Indonesia Drops 3% Budget Deficit Cap for $25b Covid-19 Stimulus
Jakarta. Indonesia has ditched a safety switch on its state budget put in place after the 1998 Asian financial crisis to provide a critical stimulus for its economy and medical supplies for doctors on the frontline of the fight against the coronavirus pandemic.
President Joko "Jokowi" Widodo said on Tuesday he had signed a government regulation-in-lieu-of-law (Perppu) that would add more than Rp 405 trillion ($24.7 billion) in spending and debts to the 2020 state budget.
"The government has decided the total increase in spending and state budget financing for Covid-19 mitigation would be at Rp 405.1 trillion," Jokowi said in a press conference on Tuesday.
"We issued this regulation also in anticipation of the possibility that our deficit would reach 5.07 percent [of the gross domestic product]," he said.
The country runs a Rp 307 trillion deficit in this year's initial state budget, equal to 1.8 percent of its GDP and safely below the 3 percent cap required by law.
But a slowing economy, or even a recession, has become a real possibility this year with the government still struggling to decide on the right containment strategy to halt the spread of the pandemic.
Radhika Rao and Eugene Leow, economists at Singapore-based DBS Bank, estimated Indonesia's economy would expand by 4.4 percent this year, slowing from 5 percent last year, and book growth of only 4.9 percent in 2021.
Finance Minister Sri Mulyani Indrawati even said the government was also preparing for a worst-case scenario of 0 percent growth this year.
On the other hand, the government has been adamant about carrying on with high spending on major projects like moving the Indonesian capital to Kalimantan by 2024.
Jokowi said the country would need to relax its budget constraint for three years until 2022.
"We would return to a disciplined fiscal policy with a 3 percent cap in 2023," Jokowi said.
Rizal Ramli, an economist and former finance minister, lauded Jokowi's electricity bill subsidy for the poor.
However, he pointed out the government should have cut spending on infrastructure projects or delayed moving the capital.
"By increasing debts of printing money with the disguise of issuing recovery bonds, the rupiah would depreciate," Rizal said, referring to the government's plan to issue special bonds that can be bought directly by Bank Indonesia, the central bank.
"Without governance and proper transparency, the recovery bonds could be another financial scandal in the making," Rizal said.
The president said this year's additional spending would be focused on healthcare, social safety net, tax breaks and restructuring business loans.
The government will allocate Rp 75 trillion on spending for health.
"The health budget will be used mostly to protect health workers [dealing with Covid-19 cases], especially for buying PPE [personal protective equipment] and other medical equipment such as testing kits, reagents, ventilators and so on," Jokowi said.
The government also made sure there was budget set aside for upgrading hospitals and for bonuses and life insurance for doctors, nurses and other hospital personnel.
For the social safety net, the government would allocate an additional Rp 110 trillion.
That should be enough for increasing the number of families receiving a conditional cash transfer to 10 million, from 9.2 million initially.
The number of people receiving food aid would also increase to 20 million from 15.2 million.
The government also doubled spending on Jokowi's trademark unemployment benefits, known as the pre-employment card, to Rp 20 trillion.
"[It's] cover for the 5.6 million people who might get laid off [during the pandemic], informal workers, and micro- and small-sized enterprises," Jokowi said.
The government would also pay the electricity bills of around 24 million of state utility company Perusahaan Listrik Negara's (PLN) lowest-tier customers for three months, Jokowi said.
For PLN's 7 million second-tier customers, the government would take 50 percent off their bills, also for three months from April to June.
There would also be an additional Rp 70 trillion to pay for various tax breaks and postponement of principal and interest payments for all government-subsidized loans (KUR) for six months.
Lastly, the government has also set aside Rp 150 trillion for "a national economic recovery program, including loan restructuring and providing business guarantees and financing, especially for micro, small and medium-sized businesses," the president said.
Jokowi said he had already signed the regulation and would enact it soon. Under Indonesian law, the president could enact a Perppu independently while waiting for the House of Representatives' (DPR) approval.