The Jakarta Post
The regulation in lieu of law (Perppu) issued by President Joko “Jokowi” Widodo on Tuesday provides much more than fiscal stimulus for coping with the devastating economic damage inflicted by the COVID -19 pandemic. The regulation grants the government a stronger and broader mandate to increase spending far over the ceiling allowed by the 2020 state budget law, to issue more bonds, to bail out banks and state companies and to restrict foreign exchange transactions by individuals, all without prior approval of the House of Representatives.
We are truly in a crisis now and, like in most other countries, the Jokowi administration must act decisively while expanding its economic role because right now only the government can save the economy and maintain stability to prevent a total collapse.
A broad spectrum of the economy has indeed been hit hard as the pandemic has brought businesses to a grinding halt. As global travel and supply chains become disrupted, plants have shut down. The combination of supply-anddemand shocks and a credit crunch will sharply cut investment capital and consumable wealth. So severe has been the damage and so great the uncertainty that Finance Minister Sri Mulyani Indrawati has cautioned that the economy could contract (experience negative growth) this year, down from 5.02 percent growth last year.
The Perppu allows the government to increase its fiscal deficit over the 3 percent (of gross domestic product) ceiling, as set by the State Finances Law, for the next three fiscal years to bail out state companies and to lower corporate income taxes and grant excise tax relief on certain goods.
For this year alone, the government has set aside an additional Rp 405 trillion (US$25 billion) for health care, social safety net programs and tax incentives for maintaining consumer purchasing power and for economic recovery programs. In anticipation of a domino-style collapse of financial service stability as businesses and individuals default on their loans wholesale, the Perppu also expands the authority of Bank Indonesia (BI), the Financial Services Authority (OJK), the Deposit Insurance Corporation (DIC) and the Financial System Stability Committee.
Under its broader mandate, BI is authorized to buy government bonds from the primary market and to give shortterm, sharia-based liquidity credit not only to systemically important banks but to all banks facing liquidity crises based on assessments by the OJK.
The Perppu also authorizes the DIC to issue bonds and to borrow from the government in light of exercising its broader mandate to cope with bank failures. The government is even authorized to set up another deposit insurance company to maintain financial stability. In a bolder move to force bank consolidation, the Perppu authorizes the OJK to order financial service companies to merge or integrate or to acquire other financial firms.
Our only reservation about the Perppu is the absence of strong safeguards and a mechanism for House oversight on how taxpayers’ money will be spent, how liquidity credits will be given and how bank bailouts will be decided.