The country’s gross domestic product (GDP) is expected to contract 3.8 percent in the second quarter and may shrink by a further 1 percent or grow 1.2 percent in the third quarter, said Finance Minister Sri Mulyani Indrawati.

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If the economy shrinks in the third quarter, it will mark Indonesia’s first recession since the 1998 Asian financial crisis. A recession happens when an economy shrinks in two consecutive quarters.

“Indonesia’s economic outlook will now depend on the ability to stimulate recovery after a drastic deterioration in economic activity,” the finance minister told lawmakers in a hearing on Thursday. She said she expected GDP to grow between 1.6 and 3 percent in the fourth quarter.

The country’s economy grew 2.97 percent in the first quarter, the slowest rate in 19 years, as the COVID-19 pandemic caused a massive slump in household spending and investment growth.

The government expects GDP to contract 0.4 percent this year under the worst-case scenario or grow 1 percent under the baseline scenario, with second half growth expected to range between 0.3 and 2.2 percent.

Government officials are now looking to accelerate spending to boost the economic recovery and strengthen the country’s virus response after receiving criticism from President Joko “Jokowi” Widodo as well as from business and health communities for the slow disbursement of stimulus funds.

“We will accelerate state spending in the second half to mitigate the impacts of COVID-19,” Sri Mulyani went on to say, adding that government ministries and regional administrations were now moving to expedite the disbursement of state funds.

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According to the ministry’s data, state spending totaled Rp 1.06 quadrillion in the first half of this year, equal to only 39 percent of this year’s target and a 3.3 percent increase compared to the same period last year. Central government spending rose 6 percent year-on-year (yoy) to Rp 668.5 trillion, equal to 33 percent of the year’s target, as social expenditure increased.

Meanwhile, state income totaled just Rp 811.2 trillion in the first half of the year, a drop of 9.8 percent, due to falling tax revenue as the pandemic affected numerous sectors of the economy and slumping nontax income following a drop in commodity prices. State income in the first half date accounted for 47.7 percent of the year’s target.

As a result, the budget deficit stood at 1.57 percent of GDP as of the first half, still below the government’s expectation of 6.34 percent this year.

Sri Mulyani said previously that several administrative issues had hampered the disbursement of state funds and pledged to address the matter.

While government spending accounts for less than 10 percent of Indonesia’s GDP, it has multiplier effects on various components of the economy, such as household spending and investment, as social aid can boost purchasing power, while government spending on goods and services helps support demand for businesses, among other factors.

Center of Reform on Economics (CORE) Indonesia research director Piter Abdullah told The Jakarta Post on Thursday that the government should move swiftly to revive the economy by disbursing its promised fiscal incentives. 

"We cannot avoid a recession but we still can avoid an economic crisis in which a huge number of businesses go bankrupt," he said.

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The government has allocated Rp 695.2 trillion for stimulus packages to mitigate the health, social and economic impacts of the pandemic.

At the same hearing with lawmakers, Bank Indonesia (BI) Governor Perry Warjiyo pledged to provide further monetary stimulus and push forward the bond buying program to help the government meet its budgetary needs.

“We still have room for interest rate cuts and more quantitative easing,” the central bank governor said.

The government and the central bank have agreed on a $40 billion bond scheme as part of the burden-sharing program to bolster the economy and reduce the government’s debt burden.