T

he World Bank has called on the Indonesian government to formulate a sound fiscal strategy to “flatten the debt curve” and maintain financial market confidence as debt mounts during the COVID-19 outbreak.

The ratio of Indonesia’s debt to its gross domestic product (GDP) is expected to rise to 37 percent this year, from 29.8 percent at the end of last year, driven by an increase in borrowing to cover the widening budget deficit and to cope with the economic slowdown, as well as the depreciation of the rupiah, said World Bank senior economist for Indonesia Ralph van Doorn.

“The government must [make clear its] fiscal strategy to raise revenues back to at least the 2018 level to flatten the debt curve,” Van Doorn told an audience during a discussion on Wednesday, adding that the country risked losing market confidence over its mounting debts.

“Indonesia must maintain its hard-earned market confidence, which can be lost very easily, as credit rating agencies have signaled concerns [about debts] in the medium term.”

The government needs to show a credible path forward for the economy to unwind the “exceptional measures” taken by the government to battle the outbreak, he said. “It must reinstate the deficit ceiling and end Bank Indonesia’s (BI) partial financing of the deficit” after the virus threat subsides.

Indonesia’s budget deficit is expected to widen to 6.27 percent of GDP this year, more than double the initial ceiling of 3 percent, as President Joko “Jokowi” Widodo instates an economic recovery stimulus to counter the effects of the outbreak.

The government is rolling out a Rp 641.17 trillion (US$43 billion) stimulus, bigger than previous allocations, to strengthen its social safety net programs and tax incentives. It is also preparing a Rp 149.29 trillion bailout for 12 state-owned firms, mostly through cash compensation and working capital investment.

The World Bank now predicts zero growth for the Indonesian economy under the baseline scenario, Van Doorn said. Under the worst-case scenario, the economy could contract by 3.5 percent.

Finance Minister Sri Mulyani Indrawati said the widening budget deficit was warranted as government revenue could drop following an increase in tax incentives alongside weakening economic sectors.

In an attempt to boost state revenue, the Finance Ministry will start charging a 10 percent value-added tax (VAT) on imported digital goods and services, including on video and music streaming subscriptions, starting on July 1.

“We will look at the potential income because right now we are having discussions with the digital companies to ensure smooth implementation,” the Tax Office’s revenue and compliance director, Yon Arsal, said on Wednesday.

As of April, the government had issued Rp 376.5 trillion in government bonds. It plans to issue another Rp 697.3 trillion starting in May until the end of the year, including yen-denominated bonds.

The Finance Ministry’s director general for financing and risk management, Luky Alfirman, estimated that the ministry would issue an additional Rp 175 trillion worth of bonds following a plan to revise the assumptions underpinning the 2020 state budget.

The central bank has pledged to buy Rp 125 trillion in government bonds this year in a move to “share the burden” of economic recovery, according to BI Governor Perry Warjiyo.