Import substitution needed to reduce Indonesian industry’s dependence on imports

Kompas Newspaper – December 16, 2014
Containers being unloaded at Tanjung Priok port in Jakarta - Undated (CIFOR)
Containers being unloaded at Tanjung Priok port in Jakarta - Undated (CIFOR)

Jakarta – The government is determined to stimulate investment in import substitution, a move which it says is certain to reduce demand for US dollars as a result of the high dependency on imports.

“The dependency on imports in Indonesia is indeed still high”, said Investment Coordinating Board (BKPM) chairperson Franky Sibarani in Jakarta on Tuesday December 16.

As an illustration, based on National Statistics Agency (BPS) data, total imports of raw materials and intermediary goods between January and October 2014 was as high as 114.365 billion US dollars. This is equivalent to 76.39 percent of Indonesia’s total imports of 149.702 billion dollars AS.

The import of capital goods over the same period was 24.844 billion dollars US and the import of consumer goods 10.493 billion dollars US [20.7 and 9.1 percent respectively – JB].

The importation of industrial goods has also contributed to the deficit. Based on data from the Ministry of Industry, the import of industrial products between January and September 2014 was as high as 93.07 billion dollars US.

Meanwhile the export of industrial products over the same period was only 87.85 billion dollars US resulting in a deficit of 5.22 billion dollars US.

Sibarani stated that the BKPM will be prioritising import substitution. “No matter what we will be definitely be prioritising import substitution because it can reduce the demand for US dollars for imports”, he said.

The BKPM will also provide incentives for export orientated industries to develop. This approach will be applied for all export orientated companies. The BKPM will also promote investment in sectors such as electricity generation, agricultural, maritime and labour intensive industries.

Speaking separately, Indonesian Industrial Estate Association chairperson Sanny Iskandar believes that the move by the cabinet of President Joko Widodo and Vice President Jusuf Kalla to support import substitution industries is the right one.

“This is because when there is a strengthening of the US dollar like now companies that depend on imported components are burdened. As a consequence they are retreating from business expansion plans and reducing production volumes”, explained Iskandar.

Prices increases however cannot automatically follow a strengthening of the US dollar. According to Iskandar, aside from taking into consideration people’s purchasing power, Indonesian industries are also faced with extraordinary levels of competition so it is not easy to increase the sales price of products. (CAS)

[Translated by James Balowski. The original title of the report was Penanaman Modal: Investasi Substitusi Impor Diprioritaskan.]