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Subsidies, lower export revenue spell end to budget surplus

The once in a blue moon budget surplus Indonesia achieved in the first six months of 2022 will prove unsustainable for the full year, experts say.

Vincent Fabian Thomas (The Jakarta Post)
Jakarta
Fri, August 5, 2022

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Subsidies, lower export revenue spell end to budget surplus

I

ndonesia posted six months of budget surplus in the first half of 2022, a once in a blue moon that makes it stand out among both emerging and developing countries, but experts say that trend will not last through the remainder of 2022.

By the end of June, the government had racked up a budget surplus of Rp 73 trillion (US$4.9 billion) or 0.39 percent of GDP, which compares with a Rp 283 trillion deficit seen in the equivalent period of last year, Finance Ministry data show.

According to the ministry, the surplus was owed to a significant increase in revenue, which was up almost 50 percent year-on-year (yoy), thanks to surging commodity prices, recovered economic activity and the implementation of the 2021 Tax Harmonization Law.

Dian Ayu Yustina, an economist with state-owned lender Mandiri, told The Jakarta Post on Wednesday that the surplus could continue as long as commodity prices remained high, yet the odds of a full-year surplus were minimal.

“The state budget will [be] in deficit at the end of 2022, but we think the deficit could be lower than previously expected,” Dian said.

With a surplus, the government could cover most of its spending needs from incoming revenue rather than by taking up debt through the issuance of bonds, which would allow it to avoid some of the burden of surging global interest rates that make borrowing more costly.

Debt issuance fell to Rp 191.9 trillion in the first half of the year, a drop of more than 50 percent yoy. That figure is just a fifth of the total issuance planned for this year, whereas debt issuance often nears half of the full-year target after the first six months.

Read also: 2022 deficit to drop below 4% despite subsidy hike: Govt

Irman Faiz, chief economist at private lender Danamon, concurred. He said he expected the surplus to end around September, arguing that the commodity prices needed to support the state budget were already on a downward trend, affecting revenue collection.

The price of palm oil was now less than 4,000 Malaysian ringgit ($897.26) per ton, just over half the price seen in the last quarter. A similar trend is seen in metal minerals like tin, copper and nickel.

“The risk would be even greater for next year’s budget. Aside from a continued downtrend of commodity prices, the global economy has been slowing down, and the effect will be felt next year,” Irman told the Post on Wednesday, citing a recession risk in some advanced economies.

Other factors seen to be preventing a surplus are the disbursement later this year of budget funds to compensate state-owned energy companies for charging consumers less than market prices – as well as the government agencies’ habit to realize most spending near the end of the year.

Read also: Indonesia eyes smaller budget deficit in 2023 amid surging commodity prices

Samuel Securities senior economist Fikri C Permana expects Indonesia’s budget deficit to be 1.6 percent of GDP or less this year, which would be much smaller than the government’s recently revised prediction of 3.8 percent.

“I think there is still a chance it could be near-balanced,” Fikri told the Post on Wednesday.

He said the government had much better tax collection this year following a strong economic recovery that was reflected in a significant increase in corporate tax and value-added tax (VAT), which the government could utilize further on top of relying on commodity prices.

Indonesia actually stood a chance of retaining the budget surplus through the end of the year, he said, but only if it could significantly boost tax revenue by utilizing the increased number of taxpayers, as Indonesia’s tax-to-GDP ratio was very low by global comparison at around 9 percent.

He said he expected the state to still feel compelled to support the public this year through a possible increase in fuel subsidies as well as higher social aid spending to shield people from inflation.

“I am not really hoping for a surplus, because with a budget surplus in a developing country, it may seem like the government is reluctant to provide the boost needed for the economic recovery,” Fikri said.

Finance Minister Sri Mulyani Indrawati said the surplus achieved so far provided a better footing for the country to face challenges in the second half, but she stressed the government was aware of the ongoing uncertainties and would remain wary of risks lying ahead while also focusing on boosting revenue.

“Our budget scored a surplus in June, but we won’t be cocky. We know the situation is still dynamic,” Sri Mulyani said on July 29.

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