Deni Ghifari, Jakarta – The government has indicated that this year's fiscal deficit may temporarily exceed the general legal limit for the sake of maintaining economic growth if oil prices remain high as war rages on in the Middle East.
President Prabowo Subianto said in a cabinet meeting on Friday that a "balanced budget is the most ideal", stressing that he hoped the deficit would not exceed the cap set at 3 percent of gross domestic product.
The cap was put in place in 2003 to enforce disciplined fiscal policy following the experience of the Asian Financial Crisis of 1997-1998.
However, Prabowo said in an interview with Bloomberg the following day that the administration might allow for a short-term increase of the deficit cap should oil prices stay elevated for a prolonged period.
He said the cap was "a good tool to discipline ourselves" and that there was no plan to revise the 2003 law, "unless there's a very big emergency like COVID", before adding, "but I hope that we need not change it".
"We must live within our means", the President said in the interview. "Do not spend more than you earn."
The war in the Middle East has pushed up the Brent crude oil price to US$103 per barrel on Friday from around $70 per barrel before the first missile was fired on Feb. 28. The recent oil price has been sustained at a far higher level than the $70 a barrel assumption set in the budget plan.
Should the actual oil price exceed the assumed level for the full year, the budget allocated for fuel subsidy would fall short. This would leave the government with three options, the first being to pass the burden on to consumers by setting higher prices for subsidized fuels.
Prabowo said he was confident the government could avoid raising fuel prices but it would become "very difficult" should oil prices exceeded $120 per barrel for a sustained period. In the cabinet meeting, he said the game plan for now was to curb fuel consumption.
The government is weighing policies Pakistan has undertaken in response to the skyrocketing oil price, such as a mandatory work-from-home arrangement, a four-day work week and turning university classes online.
The second option is to increase the subsidy allocation in the budget by issuing more government debt, which would push up the deficit that was already standing at 0.53 percent of GDP just two months into the year.
In the cabinet meeting, Coordinating Economy Minister Airlangga Hartarto revealed scenarios based on an oil price averaging between $90 and $115 per barrel and the rupiah trading at Rp 17,000 to Rp 17,500 per US dollar.
In the best-case scenario, the year would end with a deficit at 3.18 percent of GDP, while in the higher oil price and weaker rupiah scenarios, the shortfall was projected to reach 3.53 percent of GDP. In the worst-case scenario, the deficit might rise to 4.06 percent of GDP.
Airlangga's scenarios were calculated under the assumption that the government refrained from spending cuts for the sake of reaching GDP growth between 5.2 and 5.3 percent.
The budget plan stipulates a target of 5.4 percent for GDP growth.
"With these conceivable scenarios, a deficit of 3 percent is hard to maintain, unless we want to cut spending and therefore cut growth, Pak President," Airlangga said before Prabowo and the entire cabinet.
The third option is for the government to cut state spending elsewhere to free up enough money for a higher subsidy allocation, but that, as Airlangga suggested, might come at the expense of GDP growth.
Prabowo said the government would root out inefficient spending that might involve foul play of "administrative manipulation" causing "big leakages".
He said the cabinet was also considering pay cuts for high officials, limiting the availability of subsidized fuel and reducing the use of vehicles for state functions as well as cutting spending on certain state procurements and curbing overseas trips by officials.
However, he said in the Bloomberg interview that the budget for the free meals program would remain untouched, calling it a "stimulus for growth at the grassroots level."In an interview with Reuters earlier this month, Finance Minister Purbaya Yudhi Sadewa had suggested that scaling back the program that aims to feed 83 million Indonesians could save around Rp 100 trillion in the 2026 budget.
Prabowo said the Mideast conflict "forced us to accelerate" reforms, so that the country would rely less on imports of energy commodities. The President said the administration was seeking to eliminate fuel subsidies over the next three years.
"I'm determined to get rid of fuel subsidies," said Prabowo, because "we cannot survive on subsidies in the long run". He added that the country would become "energy efficient" in two years and "we will be very, very independent of external sources."
Center of Reform on Economics (CORE) executive director Mohammad Faisal warned against exceeding the 3-percent deficit cap.
Speaking to The Jakarta Post on Sunday, he argued that such a move would result not only in a heavier debt servicing burden but also "worsen investor perceptions", further exacerbating public finances after Fitch Ratings and Moody's Ratings recently downgraded their outlooks for Indonesia's sovereign debt rating.
At the same time, he urged the government not hike subsidized fuel prices but instead to tighten eligibility of its use and to cut spending on the free meals program, since it was "not that urgent".
Source: https://asianews.network/indonesian-government-mulls-lifting-deficit-cap-amid-high-oil-price