Indonesia will issue a government regulation in lieu of law (Perppu) that will boost state spending by up to Rp 405.1 trillion (US$24.6 billion) as the budget deficit is anticipated to widen to 5.07 percent of GDP in the nation’s fight against COVID-19.
President Joko “Jokowi” Widodo said Tuesday the Perppu would serve as a foundation for the government and banking and financial authorities to carry out “extraordinary measures to ensure the people’s health, safeguard the national economy and financial system stability”.
Of the extra spending, the government will allocate Rp 75 trillion for healthcare spending, Rp 110 trillion for social protection and Rp 70.1 trillion for tax incentives and credit for enterprises. The biggest chunk, Rp 150 trillion, will be set aside for economic recovery programs including credit restructuring and financing for small and medium businesses.
“I have just signed a Perppu on state finance policy and financial system stability,” Jokowi said in a telebriefing. “We will issue the Perppu to anticipate the possibility of a state budget deficit that is estimated to reach 5.07 percent.”
The relaxation of the state budget deficit limit from the current legal limit of 3 percent of gross domestic product (GDP) will apply for three years until 2022. “Afterwards, we will return to imposing fiscal discipline of below 3 percent of GDP starting 2023,” he added.
Indonesia’s fiscal discipline has been lauded, as the country has never exceeded its self-imposed state budget deficit limit of 3 percent of GDP introduced after the 1998 Asian financial crisis. The move to widen the state budget deficit, the first time in history, comes as Indonesia declared a public health emergency that involves imposing large-scale social restrictions as stipulated in the Health Quarantine Law.
COVID-19 cases in Indonesia reached 1,528 on Tuesday with 136 deaths, just a month after the nation declared it had zero cases.
Jokowi will need approval from the House of Representatives to pass the Perppu. Indonesia’s 2020 state budget originally planned for Rp 2.54 quadrillion in state expenditure with a budget deficit of 1.76 percent of GDP, equal to Rp 307.2 trillion.
“The House is ready to support mitigation measures needed by the government through the state budget and [we will support] a government regulation in lieu of law [Perppu] to improve fiscal resilience,” said House Speaker Puan Maharani during the House’s plenary meeting in Jakarta on Monday.
Center of Reform on Economics (Core) Indonesia research director Piter Abdullah described the decision to increase spending and the state budget deficit limit as a “brave step that should be appreciated”.
“We need a wider deficit to increase healthcare services and contain the COVID-19 pandemic, channel safety net assistance to those who are affected, as well as for stimulus for the business sector to speed up economic recovery,” Piter told The Jakarta Post.
“The amount is enough although it is small relative to the stimulus and safety net measures of other countries. But this is a much-needed brave breakthrough amid the COVID-19 outbreak.”
The World Bank has estimated that more than 11 million people could fall into poverty in East Asian-Pacific countries. The financial shock of the pandemic will have a serious impact on poverty, defined as a situation where an individual earns less than $5.5 a day, the bank said.
In Indonesia, only one in five people is economically secure, according to the World Bank report Aspiring Indonesia. Around 24.8 million Indonesians live on under US$1 a day — 9.22 percent of the population — and more than 60 million are vulnerable to falling into poverty.
“Lockdowns will inflict significant economic pain on those least able to take care of themselves,” World Bank East Asia Pacific chief economist Aaditya Mattoo told the media in telebriefing on Tuesday. “The [government’s] priority has to be to find a way to soften the pain both for households and informal workers.”
Mattoo said the pandemic required drastic action, such as strong social distancing and travel restrictions, adding that the government had to provide compensation for informal-sector workers, such as by devising new sick pay arrangements.
“It serves a double benefit: They soften the pain while they also encourage workers to stay at home,” he added.
The government, he went on to say, must try and think of ways to provide credit liquidity transfers to firms and exempt them from tax payments.
“If the firms go bankrupt, this can be durably destructive,” Mattoo said. “These are the complementary economic measures, that in the short run, when people can neither work nor consume as freely as they would have, are absolutely essential to minimize the economic pain and prevent short-term economic shocks.”