CORE: Import substitution as industry option to counter the rupiah's depreciation

Executive Director of the Centre for Reform on Economics (CORE) Indonesia, Mohammad Faisal, said that industry players can begin seeking and partnering with local suppliers as an alternative to imported raw materials to counter the impact of the rupiah’s depreciation against the US dollar. The rupiah, as of Tuesday (19 May) at 11:02 WIB, weakened by 60 points or 0.34 percent to IDR 17,728 per US dollar, compared with the previous close at IDR 17,668 per US dollar.

“What should industry players do to mitigate the impact? Typically, if the exchange rate continues to weaken, industry will seek domestic suppliers that are less affected by the depreciation, and diversify their supply chains,” Faisal said when contacted in Jakarta on Tuesday.

Faisal said the rupiah’s depreciation will raise production costs, especially for industries that still rely on imported inputs such as chemical and pharmaceutical sectors. Besides supply chain disruption, there is also an increase in raw material inflation from the country of origin or the importer, as well as higher distribution or logistics costs due to fluctuations in world oil prices.

“So there is an increase in production costs. While not uniform across all business players, the increase is certainly large,” he said.

With higher production costs, he continued, the industry responds by pursuing efficiency, including the possibility of reducing the number of workers. Faisal added that the potential for job cuts could grow if sales or markets also decline.

“Thus there is downstream pressure, in the market. So if sales fall, that automatically reduces the number of workers. So there is potential for layoffs,” he said.

In addition to mitigation from the industry side, he said the government should also play a direct role through a series of supportive policies to anticipate the possibility of adverse effects from the rupiah’s depreciation against the US dollar.

“In my view, one of the factors behind the rupiah’s depreciation is not only global but also domestic. Macro economic stability including fiscal issues must be safeguarded by the government, including fiscal discipline which is also a focus,” Faisal said.

“Additionally, governance in the implementation of priority programs to improve or maintain confidence in the Indonesian economy, and the credibility of government policies,” he added.