RMIT International University Vietnam

Assignment Cover Page (INDIVIDUAL)

Subject Code: ECON 1192B
Subject Name: Macroeconomics 1
Location & Campus (SGS or HN) where you Saigon South
study:
Title of Assignment: Macroeconomic Policy Report

Student name: Le Tuan Minh

Student Number: S3878437

Teachers Name: Ms.Pham Thi Thu Tra

Group Number: 6

Assignment due date: 14/9/2021

Date of Submission: 14/9/2021

Number of pages including this one: 16

Word Count: 1556

Declaration of Authorship: I declare that in submitting all work for this

assessment I have read, understood and agree to the
content and expectations of the Assessment
Declaration
Consent to Use: I give RMIT University permission to use my work
as an exemplar and for showcase/exhibition display.
This consent will remain valid
till_______31/10/2021_________

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Question 1:
a)
In 1997, Indonesia was one of the countries mostly affected by the Asian Financial Crisis. Before
the crisis, the economy grew at a solid 7% annually on average between 1990 to 1996, but then
drastically shrank to -13.1% in 1998. The crisis was triggered by an almost exponential
depreciation of the exchange rate. The value of the Rupiah devalued from Rp.2,300 per US
dollar before the crisis to Rp.16,000 per US dollar by June 1998. Furthermore, the loss in fiscal
space and deleveraging by the banking sector caused both private and public investment to fall,
resulting in weaker economic growth, higher unemployment, and further decline in asset prices.
These deteriorated tax bases had led to lower tax revenues and eventually a larger fiscal burden
for the government (Nasution 2014).
b)

Table 1: GDP growth, Unemployment, and GDP per capita rate of Indonesia from 1995 to 2005
(Source: World Bank n.d)

GROWTH RATE

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 Figure 1: GDP growth rate of Indonesia from 1995 to 2005 (Unit: %)
(Source: World Bank n.d)

UNEMPLOYMENT RATE

Figure 2: Unemployment rate of Indonesia from 1995 to 2005 (Unit: %)

(Source: World Bank n.d)

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GDP PER CAPITA GROWTH

Figure 3: GDP per capita growth of Indonesia from 1995 to 2005 (Unit: %)
(Source: World Bank n.d)

In 1998, Indonesia experienced a negative growth rate for GDP and GDP per capita, along with
an increase in unemployment rate. While growth was 8.2% in 1995 and 7.8% in 1996 (the year
before crisis), growth in 1997 fell to 4.7%. However in 1998, at the peak of the crisis,
Indonesia’s GDP contracted by 13.1%. The same observation could be seen from GDP per capita
as it fell to 3.2% in 1997, and hit rock bottom at -14.3% in 1998. After that, the economy slowly
recovered in the next years. Meanwhile, unemployment rate climbed up to 5.7% in 1998, 6.4% in
1999, and remained high until 2005.

c)
The IMF has arrived with bailout packages to help Indonesia’s economy recover and demanded
reforms using the fiscal contraction policy (Indonesia Investment n.d). To reduce its spending,
the government has eliminated the subsidies on fuel and electricity and canceled several major
industrial projects that had been restored earlier (Doraisami 2014). Additionally, the government
also diverted their expenditure away from home goods towards foreign products (Azwar & Tyers

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2020). On the revenue side, the government has announced increases in excise taxes on tobacco
and alcohol, along with adding local sale taxes on gasoline and luxury goods. In addition, the
government had removed all VAT exemptions on many goods and services. Further planned
improvements to increase non-oil tax revenue were also developed to target potential taxpayers
(IMF 1998). As a result, the policies had shown a positive sign as it successfully raised the GDP
of Indonesia the years after the crisis. Moreover, the inflation rate also decreased from 58.45% in
1998 to 20.49% in 1999, and reduced to only 3.72% in 2000. Overall, the policy has successfully
contained the crisis and generated more revenue for the government. Another strategy that the
government used to stimulate the aggregate demand was reducing the tariffs and removing
export restrictions in order to augment its inflow of foreign exchange (IMF 1998). Along with a
depreciation, which is good for exports, lower price level in an economy reduces the price of its
goods and services, making it more attractive to foreign buyers. Hence, the aggregate demand
components of consumption, investment, and net exports may rise.

Year General government final consumption expenditure (%)

1996 7.57
1997 6.84
1998 5.69
1999 6.6
2000 6.53
2001 6.89
2002 7.26
2003 8.13
Table 2: Indonesia’s general government final consumption expenditure from 1996 to 2003
( Unit: % of GDP)
( Source:Worldbank.nd)

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 Year Taxes on goods and services (IDR)
1996 27.34 trillion
1997 32.12 trillion
1998 39.31 trillion
1999 55.95 trillion
2000 n/a
2001 79.78 trillion
2002 95.13 trillion
2003 112.3 trillion
Table 3: Indonesia’s taxes on goods and services from 1996 to 2003 (Unit: Indonesia Rupiah)
(Source: Worldbank n.d)

Year Tariff rates for all products (%)

1996 7.73
1997 15.06
1998 5.48
1999 6.05
2000 5.16
2001 4.14
2002 4.38
2003 4.04
Table 4: Indonesia’s tariff rate for all products from 1996 to 2003 (Unit: % and % of GDP)
(Source: Macrotrends n.d)

Year Exports of goods and services (% of GDP)

1996 25.83
1997 27.86
1998 52.97
1999 35.51
2000 40.98
2001 39.03
2002 32.69
2003 30.48
Table 5: Indonesia’s exports of goods and services from 1996 to 2003 (Unit: % of GDP)
(Source: Worldbank.nd)

Year GDP growth rate (annual%) Inflation (annual %)

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 1996 7.82 7.97
1997 4.7 6.23
1998 -13.13 58.45
1999 0.79 20.48
2000 4.92 3.69
2001 3.64 11.5
2002 4.5 11.9
2003 4.78 6.76
Table 6: Indonesia’s GDP growth rate and inflation from 1996 to 2003 (annual %)
(Source: Worldbank n.d)

Figure 6: Depreciation causes net exports to rise which leads to the increase in
both GDP and price level (Source: Economic Discussion n.d)

Question 2:
a) Analysis of fiscal policy
I.Recent tax rate and government expenditure
Year Government expenditure (IDR million)

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 2015 2,014,591,077
2016 2,086,438,834
2017 2,250,798,237
2018 2,467,820,492
2019 2,593,822,990
2020 2,813,922,472
Table 7: Indonesia’s government expenditure (IDR million)
from 2015 to 2020 (Source: Passport n.d)

Year Taxes (IDR million)

2015 1,365,385,978
2016 1,427,454,627
2017 1,494,524,917
2018 1,727,517,126
2019 1,751,050,254
2020 1,488,532,957
Table 8: Indonesia’s tax revenue from 2015 to 2020 (%)
(Source: Passport n.d)

II.The budget situation

(% of GDP) 2015 2016 2017 2018 2019 2020
Government -2.58 -2.46 -2.51 -1.76 -2.2 -6.5
budget Deficit Deficit Deficit Deficit Deficit Deficit
situation
Table 9: Indonesia’s budget situation from 2015 to 2020 (% of GDP)
(Source: Trading economics n.d)

III. Importance of general government expenditure in GDP

(% of GDP) 2015 2016 2017 2018 2019 2020
General 9.75 9.53 9.12 9.02 8.81 9.23
government
expenditure
Table 10: Indonesia’s Importance of general government expenditure in GDP from 2005 to
2015

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(% of GDP) (Source: World Bank n.d)

According to the datasets retreived, table 4 shows that while Indonesia’s tax rate decreased in
2020, their government expenditure has increased remarkably. In order to compensate for the
loss in revenue implied by the lowered corporate income taxes and new tax facilities (lower
income taxes for taxpayers, defer tax payments on imports, investment tax incentives), the
government has introduced excise taxes on fuels, enhanced tax compliance, and eliminated
distortionary VAT exemption (IMF 2021). In terms of government spending, the government has
added more than $24.7 billion in spending and state budget financing (Utami & Ilyas 2021).
They spent a lot to provide for the healthcare sector, social protection, SMEs support, and
deffered payments (KPMG 2020). And the consequence is highlighted in table 5: Indonesia’s
budget has reached the highest defitcit in 2020 to 6.5%, which is equivalent to around Rp 1,039.2
trillion. This is because the the funding for dealing with the Covid-19 was increased to Rp 695.2
trillion (Danareska 2020). Moreover, general government expenditure took a jump in terms of its
importance to 9.23% in 2020. However, all these measures are required to ensure the
Indonesian’s economy long term viability during this pandemic.

The reduction in CIP from 25% to 22%, and the exemption from income taxes for qualified
workers will encourage individuals to spend more (KPMG 2020). Hence, this promotes
consumption to increase. Clearly, increasing spending leads to improved productivity, which in
turn leads to increased employment and income plus government subsidies, resulting in further
consumption. This rise in consumer purchases is called the multiplier effect.

b) Impacts of Policy changes to AD/AS diagram

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 Figure 7: The impact of fiscal policy on AS/AD diagram

Since the pandemic occured, the number of unemployment rose from 2.7 million to almost 10
million people (Unicef 2021). This has resulted in a reduction in people’s earnings, making the
nation’s GDP contracted by 2.4% and AD shift to the left away from the equilibrium (point A).
Consequently, fiscal policies had been implemented to boost the economy from point B. Firstly,
the governemnt increased their spending to roll out stimulus packages and stimulate the
aggregate demand. Next, they implemented tax reliefs and reduced CIP rate to help households
have more disposable income. In terms of the economy, decrease in taxes and increase in
government spending will result in higher MPC and bigger income multiplier, which will shift
the AD2 back to AD1. As AD shifts right, output will also increase and the price level will shift
back to P1.

c) Effectiveness of fiscal policy

Ever since fiscal policy was implemented, the economy has been slowly recovering since mid-
2020 owing to political assistance, gradual reopening, and favorable global conditions. GDP
growth is expected to resume at around 5% annually in 2021 and 2022, driven by consumptions
as demand increases. Production is projected to rebound to its pre-pandemic level by mid-2021.
In addition, the trade balance remained positive with support from higher international prices
from commodities such as coal, palm oil, and rubber. Hence, exports and investments are also
likely to be supportive. Moreover, the fiscal deficit is anticipated to decrease, but it will still
exceed 3% of GDP in 2022 (OECD 2021).

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 Figure 8: Indonesia’s GDP annual growth rate from 2018 to 2021 (Unit: %)
(Source: Trading economics 2021)

Figure 9: Indonesia’s consumer spending from 2018 to 2021 (Unit: IDR billion)
(Source: Trading economics 2021)

Figure 10: Indonesia’s export from 2020 to 2021 (Unit: USD billion)

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 (Source: Trading economics 2021)
d) Comparison of fiscal policy policy between the two crisis

Asian Financial Crisis Covid-19

Similarities The government has delivered a financial package to save the

economy for both crisis. Moreover, they also introduced
excise taxes on certain goods, enhanced tax compliance, and
removed VAT exemptions as part of their tax reform
programs. Additionally, they also increased exports during
both periods.

Differences The government has The government has

implemented
contractionary fiscal
policy by reducing its
spending and focused on
generating revenue from
increasing tax rate.
Moreover, they decided to
phase out the the energy
subsidies by increasing the
price of fuel and
electricity.
implemented expansionary
fiscal policy by lowering tax
rate and increasing
expenditures to stimulate the
economy. Additionally, they
increased social assistance to
low income households such as
food aid and energy subsidies.

Question 3

Year Inflation rate (%)

1991 9.37
1992 7.51
1993 9.69
1994 8.52
1995 9.43

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 1996 8.38
1997 6.19
1998 58.02
1999 20.75
2000 3.77
2001 11.5
2002 11.78
2003 6.77
2004 6.06
2005 10.46
2006 13.1
2007 6.66
2008 9.78
2009 5.05
2010 5.14
2011 5.34
2012 3.98
2013 6.41
2014 6.4
2015 6.36
2016 3.53
2017 3.81
2018 3.29
2019 2.82
2020 2.03
2021* 2.05
Table 11: Indonesia’s inflation rate from 1991 to 2021 (%) (* Estimate)
(Source: Statista 2021)

The first period that Indonesia experienced high inflation rate was in 1998 when the deprication
in currency and exchange rate resulted in high inflation. This depreciation increased the prices of
imported goods, which shifted consumption to domestic goods. As a result, domestic AD rised
and we got demand-pull inflation. Additionally, a higher demand would also increase wages and
production costs, which contributed to inflation. The second period that Indonesia experienced
high inflation rate was during 2001-2006. This is because the government increased the fuel oil
price in the country. Hence, this caused a decrease in supply as production costs increased (cost-
push inflation). Moreover, companies tried to divert an increase in production cost by increasing

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the product selling price to the consumers, which affected inflation as well (Akhmad et al. 2019).
Finally, the third period that experienced high inflation rate was 2007/2008 when the government
rolled out stimulus packages and cash transfers in response to the global financial crisis. The
increase in money supply has contributed to the increase in consumptions, but the amount of
goods and services remained unchanged, hence raised the price level of the economy (money
injection). Additionally, the rising food and oil prices also pressured inflationary to build up.

  2000 2002 2004 2006 2008 2010

Pump price for Diesel fuel 0.06 0.19 0.18 0.44 0.42 0.51
Pump price for gasoline 0.17 0.27 0.27 0.57 0.5 0.79
Table 12: Indonesia’s pump price for fuel and gasoline from 2000 to 2010 (US$ per liter)
(Source: Worldbank n.d)

Industry Engagment Reflection

After watching the industry engament, I have learned more about the policies that the
government has implemented in order to minimize the impacts caused by the Covid-19. Some of
the industries that were heavily affected were passenger transportation, tourism, manufacturing,
and retail stores. Whereas, other industries that could survive healthily through this crisis are E-
commerce, medication, securities, and IT related industries. Furthermore, one of the most
important industries that plays a significant role in controlling the money inside the economy is
the banking sector. Therefore, to deal with the crisis, the Statebank of Vietnam has implemented
the expansionary monetary policy and ịnject more money into the market. With this injection,
organizations can use that money to make up for the losses in revenue and overcome the
difficulties in the crisis. This leads to the second policy, which is decreasing the interest rates.
This allows companies to borrow at a lower expense and have enough cashflow to maintain their
operation. However, the enterprises can not operate their business as normal due to weak demand
from overseas. As a result, the high supply of money goes to individuals using and raised the
purchasing power of people in the economy. Thus, the amount of supplies of goods in the market
is smaller than the amount of money in the market. With this situation of high demand but
limited supply, it will impact the prices of goods and cause inflation in the long run.
References
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Azwar, P & Tyers, R 2020, 'Indonesian Macro Policy Through Two Crises', Journal of
Southeast Asian economies, vol. 37, no. 2, pp. 101-134, viewed 8 September 2021 2021, JSTOR
database.

n.d, Asian Financial Crisis in Indonesia, Indonesia Investment, viewed 7 September

2021, <https://www.indonesia-investments.com/culture/economy/asian-financial-crisis/
item246>.

Akhmad, A, Buyung, R, Kasnaeny, K, Muhammad Jibril, T & Muhammad, S 2019, 'The Impact
of Fuel Oil Price Fluctuations on Indonesia’s Macro Economic Condition', International journal
of energy economics and policy, vol. 9, no. 2, pp. 277-282, viewed 11 September 2021, Proquest
database.

Doraisami, A 2014, 'Macro-Economic Policy Responses to Financial Crises in Malaysia,

Indonesia and Thailand', Journal of contemporary Asia, vol. 44, no. 4, pp. 581-598, viewed 8
September 2021, Taylor & Francis database .

Danareska 2020, The Indonesian Government Officially Widened the 2020 State Budget Deficit
to 6.34% of GDP, Danareska, viewed 10 September
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widened-the-2020-state-budget-deficit-to-6-34-of-gdp/>.

IMF 1998, Indonesia—Memorandum of Economic and Financial Policies, IMF, viewed 8

September 2021, <https://www.imf.org/external/np/loi/011598.htm?
fbclid=IwAR2jOntB1aDWx2G386vNGTR-KKoWlBWSlMP-kZ7PRGVgLJ0T56jHQ179NDs>.

IMF 2021, Indonesia : 2020 Article IV Consultation-Press Release; Staff Report; and Statement
by the Executive Director for Indonesia, IMF, viewed 9 September
2021, <https://www.imf.org/external/np/loi/011598.htm?
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KPMG 2020, Indonesia Government and institution measures in response to COVID-19.,

KPMG, viewed 10 September
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measures-in-response-to-covid.html>.

OECD 2021, 'OECD Economic Outlook, Volume 2021 Issue 1', June, vol. 2021, no. 1, viewed
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Nasution, A 2014, Macroeconomic Policies in Indonesia: Indonesia economy since the Asian
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Utami, D & Ilyas, WB 2021, 'The role of tax in COVID‐19 response in Indonesia: The principles
of flexibility, solidarity, and transparency', Asian politics & policy, vol. 13, no. 2, pp. 280-283,
viewed 9 September 2021, Wiley Online database.

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 UNICEF 2021, Analysis of the Social and Economic Impacts of COVID-19 on Households and
Strategic Policy Recommendations for Indonesia, UNICEF, viewed 10 September
2021, <https://www.unicef.org/indonesia/media/9411/file/Analysis%20of%20the%20Social
%20and%20Economic%20Impacts%20of%20COVID-19%20on%20Household%20%20and
%20Strategic%20Policy%20Recommendations%20for%20Indonesia.pdf>.

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