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Stimulus programs will need to continue into 2023 if economy remains weak: Experts
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Rupiah bills (Shutterstock.com/Maciej Matlak)
T
he government’s fiscal stimulus programs may need to continue into 2023 if the Indonesian economy and domestic consumption remain weak next year, economists have warned, as concerns mount over the government’s ability provide a sufficient number of COVID-19 vaccine doses for citizens.
“The government needs to make a decision carefully because if consumer demand is still weak and the private sector is not kicking in by 2021, it should continue its fiscal stimulus programs into 2022 or even into 2023,” former finance minister Chatib Basri said on Tuesday, during a discussion held by the Australian National University.
The government should focus its financial stimulus on providing cash transfers for lower-middle income citizens, he said, adding that such programs were “quicker to disburse” and “more effective” in boosting domestic consumption amid the health crisis.
The suggestion was also based on the prediction the government may be able unable to provide sufficient COVID-19 vaccinations next year, given the country’s low level of polymerase chain reaction (PCR) testing, the economist warned.
“It will be very difficult to distribute the vaccine and that is why the recovery will be U-shaped,” he went on to say, arguing that it would be a daunting task to vaccinate even 25 million citizens. “Getting the pandemic under control is the top priority.”
The government has allocated Rp 695.2 trillion (US$47.15 billion) in fiscal stimulus this year to cushion the public health and economic impacts of the coronavirus pandemic. The Indonesian economy contracted 5.32 percent in the second quarter this year, while household spending also fell 5.51 percent during the same period.
At worst, the government expects the economy to contract a further 2 percent in the third quarter, which will mark the country’s first recession since the 1998 Asian financial crisis.
Read also: Indonesia’s inflation hits record 20-year low in August amid declining purchasing power
Meanwhile, the disbursement of stimulus funds has been hampered by bureaucratic red tape and a lack of reliable data, among other issues. As of Sept. 2, the government had only disbursed Rp 197.88 trillion, or about 28.46 percent of the earmarked stimulus funds.
President Joko “Jokowi” Widodo said on Monday that the economic recovery could only begin once public health had been restored, calling for the national COVID-19 and economic recovery committee to prioritize mitigation of transmission above all else.
“Good health will lead to a good economy […] Let’s not restart the economy before we have properly handled COVID-19,” the President said.
However, the country has continued to record surges in COVID-19 cases each week following the reopening of the economy in early June, with the number of confirmed cases surpassing 200,000 on Tuesday.
University of Indonesia economist Ari Kuncoro said in late August that the government stimulus would only be effective if people felt safe spending their money, adding that health protocols were crucial to revive the economy.
“If social restrictions continue and people are unwilling to go outside, then the economy will suffer even more and the stimulus would not be sufficient,” he told The Jakarta Post. “The key to economic recovery is to encourage people to return to their normal activities by implementing health protocols. That will help the wheels of the economy begin to turn and help avoid a greater contraction.”
The government plans to improve the targeting of it stimulus spending by reallocating funds for commodity subsidies to social protection programs, such as cash transfers, said special adviser to the finance minister Masyita Cristallin.
“A lot of different types of subsidies go to people well above the bottom 40 percent of the population, resulting in inefficiency,” she said during the same discussion. “We need to improve the database for social protection so subsidies and social assistance can be better targeted.”
The government will also continue to seek help from Bank Indonesia (BI) to fund the fiscal deficit and pay for fiscal stimulus programs through to 2022, Finance Minister Sri Mulyani Indrawati said on Sept. 4.
The government and BI have agreed to a $40 billion debt monetization scheme for this year to fund the COVID-19 response, under which the central bank will buy up to $28 billion in government bonds while shouldering the debt burden. The government expects the budget deficit to reach 6.34 percent of GDP this year and 5.5 percent of GDP next year.
“The burden sharing scheme will continue until 2022, in which BI will be a standby buyer of sovereign debt papers in [direct] auctions,” Sri Mulyani said, ruling out the possibility of another bond-buying scheme by the central bank through private placement.
