be economical and foreign investors will enter," he told Tempo , Thursday, October 20, 2022.

According to him, the uncertainty of the population who will occupy the IKN makes investors feel that they do not receive guarantees. Because, said Faisal, the most important guarantee in this business is the population. “Which Kopi Kenangan would you like to go there, which Starbucks would you like if you weren't forced to. Does Tempo really want to move there?” he said.

The signs that investors are reluctant to invest in IKN, according to Faisal, can be seen from how Sofbank CEO Masayoshi Son resigned from this project. "Masayoshi said the Indonesian government cannot guarantee there will be 5 million people in 10 years, quit ," he said.

3. The problem of financing IKN development

Executive Director of the Center of Reform on Economics (CORE) Mohammad Faisal assessed that the IKN problem was not too much related to the threat of a global recession. Because according to him, Indonesia is still relatively able to survive compared to many other countries because it has a large domestic market.

However, he sees the problem of IKN lies in the limited funding side. "Well, this limited funding means that in terms of the sustainability of its development, it is a question mark," he said. 

He doubts that the government can complete the IKN development according to the target in 2024. According to him, the global recession will only worsen in terms of potential funding for IKN projects. However, even without a global recession, he assesses that funding opportunities for the new capital city project are still limited.

The Executive Director of the Institute for Development of Economics and Finance (Indef), Tauhid Ahmad is also worried about the same thing. According to him, the cost of the Nusantara IKN project will increase in line with the inflation situation and the weakening of the rupiah. 

According to Tauhid, investors will wait longer to monitor global economic developments. Potential investors will also see first how the realization of basic infrastructure development and the government's plan to move residents to the new capital city will be. 

"Most of the raw materials and technology are still imported. Due to inflation, the price has also gone up. How much do you need to calculate?" said Tawhid. Moreover, inflation for construction materials and labor, according to him, is higher than general inflation. 

The cost of developing this IKN project requires funds of Rp. 466 trillion. A total of Rp 89.4 will be funded by the state budget (APBN). Meanwhile, the remaining Rp 235.4 trillion is planned to be injected by private investors through a government-business partnership scheme. 

Then another Rp 123.2 trillion from the support of State-Owned Enterprises (BUMN) and Regional Owned Enterprises (BUMD). Tauhid suggested that the government should start putting the brakes on this IKN development project . Especially if you look at the current slowdown in Indonesia's economic growth. 

"The trade balance gain in September 2022 was US$ 4.99 billion, a decrease of US$ 5.71 billion compared to the surplus in August 2022," he said.

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