Why Ramadan is a special economic season in Indonesia

Muslims around the world are fasting in the month of Ramadan. EPA/Bagus Indahono

The Islamic calendar has entered the second week of Ramadan. During this month, Muslims refrain from eating, drinking and sexual activities from dawn to dusk.

But, in countries where Muslims are the majority, consumption increases during this month of restraint. This happens not only in high-income countries, such as Qatar and United Arab Emirates, but also in developing countries such as Indonesia. Traditions that spur consumerism during Ramadan and preparations for Eid Fitr, the end of Ramadan, drive this trend.

Spending patterns

People spend more during Ramadan – mainly on food and beverages, but also on clothing. In Indonesia, the retail sales index on these categories showed a 30% increase during the Ramadan month in 2013.

Meals taken during Ramadan help tighten family ties and increase social interactions. In the fasting month, Muslim families usually have sahur – the pre-dawn meal – and iftar – the fast breaking meal – together, with more elaborate menus than in other months. People also have more social gatherings by breaking the fast together in restaurants at malls or in mosques.

Just after Ramadan ends, Muslims celebrate Eid Fitr. They start preparing for this holy day weeks before. People wear new clothes during Eid. They make or buy an assortment of cookies and sweets. They also prepare special menus to be enjoyed and served to guests.

The main ingredients for the festive meals are mostly beef or chicken. The Indonesian government has to ensure that beef is stocked for Ramadan and Eid holidays. Australia, as the biggest exporter of live cattle to Indonesia, benefits much from the Ramadan season.

People take the time to visit family and friends during Eid Fitr. In Muslim majority countries, the time around Eid is a long holiday. In Indonesia, the government obliges employers to pay a religious holy day bonus. This one-month salary bonus helps increase the public’s spending power during Ramadan and Eid.

Clothing sales increase in Ramadan and ahead of Eid Fitr. EPA/Mast Irham

Paying alms

During Ramadan, Muslims pay alms (zakat). The increase in alms can quadruple from regular months.

The compulsory alms in Ramadan, the zakat fitrah, is actually not much – around 3.5 litres of rice per person. But many Muslims pay other types of compulsory alms that are actually payable in other months.

Aside from zakat, spending on charities that are not compulsory also increase during Ramadan. The channelling of zakat and charity for the poor also factors in the increase in purchasing power.

Inflation

Indonesians often complain about high inflation during Ramadan. Prices for food, transportation and recreation usually rise during the fasting month.

But the holiday bonus plays a role as a safety net for people’s spending power. Zakat also helps the poor cope with rising prices of food. Last year, food prices increased 2% during Ramadan.

Prices for flights, and train and bus rides, also increase as the end of Ramadan marks the start of a long holiday in Indonesia. A lot of people go to their hometowns or where their parents or grandparents live. Even though formally the Eid Fitr holiday is two days, in reality people take a week off. Many workers take their annual leave. Plane ticket prices can increase twofold. Some are fully booked long before the day of travel.

Productivity during Ramadan

Reduced working hours is common during Ramadan. A two-hour workday reduction, as occurs in Pakistan and Egypt, brings an estimated 7.7% decrease in the country’s monthly GDP. For countries that only cut an hour of its workday – such as Indonesia and Malaysia – the decrease is around 3.8%.

Workers’ productivity tends to decline during Ramadan. A rough figure of decrease in productivity in Muslim majority countries is between 35% and 50%. However, the slowing down of productivity in Ramadan is predictable, meaning the economy can anticipate it.

The decrease in productivity happens as people choose subjective well-being from religious and Ramadan-related activities over the benefit people might get from working. During Ramadan, Muslims tend to do more religious activities and take time for activities related to Ramadan, such as breaking the fast with family, sprucing up their house and making cakes.

When people feel they get more positive benefits from non-work activities, the opportunity cost – the value that people sacrifice to gain something – from work increases.

In his study on Ramadan, Harvard economist Filipe Campante finds that, in the fasting month, people tend to choose self-employment (with flexible working hours) over formal employment. Campante says Ramadan makes people poorer but happier.

Being social

Many economic activities related to Ramadan and Eid are not just for private consumption – they are also collective ones.

Networking activities happen during Ramadan and Eid. Fast-breaking gatherings, religious activities in mosques, social bazaars and the Eid holiday exodus facilitate information exchanges. On the journey to their hometowns, people bring souvenirs for family and friends. There, people catch up and exchange information about activities in cities.

These social gatherings can increase further economic activities.

Ramadan has the potential to improve Indonesia’s current economic slowdown with its increase in consumption and trade. However, economic activity on this year’s Ramadan is predicted to be lower than previous years. The lunar calendar has brought Ramadan to coincide with school holidays in Indonesia in 2015. This means less holiday travel for Indonesians.