Indonesia's Mining Export Ban Impacts on Current Account Deficit in 2014

The current account deficit of Indonesia eased from USD $9.9 billion (equivalent to 4.4 percent of GDP) in the second quarter of 2013 to USD $8.4 billion (3.8 percent of GDP) in the third quarter of 2013, mainly due to the sharply depreciating rupiah exchange rate which makes imports expensive and exports cheap thus improving the trade balance. Moreover, the economies of the USA and China are showing an improvement (which boosts Indonesian exports). According to Finance Minister Chatib Basri, the current account deficit will continue its easing trend in the fourth quarter of 2013 to about USD $7 billion (roughly 3.5 percent of GDP). Indonesia's central bank (Bank Indonesia) expects the deficit to fall below 3 percent in 2014. This level is considered as a sustainable level.

The law that sets limits to Indonesia's export is Mining Law No.4/2009. This controversial law, which stipulates that minerals have to be processed domestically before exports are allowed, brought a shock to Indonesia's mining sector as a significant portion of exports constitute raw materials, while the ban is also not in line with long-standing contracts between the (local) government(s) and mining companies. The government designed Mining Law No.4/2009 in order to generate more value-added revenues while also limiting the influence of foreign participation in the mining sector ('resource nationalism').

However, currently Indonesia has a lack of processing capacity as the majority of smelters still need to be built. Previously it was reported that Deputy Minister of Energy and Resources Susilo Siswoutomo said that 125 proposals for smelters had been received by the government, of which 28 were under construction in December 2013. Ten smelters are expected to be operational in 2014. The lack of processing capacity means that exports in the mining sector will decline and thus pressure the country's trade balance in the near future. Other negative impacts of the raw minerals export ban are an expected increase of unemployment in the mining sector of Indonesia as well as a decline of Indonesia's foreign exchange reserves by about USD $5 billion to USD $10 billion. Last month, the Minister of Economy, Hatta Rajasa, said that in 2014 and 2015 Indonesia's mineral sector will record a deficit as the country's exports are set to plunge, while the country still needs to import minerals as well. Rajasa stressed the importance of the law for the long-term. After 2016, it will start to become beneficial to Indonesia.

Further Reading:

• Indonesia Might Delay Implementation of Mineral Export Ban by 3 Years
• Indonesia May Review its Ban on the Export of Unprocessed Minerals
• Go-Ahead for Indonesia's Controversial Ban on Unprocessed Mineral Exports
• Indonesia Studying Temporary Exemption for Export of Raw Minerals
• Export Ban on Unprocessed Minerals Temporarily Pressures Trade Balance

‹ Back to Financial Columns

Discuss

Please sign in or subscribe to comment on this column