The Jakarta Post
Indonesia’s 2020 budget deficit will widen further to accommodate a larger stimulus package announced on June 3, but economists and business representatives say it will still not be enough to prevent the economic consequences of the COVID-19 crisis.
Finance Minister Sri Mulyani Indrawati said she expected the budget deficit to swell to 6.34 percent of gross domestic product (GDP), an increase from earlier estimates of 6.27 percent in May and 5.01 percent at the end of March.
The state budget to fight COVID-19 is now Rp 677.2 trillion (US$48 billion), higher than the Rp 641.17 trillion allocation in May and the Rp 405.1 trillion initial allocation.
This was the third alteration to the state budget in just over two months. The rapid changes underscore the ferocity with which the virus has torn through the economy.
“We are hoping that this stimulus will keep our economic growth above zero percent,” Sri Mulyani said during the latest budget announcement on June 3. The government expects Indonesia’s GDP to grow by 2.3 percent this year under the baseline scenario or contract by 0.4 percent under the worst-case scenario.
The government now expects the total state budget in 2020 to be 2.74 quadrillion. State revenue is expected to be Rp 1.69 quadrillion, leaving a budget deficit of about Rp 1.05 quadrillion. Debt financing is expected to swell to Rp 1.22 quadrillion this year to cover the widening budget deficit and to pay for the government’s investments, which will be covered mostly by the issuance of bonds.
“We will treat the widening budget deficit carefully in terms of sustainability and financing,” Sri Mulyani added.
What’s covered by the latest state budget revision
The new budget aims to strengthen the health care system, direct more spending toward social protection to boost consumption and provide incentives to rescue Indonesian businesses from bankruptcy and workers from layoffs.
The government will spend Rp 87.55 trillion in the health care sector, Rp 203.9 trillion to strengthen social safety net programs and Rp 123.46 trillion to provide incentives for micro, small and medium businesses, according to the new budget.
About Rp 120.6 trillion will be allocated for tax incentives for larger entities, and Rp 97.11 trillion has been designated to support ministries and regional administrations. Rp 44.57 trillion will be used to provide a stimulus for state-owned enterprises (SOEs) and labor-intensive businesses.
Stimulus too small to handle economic fallout: Observers
Economists and businesspeople have long agreed that the government will need a much bigger stimulus to counter the economic impact of the virus.
Center of Reform on Economics (CORE) Indonesia research director Piter Abdullah said the government’s stimulus was “far from ideal” to counter the virus’ blow.
“The country needs bigger health care budget to manage the outbreak […] If we are not ready, then there is a possibility of a second wave of the virus crisis,” Piter said in a statement. “Meanwhile, the proposed budget for social protection is too small amid the threat of rising poverty.”
The government estimates that 1.8 million to 4.8 million people may fall into poverty this year, while 3 to 5.2 million may lose their jobs because of the severe economic impact of the pandemic.
Meanwhile, the Indonesian Chamber of Commerce and Industry (Kadin) called on the government last month to boost its budget to fight the pandemic.
According to Kadin chairwoman Shinta Kamdani, the government will need Rp 400 trillion for health care, Rp 600 trillion for social safety net programs and Rp 600 trillion for economic recovery.
“Demand for stimulus is increasing even after the latest package,” Bank Danamon economist Wisnu Wardana said. “The government must now focus its resources on making the spending more productive and cutting unnecessary spending.”
Meanwhile, World Bank senior economist Ralph van Doorn has called on the government to take steps to maintain market confidence as debt mounts during the outbreak.
“The government must [provide assurances about its] fiscal strategy to raise revenue back to at least the 2018 level to flatten the debt curve,” said van Doorn.
It should unwind “exceptional measures” taken to battle the pandemic after the virus subsides, including by reinstating the deficit ceiling of 3 percent of GDP and ending Bank Indonesia’s partial financing of the deficit, he added.
Indonesia’s debt-to-GDP ratio will rise to 37 percent this year from 29.8 percent at the end of last year, van Doorn predicted.
Indonesia’s economic future
The government remains hopeful that the economy will not shrink sharply in the second quarter and will begin to recover in the subsequent quarters, said Finance Ministry Fiscal Policy Agency head Febrio Kacaribu on Thursday.
“There is a possibility of a severe economic crisis and recession. We are currently revising the state budget to ensure that negative growth does not happen,” Febrio told reporters.
Indonesia’s economy grew 2.97 percent in the first quarter, the weakest since 2001, as household spending and investment growth slowed in response to the outbreak.
The World Bank now expects zero percent growth for Indonesia if large-scale social restrictions (PSBB) last for two months amid a severe global economic slowdown and falling commodity prices. Under the organization’s worst-case scenario, which allows for four months of PSBB, Indonesia’s economy may shrink 3.5 percent.