Australia offers Indonesia $ 1.5 billion loan as country enters first recession in 22 years

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Australia has announced that it will provide a $ 1.5 billion loan to Indonesia as the country enters its first recession in 22 years as it grapples with increasing cases of COVID- 19.

In a joint statement, Treasurer Josh Frydenberg and Indonesian Finance Minister Sri Mulyani Indrawati said the loan will be used to support Indonesia’s budget and is repayable over 15 years.

“COVID-19 poses an unprecedented challenge to the Indo-Pacific and the world,” the statement said.

“Indonesia’s recovery and continued prosperity are essential to the stability and security of our region.

“The loan is based on our highly valued economic relationship and [a] solid record of bilateral cooperation. “

Indonesia’s gross domestic product fell 3.49% in the third quarter of 2020, after contracting 5.32% in the previous quarter.

The holiday island of Bali has been the hardest hit due to the shutdown of international tourism – with a 12.28% drop in regional gross domestic product in the third quarter of 2020, following a 10.98% drop in the quarter previous.

Bali’s economy has been hit hard due to the shutdown of foreign visitors.(PA: Firdia Lisnawati)

A landmark free trade agreement between Australia and Indonesia went into effect in July this year, but has not been as successful as expected due to domestic spending to mitigate the pandemic.

Australia’s economic devastation caused by COVID-19 has seen its largest budget deficit since World War II in the past fiscal year and is expected to exceed $ 213 billion this fiscal year.

Peter McCawley, an Asian economic expert currently based at Australian National University, told the ABC that the $ 1.5 billion loan amount “will not be a constraint on Australia.”

A “symbolic gesture” to prevent capital flight from Indonesia

A woman wearing a hijab and a face mask looks at a coronavirus-themed banner in Jakarta.
COVID-19 has had a significant impact on the Indonesian economy.(PA: Achmad Ibrahim)

Several economists downplayed the importance of the loan, saying it will not have a major impact on Indonesia’s current economic woes.

Arianto Patunru, an Indonesian economist from the Australian National University, told the ABC that the loan is largely a “symbolic sign.”

“Australia’s share in Indonesia’s total imports is less than 3%, [while] Indonesia’s share of Australia’s total imports is also less than 3 percent. “

However, Australia’s gesture will still help Indonesia calm the markets and restore investor confidence, Patunru said.

“Even if the loan is not used, the signal it gives to the market is important,” he said.

“As Indonesia faces its economic problems, they also want to manage the attitude and confidence of investors so that at least they do not withdraw their investment from Indonesia.

“The relationship is very important geopolitically and strategically… Indonesia’s role is very important in the region and Australia needs a stronger relationship with Indonesia.”

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