Indef Warns of New Debt Risks Amid Budget Deficit Expansion Debate
JAKARTA — The Institute for Development of Economics and Finance (Indef) has emphasised the importance of prudent management of Indonesia’s State Budget (APBN) amid growing discussion of fiscal deficit expansion due to global economic pressures. Executive Director Esther Sri Astuti stated that proposed expansion of the budget deficit above 3 per cent is likely to become realistic, particularly if various macroeconomic assumptions used in budget preparation are not achieved.
“Yes, it will automatically breach the limit if all macro assumptions in the budget miss their targets,” said Esther.
Nevertheless, she warned that deficit expansion could increase financing needs through new borrowing. Therefore, APBN management must be conducted more carefully to avoid creating fiscal pressure in the future.
“The concern is that this will be used to increase debt. So, it is better to prioritise wise APBN management to have positive economic impact,” she said.
Esther believes the government should be more selective in determining state spending priorities. Large-budget programmes could be prioritised first for regions with special needs.
She also believes state budget will be more effective if directed towards activities capable of delivering wider economic impact, such as promoting exports and the tourism sector.
Additionally, improving human resource quality and technology mastery are considered important for strengthening the competitiveness of the national manufacturing industry.
Indef believes the Indonesian government needs to prepare strategic steps to maintain national economic stability amid increasing global pressures.
Indef Executive Director Esther Sri Astuti explained that weakening of the rupiah against the US dollar could potentially push the budget deficit beyond the 3 per cent limit relative to Gross Domestic Product (GDP).
This is because the exchange rate assumption in the budget is around Rp 16,500 per US dollar, whereas currently the rupiah is approaching Rp 17,000 per US dollar.
According to Esther, this condition can increase the government budget burden because various spending components using US dollar denomination will also swell. This condition can also result in the government’s fiscal space for implementing various development programmes becoming more limited.
“Moreover, oil prices have now broken through 100 US dollars per barrel, far different from the oil price assumption in the budget of 70 US dollars per barrel,” she said.
Nevertheless, Esther believes the government can still anticipate these conditions with several strategies to maintain national economic resilience amid global uncertainty.
First, the government needs to direct state spending on productive activities, such as programmes capable of encouraging economic growth and increasing state revenue.
Meanwhile, consumptive spending is considered necessary to be reduced or halted so that the budget is more efficient.
Secondly, the government is encouraged to expand opportunities from sectors with potential to generate foreign exchange. This step is considered important given the growing need for US dollars, particularly for payment of foreign debt instalments and various international transactions.
Thirdly, the government needs to strengthen hedging strategy against the rupiah exchange rate in every payment using US dollars. With this mechanism, the impact of rupiah depreciation on foreign currency payment obligations can be minimised.
Additionally, Esther emphasised the importance of strengthening national energy resilience. One way is through the development and addition of oil refineries within the country so that crude oil owned by Indonesia can be processed and utilised optimally.
On the other hand, the government also needs to accelerate the development of new and renewable energy to reduce dependence on fossil energy. Indonesia is considered to have significant potential in alternative energy sources such as hydroelectric, solar, and wind power.
“Encourage renewable energy investment so Indonesia is not entirely dependent on fossil energy because Indonesia has many renewable energy alternatives such as water, solar, wind, and others. Provide more incentives,” she said.