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Subsidies, social aid to stretch Indonesia's budget deficit close to limit

Jakarta Post - February 28, 2024

Deni Ghifari, Jakarta – Government projections point to a sharp increase in the budget deficit this year amid massive spending on social aid and subsidies.

Speaking to reporters in his office on Monday, Coordinating Economic Minister Airlangga Hartarto said the 2024 budget deficit was now seen at 2.8 percent to GDP. That is far above the figure of 2.3 percent stated in the state budget plan for this year.

"It was decided in the cabinet meeting that there will be no [price] hike for electricity and no hike for fuel until June, whether subsidized or unsubsidized," said Airlangga.

That decision suggests the government will allocate more funds to keep energy cheap for consumers through subsidies and by giving "compensation" to electricity monopoly PLN and oil and gas company Pertamina in return for expecting the state-owned firms to sell their commodities below market prices.

Together, the measures weigh heavily on state coffers.

An additional Rp 14 trillion (US$894 million) is to be spent on fertilizer subsidies, on top of the Rp 26 trillion initially earmarked for the program. Airlangga said the increase was necessary given the "steep decline" in rice production.

The latest fiscal plan also allocates some Rp 11.3 billion in cash aid for 18.8 million households for the first quarter of the year.

The program to distribute Rp 600,000 to each of the eligible households sparked controversy because its announcement came just before the February election.

"The [money for the aforementioned spending] will come from last year's excess budget [as the deficit was lower than planned] or by widening the [planned] 2024 budget deficit," said Airlangga, before mentioning that the deficit for next year was projected at 2.4 to 2.8 percent of GDP.

Confirming that, Finance Minister Sri Mulyani said on Monday that the budget deficit projected for 2025 was 2.45 to 2.8 percent of GDP.

"Bapak President asked for the deficit to be truly controlled so that trust in the state budget can be maintained despite a heated global situation and geopolitical turmoil," Sri Mulyani said after a cabinet meeting on the 2025 fiscal policy draft.

She went on to say that the deficit projection encompassed promised spending programs of the likely next president, Prabowo Subianto, including the costly free school meals plan.

Airlangga said the program was estimated to cost Rp 15,000 per beneficiary per day, which translated to some Rp 400 trillion in annual spending once the program was fully implemented nationwide, equivalent to around 2 percent of the country's GDP.

In 2023, Indonesia's budget deficit, at 1.65 percent of GDP, came in far below the initial target of 2.84 percent set out in the 2023 state budget, safely below the legal cap set more than two decades ago.

Law No. 17/2003 on state finances mandates that the state budget deficit not exceed 3 percent of GDP and that the country's accumulated debt not surpass 60 percent of GDP.

The law was inked to avoid a monetary crisis like the one Indonesia went through in 1997 and 1998. Since the law was passed, Indonesia has not breached its limits, with the exception of the COVID-19 pandemic period, which pushed the deficit to as high as 6.14 percent of GDP in 2020 and the debt-to-GDP ratio to almost 40 percent, necessitating a legal amendment.

Speaking to reporters after a meeting with Airlangga on Tuesday, World Bank Indonesia country director Satu Kahkonen said her institution looked forward to Indonesia "adhering to the prescribed fiscal deficit ceiling", referring to the 3 percent legal cap.

"[We also look forward to Indonesia] retaining macroeconomic stability and fiscal stability. And [based on] what we heard from [Airlangga] today, that is indeed the intention," said Kahkonen.

Center of Economic and Law Studies (CELIOS) executive director Bhima Yudhistira told The Jakarta Post on Tuesday that a budget deficit close to 3 percent could prompt a downgrade of Indonesia's sovereign debt rating as it might indicate looser fiscal discipline.

"If the government bond rating goes down, the Indonesian government must offer higher interest rates to attract creditors' interest," said Bhima, noting that a higher cost of funds would also impact the banking sector.

Bank Permata chief economist Josua Pardede told the Post on Tuesday that, based on what Airlangga had said, he viewed the widening deficit projection to be more of an "anticipation of worsening global conditions".

Should the external economic conditions improve in the second half, Josua said, the deficit would not increase as dramatically as projected. All things considered, Josua opined, the perception of risk in government bonds would remain manageable.

Kahkonen said the World Bank was in the process of revising its GDP growth projection for Indonesia. At the moment, the country was predicted to grow at 4.9 percent, but that "may change", given that it was still early in the year.

Source: https://asianews.network/subsidies-social-aid-to-stretch-indonesias-budget-deficit-close-to-limit