In the Revised 2016 State Budget the central government of Indonesia allocated a total of IDR 776.3 trillion (approx. USD $60 billion) for fund transfers to the regional governments. These funds should have been disbursed at the start of the year for various public projects (that trigger a multiplier effect in the economy) in the provinces, districts, cities and villages. Earlier, Indonesian President Joko Widodo reminded his ministers that it is of vital importance to optimize government spending now exports, household consumption and private sector investment have all been sliding.

Indeed, the latest GDP data - released by Statistics Indonesia (BPS) this morning (05/08) - show that there has been an improvement in Indonesia's household consumption in Q2-2016, while the nation's exports are contracting at a slower pace. Private sector investment, however, continued to slide and therefore the focus should remain at optimizing public spending. And although government spending accelerated strongly from 2.94 percent (y/y) in Q1-2016 to 6.28 percent (y/y) in Q2-2016, this growth is particularly supported by central government spending, not by spending of regional governments.

President Widodo stated that in May 2016 there was a pool of IDR 246 trillion worth of regional funds left untouched in bank accounts, and then fell to IDR 214.7 trillion in June. However, this is still a much too large pool of unused funds and therefore constitutes missed opportunities in the context of boosting local and overall economies of Indonesia. Widodo thus calls on all local authorities to realize their spending programs in accordance with existing procedures and principles of good governance.

Similarly, the main bottlenecks to the full implementation of the series of economic policy packages that have been unveiled by the central government since September 2015 involve weakish coordination and cooperation between the central and regional governments. Indonesia's Chamber of Commerce and Industry (Kadin) more-or-less blames it on the regional governments as it detected that several regional governments issued new regulations that actually undermine the policies of the recent economic policy packages. This could be related to the mindset of local authorities. They may fear that central authorities benefit more from reforms than local authorities.

Read more: Update Indonesia's Economic Policy Packages: What's the Progress?

In the era of decentralization (in the post-Suharto period) regional governments have in fact seen a great increase in power and therefore it is now much more difficult to impose uniform policies across the vast archipelago. However, the regions are vital to boost local economies and Indonesian economy as a whole. Therefore, the central government continues to allocate a larger amount of funds for the regions in the annual state budgets. The IDR 776.3 trillion that is allocated to the local governments in the Revised 2016 State Budget implies a 29 percent (y/y) increase from funds allocated to the regions in last year's budget.

Economic Stimulus Packages of the Indonesian Government:

Package Unveiled Main Points
1st 9 September
• Boost industrial competitiveness through deregulation
• Curtail red tape
• Enhance law enforcement & business certainty
2nd 30 September
• Interest rate tax cuts for exporters
• Speed up investment licensing for investment in industrial estates
• Relaxation import taxes on capital goods in industrial estates & aviation
3rd 7 October
• Cut energy tariffs for labor-intensive industries
4th 15 October
• Fixed formula to determine increases in labor wages
• Soft micro loans for >30 small & medium, export-oriented, labor-intensive businesses
5th 22 October
• Tax incentive for asset revaluation
• Scrap double taxation on real estate investment trusts
• Deregulation in Islamic banking
6th 5 November
• Tax incentives for investment in special economic zones
7th 4 December
• Waive income tax for workers in the nation's labor-intensive industries
• Free leasehold certificates for street vendors operating in 34 state-owned designated areas
8th 21 December
• Scrap income tax for 21 categories of airplane spare parts
• Incentives for the development of oil refineries by the private sector
• One-map policy to harmonize the utilization of land
9th 27 January
• Single billing system for port services conducted by SOEs
• Integrate National Single Window system with 'inaportnet' system
• Mandatory use of Indonesian rupiah for payments related to transportation activities
• Remove price difference between private commercial and state postal services
10th 11 February
• Removing foreign ownership cap on 35 businesses
• Protecting small & medium enterprises as well as cooperatives
11th 29 March
• Lower tax rate on property acquired by local real estate investment trusts
• Harmonization of customs checks at ports (to curtail dwell time)
• Government subsidizes loans for export-oriented small & medium enterprises
• Roadmap for the pharmaceutical industry
12th 28 April
• Enhancing the ease of doing business in Indonesia by cutting procedures, permits and costs

Various sources