A worker carries buckets of fish at a traditional fish market in Surabaya on August 28, 2021. (Photo by JUNI KRISWANTO / AFP)

JAKARTA – Indonesian Finance Minister Sri Mulyani Indrawati has set an ambitious 2022 budget deficit target of 4.85% as she strives to keep faith with Covid-19 emergency legislation that mandates a return to below 3% of gross domestic product (GDP) by the end of 2023, months out from the next presidential and general elections.

But economists agree that despite 7.07% year-on-year growth in the second quarter, it is too early to tell how an alarming spike in new coronavirus infections across the country in June and July has affected the pace of Indonesia’s economic recovery.

Propelled by an encouraging surge in commodity exports and the expected impact of wide-ranging reforms in the 2019 Job Creation Omnibus Law, the budget forecasts gross domestic product (GDP) will rise by up to 5.5% next year, the highest level in eight years.

The growth spurt between April and June showed significant improvements across all components of GDP. But it came off an historic low base of -5.32% in the second quarter of last year when the pandemic dealt a severe blow to President Joko Widodo’s plans for the rest of his second term.

The new deficit target, unveiled in Widodo’s budget speech to Parliament in mid-August, represents a gap between state revenue and expenditure of 868 trillion rupiah (US$60.2 billion) and compares with 6.09% realized in 2020 and 5.82% now predicted for 2021.

Analysts say although achieving consolidation will be a challenge, it will help improve fundamental elements of the government’s fiscal position. S&P Global Ratings believes next year’s deficit could even come in lower at 4.2%, basing its prediction on GDP growth at a stronger 5.6%.

The International Monetary Fund (IMF), on the other hand, believes this year’s deficit could reach 6.2% because of the higher spending and lower tax revenue associated with Covid’s second wave, which at one point in early July reached 56,000 new infections a day.

Health workers remove the body of a man who died of Covid-19 coronavirus at his Home in Bandung on June 23, 2021, as Indonesiaís infection rates soar and hospitals are flooded with new patients. Photo: AFP / Timur Matahari

The budget sees revenues growing 6.05% to 1.8 quadrillion rupiah ($125 billion), with tax collection rising 9% to 1.5 quadrillion rupiah ($104.2 billion). But that doesn’t take into account a projected 6.7% decline in non-tax revenue to 333.2 trillion rupiah ($23.1 billion) and a drop in the corporate tax rate from 22% to 20%.

Analysts see little evidence of a counter-cyclical fiscal policy on the revenue side, suggesting that proposed changes to the tax code, including a multi-tariff value-added tax, the addition of a top income tax bracket set at 35% and a new carbon tax, are only likely to offset potential declines in tax revenue.

Little mention is made in the budget of a new tax amnesty in 2022, but given the timing and limited incentives its impact is likely to be negligible if it goes ahead at all. The 2016-2017 amnesty resulted in one million taxpayers declaring more than $336.5 billion worth of assets, though only $1.05 billion was eventually repatriated.

For the first time in a decade, government spending will stay the same at 2.7 quadrillion rupiah ($187.5 billion), achieved through reductions in health care (12.7%), social assistance (12.4%) and infrastructure (7.8%), the latter a big-ticket budgetary item for much of the Widodo presidency.

There are notable increases in budget allocations for defense (+12%), public service (+42%) and education (+0.3%). Analysts believe the latter two are driven by efforts to accelerate digitization, particularly in relation to tax collection, import/export administration and online schooling.

Meanwhile, energy subsidies have been maintained at similar levels to last year, based on the prediction that oil prices will remain stable and near current levels. The implication from that is the government will continue to absorb the risk of inflation.

The National Economic Recovery (PEN) budget foresees the government spending 148.1 trillion rupiah ($10.2 billion) on health care and 153.7 trillion rupiah ($10.6 billion) to shore up the social safety net as Indonesia continues to fight off the effects of the pandemic.

A market vendor in Pamulang area, South Tangerang, Banten, Indonesia on July 23, 2021. Photo: AFP via NurPhoto / Donal Husni

Up by 21% over 2020, this year’s 699.43 trillion rupiah ($48.5 billion) PEN allocation has been focused on health, social protection, government priority programs, business incentives, support for small and medium industries and corporate financing.

Domestic demand in the second quarter increased by about 2% over the first quarter, still lower than the average 3% recorded in a normal year because of restrictions on homecoming festivities during the post-Ramadan holiday period in May, which triggered the Covid outbreak. 

After contracting 2.1% last calendar year, the government initially forecast a  rebound to a growth range of 4.5% to 5% by the end of 2021. Most analysts now believe that will come in at about 3%, depending to a large extent on the future course of the health crisis.

Another lockdown would mean a significant increase in social and economic support, particularly for small and medium businesses, and force the administration to legislate a delay in reducing the deficit, though with a compliant Parliament that would not be difficult.

Widodo’s overwhelming concern up to now has been to keep business ticking over, but he came under fire for ignoring the advice of some of his senior ministers and delaying implementation of tougher measures against the new Covid surge.

An Indonesian Survey Institute (LSI) poll in late July found his approval rating had dropped from 68.9% to 59.6% since December 2020, with public trust in his handling of the pandemic down from 56.5% to a new low of 43% over the same period.

Economists say the president can take heart from a 31.7% surge in second quarter exports, which had already begun to gather steam late last year, bolstered by soaring commodity prices and a swifter-than-expected recovery in the United States and China. 

Indonesian President Joko Widodo with a “404: not found” network error message covering his eyes, in Tangerang, Banten, prior to its removal with police launching an investigation, August 12, 2021. Photo: AFP / Fajrin Raharjo

Indonesia’s depressed domestic sector also received a much-needed boost in the second quarter, with consumption up 5.9% year-on-year and growth in the base metals, chemical, pharmaceutical and telecommunication sectors already well above pre-Covid levels.

Bank Central Asia credits the recovery in demand, reflected in its own consumer index, to the disbursement of government stimulus, with state spending increasing by 8.1% year-on-year and by 29.1% from the first to second quarter.

Analysts say that with tax revenue this year now predicted to equal just 8% of GDP, down from an already poor 12%, the government is so fiscally constrained that most of the remaining stimulus will likely be diverted to the social safety net, leaving many small businesses to their fate.

One sign of the gravity of the situation is that the Finance Ministry has recently instructed ministries to cut their budgets for the rest of the year and return the savings to the treasury.

Investment Coordinating Board (BKPM) data points to a large portion of the stimulus going to infrastructure projects. Another stand-out driver of both foreign and domestic investment was mining, with foreign investors in that sector showing they can provide a solid foundation if domestic conditions suffer a further setback.