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Introduction
This paper seeks to assess the causes and effects of Indonesia’s Trade Deficits. Indonesia’s current account balance has been in deficit for the last five years and this imbalance is expected to remain for the foreseeable future. On the current account side, the trade balance has been in deficit for the same period. The reason for this is a lack of export competitiveness that has caused persistent trade deficits, leading to economic and financial challenges.
Causes of Trade Deficit
The main reason for Indonesia’s current trade deficit is its lack of export competitiveness. The underperformance of Indonesian exports is largely due to the higher cost of Indonesian goods compared to its major trading partners such as China and other countries in Asia. The higher cost of Indonesian goods makes them less attractive to foreign buyers and thus exports remain low.
Another factor that has contributed to Indonesia’s trade deficit is the decline in commodity prices in recent years. Commodities make up a large portion of Indonesia’s exports, so a decline in commodity prices has significantly weakened its export competitiveness. Furthermore, the process of currency devaluation in Indonesia has made imported goods more attractive and thus increased imports into the country. This has further increased the trade deficit at a time when exports are already low.
Finally, low foreign investment and low productivity have also been major sources of Indonesia’s trade deficit. Low foreign investment means there is less capital to invest in the economy, which limits the productive capacity of the country. Low productivity also has an adverse effect on exports as low productivity leads to higher costs which in turn makes Indonesian goods less competitive in the international market.
Effects of Trade Deficit
The main consequence of Indonesia’s trade deficit is an increase in debt. A persistent trade deficit will force Indonesia to borrow from foreign countries and institutions, leading to a growing debt burden. In the longer term, this debt could become unsustainable and the country could face a debt crisis.
The trade deficit also has a negative effect on the Indonesian currency. Since Indonesia’s exports are low and imports are high, this means there is a persistent outflow of funds from the country. This has led to a weakening of the Indonesian rupiah which has made it more difficult for the country to sustain its balance of payments.
Finally, a prolonged trade deficit will cause economic stagnation and could lead to financial insecurity. A prolonged trade deficit signals a lack of competitiveness in the global market and a lack of economic growth. This can lead to a lack of investment and can make it difficult to generate jobs, leading to financial insecurity.
Conclusion
In conclusion, Indonesia’s current trade deficit is a major source of economic and financial instability. The main causes of this deficit are Indonesia’s lack of export competitiveness, the decline in commodity prices and the effects of currency devaluation. These have had a negative effect on the country’s currency and debt burden, as well as leading to prolonged economic stagnation. It is therefore important for Indonesia to address these issues and take measures to improve export competitiveness and reduce its trade deficit.
