Bulletin of Indonesian Economic Studies

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Estimating the Impact of Covid-19 on Poverty in

Indonesia

Asep Suryahadi , Ridho Al Izzati & Daniel Suryadarma

To cite this article: Asep Suryahadi , Ridho Al Izzati & Daniel Suryadarma (2020) Estimating
the Impact of Covid-19 on Poverty in Indonesia, Bulletin of Indonesian Economic Studies, 56:2,
175-192, DOI: 10.1080/00074918.2020.1779390

To link to this article: https://doi.org/10.1080/00074918.2020.1779390

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 Bulletin of Indonesian Economic Studies, Vol. 56, No. 2, 2020: 175–192

ESTIMATING THE IMPACT OF COVID-19

ON POVERTY IN INDONESIA*

Asep Suryahadi, Ridho Al Izzati and Daniel Suryadarma

SMERU Research Institute

Covid-19 has infected and will continue to infect millions of people all over the
world. The economic impact is predicted to be large and millions of people will be
pushed into poverty. In this paper, we estimate the impact of Covid-19 on poverty
in Indonesia. The economic impact is expected to be severe, reducing the economic
growth rate projected for 2020 from about 5% to between 4.2% and –3.5%. We
find that under the best-case scenario, the poverty rate will increase from 9.2% in
September 2019 to 9.7% by the end of 2020, pushing 1.3 million more people into
poverty. Under the worst-case scenario, the poverty rate will increase to 16.6%, close
to the level seen in 2004 when the poverty rate was 16.7%. This means that 19.7 mil-
lion more people will become poor, substantially reversing Indonesia’s progress in
reducing poverty. The implication is that Indonesia will need to expand its social
protection programs to assist the new poor as well as the existing poor.

Keywords: Covid-19, poverty, shock, economic growth, household expenditure

JEL classifications: C53, I19, I32, O49

INTRODUCTION
Covid-19 was first detected in China in December 2019. On 13 January 2020, the
first case outside of China was reported in Thailand (WHO 2020a). By the end of
January 2020, the disease had infected 7,818 people, 82 of whom were situated in
18 countries outside China (WHO 2020b). By the end of February 2020, more than
85,000 people had been infected in 53 countries (WHO 2020c). At this time, six
countries in Southeast Asia had reported positive cases. By the end of March 2020,
more than 750,000 people had been infected worldwide. Fewer than 10 countries
had not reported any positive cases (WHO 2020d). By April 2020, close to 1.5 mil-
lion people across the world had been infected (Johns Hopkins University 2020).
As of 20 June 2020, WHO (2020e) had reported more than 8.5 million confirmed
cases, including more than 450,000 deaths.
While projecting the global effects of Covid-19 is challenging (de Walque 2020),
widely cited results from Walker et al. (2020, 2) estimated that the number of global
deaths from the virus would reach about two million if interpersonal contact was
reduced by 75%, and about 40 million if the spread of the virus was not mitigated.

* This work was supported by the Knowledge Sector Initiative, an Australia–Indonesia

partnership. Grant number: 1301001-G-2018-001.

ISSN 0007-4918 print/ISSN 1472-7234 online/18/000175-192 © 2020 ANU Indonesia Project

http://dx.doi.org/10.1080/00074918.2020.1779390
176 Asep Suryahadi, Ridho Al Izzati and Daniel Suryadarma

McKibbin and Fernando (2020) predicted that between 15 million and 69 million
people could die from Covid-19 in the first year alone, under various scenarios in
which the Covid-19 outbreak was not contained within China.
The economic impact of Covid-19 is assumed to start as a negative supply shock
(Hausmann 2020, 22). Two things occur to produce this shock. First, workers are
infected, reducing production capacity—Atkeson (2020, 2) states that when 10% of
a population is infected, severe staffing shortages affect key financial and economic
infrastructure. Second, activity is restricted to suppress the disease. As mentioned,
a reduction of up to 75% in interpersonal contact may control the spread of Covid-
19, but it would also decrease production, international trade, tourism and many
other economic activities.
Inoue and Todo (2020) showed that shutting down firms in Tokyo would result
in an 86% reduction in output throughout Japan within one month. Modelling by
Eichenbaum, Rebelo and Trabandt (2020, 28) showed that disease-suppression
policies saved lives but exacerbated economic recession. The long-term effects of
such policies could include unemployment hysteresis effects—effects that last after
their initial causes are gone—and the destruction of supply-side chains.
The resulting supply shock would most likely lead to a demand shock. A large
slowdown in the economy has already been predicted, based on calculations of the
first-order supply and subsequent demand shocks. For example, del Rio-Chanona
et al. (2020) estimated a 25% reduction in US value added. They found that supply
shocks caused most of the reduction in demand. In countries with incomplete
markets and liquidity-constrained consumers, the initial supply shocks could lead
to even larger demand shocks (Guerrieri et al. 2020, 4).
In summary, economic downturn is a certainty. The global economy could con-
tract by 3% (IMF 2020a), worse than the economic contraction seen during the
2008–09 global financial crisis. McKibbin and Fernando (2020) estimated that a
serious outbreak similar to the Spanish flu could reduce global GDP by over $9
trillion in 2020.
An economic recession would push millions of people into poverty. A rapid
simulation covering 138 developing and 26 high-income economies found that
even in the mildest scenario, Covid-19 could impoverish an extra 85 million people
(Sumner, Hoy and Ortiz-Juarez 2020, 5).
In this paper, we estimate the impact of Covid-19 on poverty in Indonesia. The
country announced its first two Covid-19 infections in early March 2020. Within
one month, the number of infected people had reached close to 3,000, with a case
fatality rate of 8%. By 20 June 2020, more than 45,000 people had tested positive for
Covid-19, with more than 2,400 deaths (GTPP 2020). According to the most recent
estimates, 1.2 million people in the country could eventually be infected (Shidiq 2020,
3). Jaffrey (2020) stated that, because of its lack of mass testing and its lax containment
measures, Indonesia could become the worst-affected country in Southeast Asia.
Economic impacts would be severe. Various studies (see below) estimate that
Indonesia’s economic growth rate for 2020 could fall to between 4.2% and –3.5%
because of Covid-19, in contrast to the baseline forecast of 5%, made before the
pandemic. A worst-case scenario proposed by the World Bank (2020) projects that
the economic growth rate could contract to –3.5% from the baseline of 5%.
We first estimate the growth elasticity of household expenditure, based on long
time-series data on economic growth and average household expenditure. Then we
Estimating the Impact of Covid-19 on Poverty in Indonesia 177

estimate the shock experienced by each expenditure percentile, using the pattern
seen in another episode of poverty-increasing economic downturn in Indonesia.
We use the resulting household expenditure distribution to predict the poverty rate
in 2020. We base the simulations on various projections of the outbreak’s impact on
economic growth. We find that under the best-case scenario of impact on growth,
1.3 million people will be pushed into poverty. Under the worst-case scenario, 19.7
million more people will become poor, increasing poverty to the levels last seen in
2004, when the poverty rate was 16.7%.

ESTIMATION METHOD AND DATA

Estimating the impact of a shock such as the Covid-19 pandemic on poverty
requires one to forecast the impact on the distribution of household income or
expenditure. Our forecast is based on a historical economic shock in Indonesia. In
the past two decades, Indonesia experienced two shocks large enough to cause the
poverty rate to increase significantly.
The first was during the 1997–98 Asian financial crisis. The crisis began with a
slide in the value of the rupiah in August 1997, after a currency crisis hit Thailand
in the previous month. The exchange rate of rupiah to US dollar fell from Rp 2,200
in July 1997 to Rp 5,000 in October 1997 and then to Rp 17,000 in January 1998.
The currency crisis caused a financial crisis, which developed into an economic
crisis, with gross domestic product (GDP) falling by 13.7% and inflation soaring
to 78% in 1998. This culminated in a political crisis. With riots erupting in several
cities, Soeharto, who had been president for three decades, resigned in May 1998
(Suryahadi, Sumarto and Pritchett 2003, 221–2). As a result of this turbulence, the
official poverty rate jumped from 17.6% in 1996 to 23.4% in 1999, and real average
per capita household expenditure fell by 7% during the period (BPS 2000, 571).
The second major shock was in 2005–06 and was caused by large increases in
the prices of fuel, especially kerosene, exacerbated by a significant increase in the
price of rice (World Bank 2006, 26). Back then, domestic fuel prices were fixed by
the government, with the gaps between them and the international oil price covered
by a government subsidy. When the international oil price increased substantially
in 2005, the government faced budgetary pressure to increase domestic fuel prices,
and raised them by an average of 114% in October of that year (Sen and Steer 2005,
285). While most of the changes in fuel prices had a limited direct impact on the
poor, the large increase in the price of kerosene undoubtedly had a large nega-
tive effect on poor Indonesians (World Bank 2006, 26). Yusuf and Resosudarmo
(2008) found that while the policy to increase fuel prices was efficient, it resulted
in increased inequality in urban areas.
At around the same time, between February 2005 and March 2006, the rice price
also increased, by 33%. The World Bank (2006, 26) found that while the negative
effect of increasing fuel prices was offset by an unconditional cash transfer pro-
gram, the increasing rice price caused the poverty rate to rise from 16% in 2005 to
17.8% in 2006.
This study uses the 2005–06 pattern of shock experienced by each expenditure
percentile to measure the 2019–20 distributional impact of Covid-19 on house-
hold expenditure. The main reason we chose the 2005–06 shock as a benchmark
is that the economic and political structures of that time are more similar to those
178 Asep Suryahadi, Ridho Al Izzati and Daniel Suryadarma

TABLE 1 Economic Growth, Household Expenditure

and the Poverty Rate in 2005 and 2006

2005 2006 Change

Economic growth (%) 5.70 5.50 –0.20

Economic growth, Q1, 6.30 4.60 –1.70
year on year (%)
Real average per capita 265,368 249,326 –16,042 (–6%)
household expenditure (Rp)
Poverty rate (%) 15.97 17.75 1.78

Source: Statistics Indonesia (BPS).

Notes: Economic growth is based on real GDP at constant 2000 prices; the average per capita household
expenditure values are expressed in real 2005 rupiah.

of 2019–20 than the 1997–98 shock. Another reason is that we needed access to
annually representative household expenditure data in order to estimate the short-
term effects of shocks on household expenditure. Statistics Indonesia (BPS) began
conducting annual consumption surveys only in 2004.

The Impact of a Shock on Poverty: The 2005–06 Experience

Table 1 summarises the impact of the 2005–06 shock on the Indonesian economy.
Annual economic growth was only marginally affected, declining from 5.7% in 2005
to 5.5% in 2007. However, the small annual decline masked a more pronounced
short-term impact, as shown by the year-on-year decline in quarterly economic
growth, from 6.3% in the first quarter of 2005 to 4.6% in the first quarter of 2006.
Figure 1 shows the trend of quarterly economic growth more clearly.
Data from the National Socio-economic Survey (Susenas) show that there was
a significant change in household expenditure and poverty from 2005 to 2006.
This is because the 2006 survey was conducted only five months after the 2005–06
shock began to affect households. Real average per capita household expenditure
dropped by 6.1% from 2005 to 2006, while the poverty rate increased from 16%
to 17.8% (BPS 2007, 7). We should note, however, that the impact on household
expenditure and poverty would have been larger if social protection programs had
not been implemented (Manning and Roesad 2006). Using the above figures, we
can simulate the impact of Covid-19 on household expenditure and poverty in a
context where social protection policies are in place.
Figure 2 shows that the mean 6.1% decline in average per capita household
expenditure was not evenly distributed across the percentiles of expenditure.
Reductions in expenditure were larger at the bottom of the expenditure distribu-
tion than at the top. While the poorest 10% of the population suffered a 9%–12%
decline in expenditure, the richest 10% experienced only a 0%–5% decline. This
positively sloped impact distribution explains the significant increase in poverty.
Estimating the Impact of Covid-19 on Poverty in Indonesia 179

FIGURE 1 Quarterly Economic Growth in 2005–06 (year on year)

%
7
6.25 6.10
6 5.63 5.63 5.52
4.90 5.08
5 4.59

0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2005 2006
Source: BPS.

FIGURE 2 Proportional Change in per Capita

Household Expenditure (PCE) in 2005–06

%
2
0
–2
–4
Mean –6.1%
–6
–8
–10
–12
–14
0 10 20 30 40 50 60 70 80 90 100
Percentile of PCE

Source: Authors’ calculations based on Susenas panel data, 2005–06.

Notes: The Y axis shows the distributional range of the mean 6.1% decline in average per capita house-
hold expenditure in 2005–06.
180 Asep Suryahadi, Ridho Al Izzati and Daniel Suryadarma

FIGURE 3 Transmission Mechanism: From Shock to Poverty Incidence

1 2 3
Declining Distributional
Declining Declining
average impact on Poverty
Covid-19 economic economic
household household incidence
activity growth
expenditure expenditure

Focus of simulations

Transmission Mechanism
A key lesson from the 2005–06 shock is that a sudden decline in economic growth,
even if that growth remains positive, can cause an increase in poverty if the impact
on household expenditure is largest at the low end of the expenditure distribution.
This lesson allows us to estimate the possible impact of Covid-19 on poverty.
Figure 3 illustrates the transmission mechanism by which a shock affects pov-
erty. First, through a combination of supply and demand shocks, the Covid-19
outbreak causes a decline in economic activity, which leads to a decline in economic
growth. In turn, this macroeconomic shock causes a decline in average per capita
expenditure at the household level. Then, depending on its distributional impact,
the decline in per capita household expenditure may lead to an increase in the
incidence of poverty. The reality is, of course, more complex. As figure 3 shows,
declining economic activity can also cause a decline in household expenditure,
which can in turn cause a decline in economic growth.
The impact of Covid-19 on economic growth has already been projected by
various authors and institutions (BI 2020; EIU 2020; Rogers 2020; World Bank 2020;
Yusuf 2020). Therefore, in this paper we focus on estimating how the decline in
economic growth will affect poverty incidence.
In the first step, we estimate the growth elasticity of average per capita house-
hold expenditure using long time-series data on both variables. We then turn to the
various projections of Covid-19’s impact on economic growth to complete our simu-
lations. We should note that these simulations do not attempt to estimate a causal
relationship between economic growth and household consumption expenditure.
In the second step, we use the estimated shock in aggregate household expendi-
ture to derive the shock for each percentile of per capita household expenditure.
We do this by looking at the 2005–06 economic downturn and simulating its pat-
tern of effects on the distribution of per capita household expenditure (figure 2).
Finally, in the third step, we use the estimated distribution of per capita house-
hold expenditure to estimate the poverty rate.

The Impact of Covid-19 on Household Expenditure

Poverty in Indonesia is measured based on household expenditure. Therefore,
we must first translate the impact of Covid-19 on economic growth into impact
on average per capita household expenditure. This can be achieved by estimating
the correlation between the change in economic growth and the change in average
per capita household expenditure. The correlation can be obtained by estimating
the following model.
Estimating the Impact of Covid-19 on Poverty in Indonesia 181

∆logPCEt = α + β∆gGDPt + ε t (1)

where ∆logPCE is change in the logarithm of average per capita household

expenditure, ∆gGDP is change in the rate of economic growth, and β is the correla-
tion parameter to be estimated. The model can be estimated using time series data
on economic growth and average per capita household expenditure. Since our aim
is to estimate the unconditional correlation between economic growth and aver-
age per capita household expenditure, the model is estimated without covariates,
as in the ordinary least squares (OLS) estimation by Dollar and Kraay (2002, 205).
Once a correlation between economic growth and average per capita house-
hold expenditure has been estimated, we can use the correlation to estimate the
decline in expenditure between 2019 and 2020, based on the various projections of
economic growth. The result will show how much average per capita household
expenditure will decline in each scenario of economic growth in 2020.

The Distributional Impact of Covid-19 on Expenditure

Once the decline in average per capita household expenditure in 2020 has been
estimated, the next step is to estimate the distributional impact on expenditure.
To do this, we refer to the 2005–06 shock and its pattern of distributional impact
on expenditure (figure 2). We use this pattern to estimate the distributional impact
of the 2019–20 shock on expenditure.
The first step is to calculate the factor of decline in per capita household expendi-
ture by percentile for every 1% decline in average per capita household expenditure.
This is done by dividing the proportional decline in real per capita household
expenditure (figure 2) by the decline in average per capita household expenditure
for 2005–06. For example, the factor of decline in per capita household expenditure
for the poorest percentile of households is 1.9, which is obtained by dividing the
proportional decline of 11.5% by the average decline of 6.1%. The results in figure
4 show a negative slope, confirming that the 2005–06 shock had a larger impact at
the low end of the expenditure distribution than at the high end.
We believe that the impact of Covid-19 will also disproportionately affect
households at the low end of the distribution. The Economist (2020a, 2020b)
explains this effect. First, households at the low end of the distribution are more
likely to work in the sectors most affected by lockdown measures. Second, they
are more likely to have poor health, to be exposed to pollution and to be unable
to afford nutritious food.
Ramped-up social protection programs may not be sufficient to maintain house-
hold consumption at pre-Covid-19 levels, especially given the well-documented
problems with program targeting and delivery. Hanna and Olken (2020) found
that only 25% of unemployed men and women received any government social
assistance. They also found that only 23% of their survey respondents reported
eating as much as they should in the week preceding the survey, with the rate
lower among those with low levels of education.
Next, we apply the 2005–06 pattern of distributional impact on expenditure to
the simulation of decline in average per capita household expenditure between
2019 and 2020. This allows us to estimate the distribution of per capita house-
hold expenditure in 2020 in constant 2019 prices. Since the 2020 expenditure is
182 Asep Suryahadi, Ridho Al Izzati and Daniel Suryadarma

FIGURE 4 Factor of Decline in per Capita Household Expenditure

(PCE) by Percentile for every 1% Decline in Average PCE, 2005–06
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
0 10 20 30 40 50 60 70 80 90 100
Percentile of PCE

Source: Authors’ calculations using Susenas panel data, 2005–06.

measured using 2019 prices, we can use the same poverty lines for 2020 as in 2019.
The poverty rate for 2020 can then be calculated.

Data
The main data set used in this study is the National Socio-economic Survey
(Susenas), by BPS. Susenas collects data on household welfare indicators, such
as household expenditure, as well as basic demographic and other characteristics
of households and their members. BPS uses Susenas data to calculate Indonesia’s
official poverty statistics at the national, provincial and district levels.
First, since the 2005–06 shock is the benchmark for our simulations, we use
data from the 2005–06 Susenas panel to calculate the changes in the distribution
of household expenditure due to the 2005–06 shock. The panel data are based on
a sample of 10,500 households surveyed in both years and were used to calculate
the official national poverty rates for that period.
Second, we use data from the March 2019 Susenas, which has a sample of 315,000
households, to simulate the changes in the distribution of household expenditure
in 2019–20 due to the Covid-19 shock in order to calculate the poverty rate for 2020.
Third, to estimate the correlation of GDP with household expenditure in equa-
tion (1), we use BPS data on average per capita household expenditure and GDP,
both in real terms. We then determine GDP growth for 1981–2019.

ESTIMATION RESULTS
Using the available data and the methods outlined in the previous section, we
estimate the implications that Covid-19 may have for poverty in Indonesia under
the proposed scenarios of economic growth. We use the national poverty rate of
9.2% in September 2019 as the baseline for our poverty rate estimates for the end
of 2020 to early 2021.
Estimating the Impact of Covid-19 on Poverty in Indonesia 183

TABLE 2 Correlation between Change in GDP Growth and Change

in Logarithm of Average per Capita Household Expenditure (PCE)

Change in log of PCE

Change in GDP growth 1.424**

(0.254)
Constant 0.040**
(0.010)
R2 0.470
N = time period 1981–2019 38

Source: Authors’ calculation based on data from BPS.

Notes: * p < 0.05; ** p < 0.01. Standard errors are in parentheses.

Correlation between Expenditure and Economic Growth

Table 2 shows estimates of the correlation between change in economic growth and
change in the logarithm of average per capita household expenditure, based on
equation (1), using time-series data from 1981 to 2019. The correlation coefficient
indicates that a one percentage point increase (decrease) in economic growth cor-
relates with a 1.4% increase (decrease) in average per capita household expenditure.
This estimated correlation will be used to estimate the change in average per capita
household expenditure between 2019 and 2020, based on the projections of eco-
nomic growth in Indonesia.

Economic Growth Projections and Expected Impacts on Expenditure for 2020

Figure 5 shows the projections of economic growth for 2020–23, made by various
authors and institutions. All predict slower growth in 2020 than in 2019. As men-
tioned in the introduction, a worst-case scenario is proposed by the World Bank
(2020), which projects that Indonesia’s growth rate could fall to –3.5%.
The Economist Intelligence Unit (EIU) estimates that the growth rate will be
1% in 2020. Reductions in international trade will reduce Indonesia’s exports and
imports by 5.4% and 14.5%, respectively. According to the EIU, the contractions
will be caused by reductions in private consumption of 0.3% and in gross fixed
investment of 3%, while government spending will increase by 14% in response to
the Covid-19 outbreak. The EIU also forecasts that industry growth will decrease
by 1.5%, while agriculture and services growth will decrease by 3.2% and 2.3%,
respectively, though remaining positive. The EIU expects that all components of
GDP growth will recover in 2021 (EIU 2020).
Similarly, Yusuf (2020) predicts a growth rate of just 1.8% in 2020, under a sce-
nario that involves 15 days of restricted activity intended to contain the spread of
the virus (similar to a lockdown), followed by fiscal stimulus. From 2021 to 2023,
growth is predicted to return to the baseline rate or slightly higher. However, this
V-shaped recovery will be possible only if maximum intervention to supress the
spread of Covid-19 is used. Yusuf (2020) argues that suppressing or controlling
the transmission of the virus as much as possible will create a temporary negative
shock in 2020 but allow the highest economic growth impact in the long run.
184 Asep Suryahadi, Ridho Al Izzati and Daniel Suryadarma

FIGURE 5 Economic Growth Projections for 2020–23

%
10 2019 2022
2020 2023
8 World Bank
2021
worst-case
scenario
6

0
EIU Rogers Yusuf World Bank BI
baseline
–2

–4

Source: EIU (2020), Rogers (2020), Yusuf (2020), World Bank (2020), BI (2020).
Note: Growth in 2019 is actual growth and is the baseline.

Rogers (2020, 34) and Bank Indonesia (BI 2020, 9) propose the most optimistic
scenarios of economic growth, with rates of 3% and 4.2%, respectively.1 Rogers
argues that Indonesia will experience a V-shaped recovery through means
such as cheaper oil, a stronger rupiah, and better sovereign debt composition.
However, in a more severe pandemic scenario, such as the one currently being
experienced across the world, Rogers (2020, 44) projects Indonesia could have a
growth rate lower than 2%.
BI (2020, 9) assumes that household consumption will remain steady owing
to fiscal stimulus and lower inflation as well as stimulus originating from a large
number of district head elections in 2020. Under these conditions, it is estimated
that Indonesia’s economy will experience a V-shaped recovery from 2021, assuming
that the investment climate improves, supported by new bills on job creation and
taxation designed to attract more investment into Indonesia, and assuming that
Indonesia’s balance of payments and current account deficit improve. However,
Sri Mulyani Indrawati, the Indonesian finance minister, has said that Indonesia’s
economic growth in 2020 could be as low as –0.4% (Sugianto 2020).
The World Bank (2020, 19) estimates a growth rate of 2.1%, rising to an aver-
age of 5.4% in 2021–23 as aggregate demand recovers and stabilises. Under the
World Bank’s worst-case scenario, however, the growth rate will fall to –3.5%.

1. BI’s projection is 4.2%–4.6%. Even the low end of the projection is optimistic compared
with other projections.
Estimating the Impact of Covid-19 on Poverty in Indonesia 185

TABLE 3 Estimation Results of Change in Average per

Capita Household Expenditure (PCE) in 2020

 Change
Growth Projected in 2019–20 Change in
rate in growth rate (percentage Coefficient of average
2019 (%) Source of scenario for 2020 (%) points) correlation PCE (%)

5.02 BI (2020) 4.20 –0.82 1.424 –1.17

5.02 Rogers (2020) 3.00 –2.02 1.424 –2.88
5.02 World Bank (2020) 2.10 –2.92 1.424 –4.16
5.02 Yusuf (2020) 1.80 –3.22 1.424 –4.59
5.02 EIU (2020) 1.00 –4.02 1.424 –5.72
5.02 World Bank (2020) –3.50 –8.52 1.424 –12.13

Source: Authors’ calculations.

This scenario involves delayed containment of the virus, posing additional risks
and leading to a protracted economic slowdown, which would further affect
domestic demand, international trade, tourism flows, global business sentiment
and investment growth.
Based on these economic growth scenarios and the estimated correlation
coefficient in table 2, we estimate the impact of Covid-19 on average per capita
household expenditure between 2019 and 2020. Table 3 shows the estimation
results. The average per capita household expenditure is estimated to decrease
by 1.2% if the economic growth rate falls to 4.2%, and by 2.9% if the growth rate
falls to 3%. However, it will decrease more significantly, by 4.2%, 4.6% or 5.7%,
if the growth rate falls further, to 2.1%, 1.8% or 1%, respectively. The worst-case
scenario of a growth rate of –3.5% would result in a decrease of 12.1% in average
per capita household expenditure.

Distribution of Expenditure Shock

Next, we determine the distribution by percentile of the estimated impact of each
economic growth scenario on average household expenditure for 2020. To do this,
each scenario’s impact on average expenditure (table 3, column 6) is multiplied
by the factor of impact (figure 4) that the 2005–06 shock had on each percentile
of per capita household expenditure. The results show the distributional impact
of each economic growth scenario on per capita household expenditure for 2020
(figure 6).
The pattern of per capita household expenditure change predicted for 2019–20
is similar to the pattern seen in 2005–06 but with different magnitudes of change.
Thus, if the economic growth rate decreases to 4.2%, as predicted by BI, then
the per capita household expenditure of the population’s poorest percentile
will decrease by 2.1%. However, if the economic growth rate falls to 1%, the
expenditure of the poorest percentile will decrease by as much as 10%. Under
the worst-case scenario of a –3.5% growth rate, the expenditure of the poorest
percentile will decrease by more than 20%. Regardless of the simulation chosen,
the poor are always the most affected by the economic shock.
186 Asep Suryahadi, Ridho Al Izzati and Daniel Suryadarma

FIGURE 6 Change in per Capita Household Expenditure (PCE) by

PCE Percentile under Economic Growth Scenarios for 2020

PCE change %
0

–5

–10

–15
4.2% growth 1.8% growth

–20 3.0% growth 1.0% growth

2.1% growth – 3.5% growth
–25
0 10 20 30 40 50 60 70 80 90 100
Percentile of PCE

Source: Authors’ calculation based on Susenas data from March 2019.

Poverty Impact
To measure the impact of Covid-19 on poverty, we need to set a baseline poverty rate
that is as close as possible to the rate before the outbreak. Currently, BPS calculates
Indonesia’s poverty statistics twice a year in the months of March and September.
This study uses the BPS poverty rate of 9.2%, published in September 2019, since
this date is close to December 2019, the time that Covid-19 began to spread.2
Unfortunately, the latest Susenas data available at the time of writing were
for March 2019, when the poverty rate was 9.4%. Hence, we need to calibrate
the March 2019 Susenas data with the September 2019 poverty rate. To do this,
we multiply the population weight of the March Susenas data set by the ratio
between the poverty rate in September and the poverty rate in March. Now the
per capita household expenditure distribution in the newly weighted March
Susenas data set reflects the distribution in September but in March prices. Hence,
when the poverty rate is recalculated using the March Susenas data with the new
weight and the original poverty lines, the result is 9.2%, which was the poverty
rate in September.
To predict the poverty incidence for 2020, we first estimate the per capita
household expenditure for 2020 by applying the pattern of distributional change
in figure 6 to the per capita household expenditure distribution of 2019. The 2020
poverty lines are the same as the March 2019 poverty lines because the 2020
household expenditure is measured using March 2019 constant prices. Using
these poverty lines, we then calculate the poverty rate for 2020.

2. BPS calculates the national poverty rate using separate poverty lines for urban and rural
areas in each province.
Estimating the Impact of Covid-19 on Poverty in Indonesia 187

FIGURE 7 Projected Impact of Covid-19 on the

Poverty Rate and Number of Poor People

% Million
20 60
Poverty rate (lhs)
18 Number of poor people (rhs)
55
16 16.6%
50
14
44.5 45
12
12.4%
11.4% 11.7%
10 10.7% 40
9.7% 33.2
8 9.2%
35
30.7 31.4
6
28.7 30
4 26.1
24.8
25
2

0 20
Sep 2019 4.2% 3.0% 2.1% 1.8% 1.0% –3.5%
baseline
Economic growth rate scenario for 2020

Source: Authors’ calculations based on March 2019 Susenas data.

Figure 7 shows the poverty rate projections based on the various economic
growth projections for 2020. It shows that as economic growth slows, poverty
increases. The baseline poverty rate in September 2019, before the Covid-19 out-
break, was 9.2%, which indicates that 24.8 million people were living below the
poverty line. When the predicted economic growth rate for 2020 is 4.2%, the pov-
erty rate is 9.7%. When it is 3%, the poverty rate is 10.7%. Under the scenarios in
which growth slows to 2.1%, 1.8% and 1%, the respective poverty rates jump to
11.4%, 11.7% and 12.4%. Under the worst-case scenario, in which the economic
growth rate slows to –3.5% in 2020, the poverty rate increases to almost 17%.
Figure 8 shows the changes in the poverty rate and the number of poor people
under the various growth rate scenarios. Under the scenarios in which economic
growth slows to 4.2% and 3%, the respective poverty rates increase by 0.5 and
1.4 percentage points. That means that between 1.3 and 3.9 million more people
may become poor. Under the scenarios in which economic growth slows to 2.1%,
1.8% and 1%, the respective poverty rates increase by 2.2, 2.5 and 3.1 percent-
age points. In these scenarios, 5.9, 6.6 and 8.5 million more people become poor.
Finally, under the worst-case scenario, in which the economic growth rate slows
to –3.5%, the poverty rate increases by 7.3 percentage points, meaning that 19.7
million more people become poor.
188 Asep Suryahadi, Ridho Al Izzati and Daniel Suryadarma

FIGURE 8 Change in the Poverty Rate and Number of Poor People

Percentage points Million
10 50
Change in poverty rate (lhs)
9 Change in number of poor (rhs) 45

8 40
7.3
7 35

6 30

5 25
19.7
4 20
3.1
3 2.5 15
2.2
8.5
2 10
1.4 6.6
0.5 5.9
1 3.9 5
1.3
0 0
4.2% 3.0% 2.1% 1.8% 1.0% –3.5%

Economic growth rate scenario for 2020

Source: Authors’ calculation using March 2019 Susenas.

CONCLUSION
Covid-19 had infected about 8.5 million people all over the world by June 2020.
The economic impact is expected to be massive, with a significant decline in global
economic growth projected for 2020. Economies all over the world are either in
recession or preparing for one. Amid the economic contraction, millions more
people will become poor.
In this paper, we have estimated the impact of the Covid-19 outbreak on poverty
in Indonesia, by first looking at the possible impacts on economic growth. In contrast
to the baseline projection of a 5% economic growth rate for 2020, various recent
projections propose that Covid-19 will reduce Indonesia’s economic growth rate to
between 4.2% and –3.5%. To estimate the impact of this on poverty, we conducted
simulations based on a past pattern of shock. We found that under the best-case
scenario of Covid-19 impact, in which the economic growth rate falls to 4.2%, the
poverty rate increases from 9.2% in September 2019 to 9.7% by the end of 2020. This
means that 1.3 million more people are pushed into poverty. Meanwhile, under the
worst-case scenario, in which the economic growth rate falls to –3.5%, the poverty
rate increases to 16.6%, meaning that 19.7 million more people become poor. This
would increase poverty to the levels seen in 2004, when the poverty rate was 16.7%.
In May 2020, government statistics showed that the annual growth rate in the
first quarter of 2020 was only 3%, significantly lower than the 5.1% rate in the first
quarter of 2019 (BPS 2020). Therefore, we believe that the poverty rate in 2020 will
Estimating the Impact of Covid-19 on Poverty in Indonesia 189

increase significantly. The main implication of this is that Indonesia will need to
implement much larger social protection programs to assists the new poor in addi-
tion to the existing poor. By the end of March 2020, the government had already
introduced measures to alleviate the impact of Covid-19 on the economy. Income tax
breaks were provided to companies and workers earning less than Rp 200 million
per year. Existing social assistance programs, such as the conditional cash transfer
and non-cash food assistance programs, were expanded to cover more beneficiaries
and provide larger benefits, for at least three months.
Other programs were adapted to include social assistance components. For
example, the Village Fund Program (which provides block grants for villages)
now includes an allocation for unconditional cash transfers to villagers. Similarly,
Indonesia’s newly developed pre-employment program (Program Prakerja), which
was originally designed as a training program for new graduates and laid-off work-
ers, has been redesigned to provide cash assistance and to focus on laid-off workers.
The government’s Covid-19 response amounts to 3.9% of GDP (IMF 2020b).
Given that much of the outbreak’s impact on poverty occurs through workers
losing their jobs and incomes, an effective way to stop poverty from increasing is to
prevent workers from being laid off in the first place. One way to do this is by pro-
viding a wage subsidy to help companies pay wages, at least partially. This policy
should be focused on labour-intensive industries, and companies that receive the
wage subsidy should sign a contract with the government that stipulates that they
will not lay off their workers. Gentilini et al. (2020, 8) find that 52 countries have
offered wage subsidies. However, Indonesia has yet to implement one, most likely
because it lacks the fiscal space to do so. By mid-May, Indonesia’s 2020 budget
deficit had already been projected to reach 6.7% of GDP (Fauzia 2020).
Other policy options to help companies include ensuring that they can obtain
their input materials and market their products, two areas that may have been
hindered by the restrictions on interpersonal contact. In addition, these companies
should be able to restructure their bank loans. The shock may have reduced their
ability to meet their credit obligations. The Financial Services Authority (OJK) has
already relaxed the regulation on credit restructuring and has subsidised interest
payments (OJK 2020). The latter is aimed at assisting financial institutions to con-
tinue their business.
This paper has estimated the impact of the Covid-19 outbreak on poverty rates at
the national level. To build on this, further research could disaggregate the poverty
impacts at the provincial and district levels, for urban and rural areas, and for Java
and outside Java. In order to do this, economic growth in these regions may need
to be projected first. A further study could also cover the different sectoral impacts
of Covid-19 and their implications for poverty.

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