Indonesia Keeps Fiscal Deficit Promise Despite Pandemic Woes

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Indonesia will stick to its pledge of narrowing the budget deficit to less than 3% of gross domestic product by 2023 despite the fiscal uncertainty spawned by the Covid-19 pandemic.

Southeast Asia’s largest economy should be able to cut its shortfall to as low as 2.71% of GDP in 2023, from 5.7% this year and 4.5%-4.85% next year, Finance Minister Sri Mulyani Indrawati said in a parliamentary hearing Monday. The deficit ratio is expected go down steadily, to as low as 2.6% by 2025.

“The combination of economic recovery and fiscal consolidation is really not easy, especially when it’s combined with the Covid-19 uncertainty,” Indrawati said. She urged lawmakers to be mindful of deficit targets as they work on next year’s budget.

A fresh spike in Covid-19 cases is threatening Indonesia’s economic recovery and complicating the government’s task of funding a bigger stimulus program without inflating its debt. Still, the nation has repeatedly vowed to rein in pandemic spending as it seeks to boost credibility among investors and rating companies.

New Strategies

According to Indrawati, the government can make spending more efficient and tap new funding strategies like the wealth fund to bring in more equity financing instead of debt. New taxes could also be imposed, though this will need to be timed carefully to avoid disrupting economic momentum.

Bank Indonesia projects economic growth of 5%-5.5% next year, slower than the government’s 5.2%-5.8% target. Governor Perry Warjiyo said in the same hearing that “recovery in private consumption is not as fast as predicted due to mobility constraints and an increase in Covid-19 cases.”

Warjiyo signaled that the central bank is ready to keep interest rates low for the rest of the year, saying inflationary pressures were unlikely to appear until early 2022.

Other highlights:

• For 2022:
  • Current-account deficit at 1%-2% of GDP
  • Rupiah exchange rate averaging 14,100-14,500 to the U.S. dollar
  • Inflation at 2%-4%
• 2023 budget deficit seen at 2.71%-2.97% of GDP
• 2024 budget gap at 2.69-2.85% of GDP, and 2025 deficit at 2.6-2.74% of GDP

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