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View all search resultsIndonesian fiscal management on brink of being unsustainable
This fiscal financing through money creation, if excessive, is very dangerous for the economy.
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T
he Indonesian economy has shown a weakening trend in the last 15 years (2005-2019). One of the main reasons for the weakness has been the sharp decline in export commodity prices since 2011, particularly coal, palm oil and rubber prices, which together accounted for nearly 40 percent of total non-oil and gas exports in 2011.
Commodity prices initially rose rapidly until mid-2008 following the relaxation of global monetary policy, especially of the Federal Reserve during the era of Alan Greenspan. Commodity prices then fell sharply following the global financial crisis, approaching the price levels of early 2004. Fortunately, this sharp decline in commodity prices did not last long.
The global quantitative easing (QE) policy to fight the global recession in 2007/2008 made commodity prices rise again. This second wave of commodity booms lasted until early 2011 before they fell sharply following the tapering off the QE. As a consequence, the value of Indonesia's exports also steadily decreased from US$203 billion in 2011 (the highest) to only $145 billion in 2016.
In line with the decline in commodity prices and the value of Indonesia's exports, gross domestic product (GDP) growth in nominal terms also decreased from an average of 19.6 percent annually in the first five-year period (2005-2009) at a compound rate, to 12.5 percent in the second five-year period (2010-2014) and 8.43 percent in the third five-year period (2015-2019).
Consequently, the decline in nominal GDP growth was followed by a decline in government revenue growth from an average of 17.5 percent per year (2005-2009) to 12.9 percent (2010-2014) to 5 percent (2015-2019). This led to a sharp fall in the ratio of government revenue to GDP after its rise in the early 2000s.
The ratio of government revenue to GDP reached 19.8 percent in 2008, which was the highest ratio since 2000. Thereafter, this ratio steadily declined to 15.4 percent in 2014, 12.4 percent in 2019, then reached the lowest level of 10.6 percent in 2020. This low ratio indicates that the government's fiscal and financial condition was difficult to sustain.
The ratio of government debt to GDP is also worsening, which initially fell sharply from 47.1 percent in 2005 to 24 percent in 2012, but then increased to 30.4 percent in 2019 and jumped to an estimated 39 percent in 2020.
