A wheel loader moves coal at a power plant in Pacitan, East Java. (Antara Photo/Puspa Perwitasari)

Commentary: Indonesian Economy in Trouble for Betting on Coal


OCTOBER 03, 2015

The current instability of financial systems around the world, led by the recent downturn of the Chinese stock market in what has been termed ‘Black Monday’ has many commentators worried about Indonesia’s rupiah and a possible return of the 1997 Asian financial crisis.

In the past month we have seen the rupiah fall to 17 year lows, plunging from one of the best performing currencies to one of the worst in Southeast Asia, which compounds Indonesia’s broader macro-economic problems: its widening account deficit, high inflation and slowing economic growth.

The volatile collapse of the rupiah does little to build confidence in the Indonesian economy for investors. The central bank, Bank Indonesia, repeatedly states that the rupiah depreciation is good for exports since it should theoretically strengthen export goods’ competitiveness, but for a year now, despite the rupiah depreciating further and further, exports have remained weak. Instead, the weaker rupiah has made it challenging to pay external debts, driving up prices of imported goods and making investments more costly.

Sadly, what is occurring now in the market echoes the analysis made in the 2014 Greenpeace paper "How Coal Mining Hurts the Indonesian Economy." This paper argued that our export-driven economy makes us vulnerable to commodity markets’ boom and bust cycles. Our reliance on exports has made our entire economy susceptible to volatilities in the global commodities market, which is largely dependent on Chinese demand.

Notably, global coal prices have now fallen below 2009 crisis levels for the first time in half a decade. This makes it officially one of the weakest commodities in the world.

During the coal price boom, the mining industry promoted itself as a driver for economic growth and social development, even though it never contributed to more than 4 percent of Indonesia’s GDP. Now that the coal market gone into a death spiral, there is even less evidence of long-term benefits to the Indonesian economy.

When coal prices were high, it was reported that over 4,000 mining licences were issued illegally and companies like Bumi Resources, the biggest coal miner in Indonesia, were accused of having evaded paying trillions of rupiah in taxes and royalties. Now that the coal market has collapsed, this company has posted a $555.7 million loss in the first half of this year, and it is currently facing bankruptcy lawsuits from creditors.

While we have commended President Joko Widodo for shifting government spending away from subsidies and toward capital investments in his draft budget for 2016, we clearly need more direct action to address the extractive sector, which has largely been allowed to operate with indemnity in Indonesia for too long.

Throughout the entire coal supply chain, from mining to coal-fired power plants, the industry not only destabilizes the Indonesian economy, but also carries extremely high social costs in terms of its health, social and climate impacts.

Coal mining has been in conflict with our agricultural and fisheries industries for years, even though these primary industries employ large numbers of people who are highly dependent on their work for their livelihoods. In Kalimantan, the island of coal, it is common to see the tropical forest and paddy fields overlap with giant open-pit coal mine concessions, leaving local farmers’ water and land resources vulnerable to pollution. Often groundwater is drained, forests are cleared and fertile topsoil removed by mining companies.

Similarly, a giant coal-fired power plant has now divided communities in Batang, with 75 farmers from local villages refusing to sell their land in hopes of protecting their livelihoods.

Further to the review of mining concessions, royalties and subsidies, the people of Indonesia need to see strong commitment that the president’s promise of infrastructure funding will not be directed at extractive, exploitative industries like coal.

We believe the government can deliver strong, inclusive economic growth and development if it embraces new types of energy production that boost productivity in the country's non-commodity sectors. Indonesia's future can indeed be prosperous and coal-free, but for that to happen, the government does need to start showing some serious commitment to these goals.

Arif Fiyanto leads Greenpeace Southeast Asia's climate and energy campaign.