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State finances still solid, but Indonesia's government wary of trend

Jakarta Post - July 13, 2023

Deni Ghifari, Jakarta – The Finance Ministry has warned that a slowing global economy could hurt Indonesia's budget, as weaker commodity exports take a toll on customs and excise as well as on non-tax revenue.

The government still expects to beat its overall budget revenue target for this year, however.

Speaking in front of the House of Representatives Budget Committee on Monday, Finance Minister Sri Mulyani Indrawati revealed that two out of three components of state income would exceed the targets set last year.

"Regarding the [state revenue] level, we remain optimistic. Regarding the trend, we must be on alert," Sri Mulyani said in front of the lawmakers.

She elaborated that income from customs and excise, taxes as well as non-tax state revenue would enter a downtrend.

The former is the only component projected to miss the target, as it was forecast to pour Rp 300.1 trillion (US$19.8 billion) into state coffers, while the target is set at Rp 303.2 trillion.

Meanwhile, tax revenue is expected to exceed the target by 5.8 percent as the ministry projects income of Rp 1.818 quadrillion from the component, exceeding the targeted Rp 1.718 quadrillion.

Non-tax revenue, on the other hand, is projected to surpass the target by a large margin at 515.8 trillion, 16.9 percent more than the targeted Rp 441.4 trillion.

However, there is a downtrend in each of these components when compared to last year, when they registered significant increases of 18 percent, 34.3 percent and 29.9 percent, respectively.

This projection sees customs and excise drop by 5.6 percent this year, while non-tax revenue is projected to drop by 13.4 percent. Only tax revenue is forecast to grow, namely at 5.9 percent.

The ministry named three causes for the decline in customs and excise, namely decreasing tobacco production, dwindling exit duty from mineral products due to the downstream industry agenda, which bans many ore exports, and waning prices of crude palm oil (CPO), Indonesia's main export commodity.

Moderating prices of coal and metal minerals are also hurting state income.

"We must be cautious of the weakening or negative gross [revenue] trend, especially in formulating the 2024 State Budget Law," said Sri Mulyani.

Total state revenue is predicted to reach Rp 2.637 quadrillion by year-end. While that would be 7.1 percent more than the targeted Rp 2.46 quadrillion, it only just beats last year's Rp 2.635 quadrillion.

However, Sri Mulyani pointed out that was still "an achievement", given the fact that last year's extraordinary growth was carried by a commodity windfall, and that the archipelago was on track to maintain or even exceed 2022 figure despite this year's declining commodity prices and global economic downturn.

Concurring with that, Bank Permata chief economist Josua Pardede told The Jakarta Post on Tuesday that a 7 percent increase was a good enough score for this year.

Josua explained that the main threat to watch out for was weakening demand from China, as that would accelerate the decline in commodity prices. It could also lead to lower export volumes and thus lower income from customs and excise.

"Beside the export performance, there's a potential weakening in the domestic economy caused by increasing credit interest rates, which leads to higher borrowing costs for businesses and consumers," said Josua.

He went on to say that a contraction in exit duty would "potentially continue until year-end", due to the government's export ban on some commodities, in addition to a CPO price that was likely to either stagnate or wane.

Bank Danamon economist Irman Faiz told the Post on Tuesday that state revenue was in good shape thanks to commodity prices that were "still high", albeit declining.

"Going forward, with the world's economic weakening in mind, commodity prices will continue to diminish, so it is understandable that [the government] is wary of this risk," said Irman, before saying that a 7 percent state revenue increase was "realistic".

He argued that the downward trend in state revenue would remain until year-end, but things would improve next year as the global economy improves after monetary tightening gets fully transmitted this year.

"The risk of uncertainty is still high in 2024. Oil price fluctuation, tightening monetary policies and global growth must be watched out for. That's why the state budget needs to be devised as a buffer and a countercyclical measure for facing those challenges," said Irman.

The finance minister estimated that the 2023 state budget deficit would be Rp 486.4 trillion, or 2.28 percent of the country's estimated gross domestic product (GDP) of Rp 21.3 quadrillion.

In this year's first half, the government raked in Rp 970 trillion from tax, Rp 302.1 trillion from non-tax revenue and Rp 135.4 trillion from customs and excise.

Source: https://asianews.network/state-finances-still-solid-but-indonesias-government-wary-of-trend