The Jakarta Post
The government has decided to triple its debt issuance to Rp 1 quadrillion (US$67.1 billion) this year to finance Indonesia’s battle against the COVID-19 pandemic.
This massive debt will be used to plug the state budget deficit, which looks likely to surpass the self-imposed 3 percent threshold of gross domestic product until 2022. Part of the debt is a new bond series to mature in 50 years, the longest tenure in history with two generations later having to pay taxes to repay it.
Indeed, unprecedented times call for unprecedented measures. Because we want the measures to bear fruit, close monitoring of how the funds are spent needs to be prioritized. During a crisis, every penny counts.
News surrounding the social aid distribution fiasco makes this expectation of effective budget disbursement less than convincing. Some citizens who have lost their jobs cannot access government aid, while others are receiving double. Staple foods have piled up for days in warehouses only to wait for bags labeled “Presidential assistance”. Jakarta is running out of money to fund social aid.
The preemployment card program has come in for scrutiny over the relevance of training at a time when few employers are hiring as they struggle to stay afloat. Tax incentives and loan-relaxation schemes have yet to reach businesses, some of which have already resorted to permanent closure.
The government has plans for Rp 436 trillion spending to contain COVID-19, focusing on health care, the social safety net and business-rescue programs. Thus, the government will become the biggest spender during the economic crisis as businesses and consumers mostly tighten their belts.
The COVID-19 budget is justified. If anything, it is too low. At 2.5 percent of the country’s GDP, Indonesia’s COVID-19 spending is much lower than countries ranging from Singapore and the United States to Australia and Malaysia, which have allocated at least 10 percent of their respective GDPs to handle the pandemic.
Hospitals are still overwhelmed. The number of hospital beds and physicians remains far below demand, while crucial medical equipment such as protective gear and ventilators continue to be in deficit. Indonesia is also catching up in boosting its testing capacity with the more reliable polymerase chain reaction (PCR) tests rather than the rapid antibody tests.
Meanwhile, the universal healthcare advice for physical distancing and large-scale social distancing (PSBB) regulations in regions across Indonesia are causing severe pain to local businesses, which have resorted to layoffs and furloughs to cut costs and survive. Up to 5.2 million people could lose their jobs and 3.78 million fall into poverty during the pandemic as GDP may contract 0.4 percent, based on the government’s worst-case estimates.
The government has allocated Rp 75 trillion of the COVID-19 spending for health care, Rp 110 trillion for the social safety net and Rp 70.1 trillion in tax incentives and bank loan subsidies for businesses. That is on top of the first two rounds of fiscal stimulus packages worth Rp 10.3 trillion and Rp 22.9 trillion, respectively.
Apart from cash transfers and staple food aid, a large chunk of the COVID-19 state budget is being funneled into banks for interest subsidies and so they can restructure loans for customers, mainly for hard-hit small businesses. The government is also finalizing a new rule to allow small businesses to take up subsidized working capital loans for survival.
In making sure that these plans pan out, the government has developed a new 2020 state budget to revise the earlier version to account for COVID-19. Presidential Regulation (Perpres) No. 54/2020 shows Indonesia will issue Rp 1 quadrillion debt this year, close to tripling the original plan for Rp 351 trillion debt.
As in some economic theories, public debt to plug a budget deficit helps boost public spending and gets the economic wheels moving. For Indonesians, however, the words “loans” and “debt” bring painful memories of the 1998 financial crisis.
During the crisis two decades ago, companies defaulted on mounting foreign debts as the rupiah plummeted to the weakest level in history. GDP contracted by 13 percent and inflation soared over 60 percent. The government resorted to billions of dollars of loans from the International Monetary Fund (IMF) to save the economy. The central bank rolled out short-term debt called short-term liquidity support to save failing banks as the financial system collapsed.
Today, the debt trauma is reflected in Indonesia’s debt levels. Micro and small businesses remain hesitant to take up loans with most of their funding coming from their own pockets and a small fraction getting bank loans.
At 30.2 percent, Indonesia’s debt-to-GDP ratio is lower than the internationally accepted norm of 60 percent. The new debt issuance will likely boost the ratio to less than 40 percent, economists estimated. Compare that with 238 percent in Japan or 107 percent in the US.
With Indonesia’s COVID-19 budget likely to leave the country more indebted than ever before and with relatively low spending to address mounting and pressing problems, every rupiah matters.
Close monitoring and quick troubleshooting of COVID-19 budget disbursement requires special attention. The COVID-19 task force needs to be empowered to handle this on top of relevant ministries and regional administrations. The goal is to make sure every single affected person and business gets aid quickly and with good governance.
By focusing on that, Indonesia will indeed emerge out of this pandemic highly indebted, but its people and businesses cushioned, and the much-needed data system strengthened.