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29 May 2020 (closed)
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If we take a look at Indonesia's central government spending in the first four months of 2018, then we detect something interesting. Overall, government spending has grown in the January-April 2018 period (compared to the same period one year earlier). However, growth in government spending is led by rising social assistance spending and rising subsidy spending. Meanwhile, growth of infrastructure spending has been much less robust. Does this mean that the Indonesian government has curtailed infrastructure development spending in order to relieve rising pressures on the budget deficit?
Ahead of the regional elections in mid-2018 and the legislative and presidential elections in 2019 the Indonesian government adopted a more populist approach. Thus, social assistance spending programs are given priority (moreover these programs should improve people's purchasing power and therefore can contribute to the nation's overall economic growth which has been stagnant around the 5 percent year-on-year level in recent years).
Meanwhile, the central government has also allocated more funds to the subsidy spending budget (especially for energy subsidies: fuel and electricity). This is necessary because the government announced that prices of subsidized fuel and electricity will not be altered until (at least) the end of 2019. Considering crude oil prices have been rising significantly in recent months it implies the government has to cope with a bigger financial burden.
Indonesia allotted IDR 94.5 trillion (approx. USD $6.8 billion) for its energy subsidy budget in 2018. This calculation was based on an average Indonesia crude oil price of USD $48 per barrel (set in the 2018 State Budget) and an exchange rate of IDR 13,400 per US dollar. However, Brent crude futures have gained nearly 20 percent so far this year to around USD $80 per barrel, while the rupiah depreciated to above IDR 14,000 per US dollar. Ideally, the government would raise prices of subsidized fuels and electricity to close the gap. However, this does not fit its recent populist approach.
Indonesian Finance Minister Sri Mulyani Indrawati informed that the government is still calculating how much it needs to set aside to keep energy prices unchanged for consumers. She added that rising crude prices actually also means that the government obtains additional oil and gas revenues (thus being positive for the fiscal deficit). However, part of that additional income will need to be allocated to the nation's energy subsidies.
Based on data from Indonesia's Finance Ministry, government spending reached IDR 165.88 trillion (approx. USD $11.8 billion) in January-April 2018, up 22.75 percent (y/y). Among the ministries (and other government institutions) it was the Health Ministry that reported greatest growth in terms of spending (rising 38.84 percent y/y to IDR 22.95 trillion). This growth is primarily attributed to Indonesia's universal healthcare scheme (in Indonesian: Jaminan Kesehatan Nasional or JKN).
Meanwhile, those ministries that are tasked with infrastructure development reported much less significant growth in spending. The Ministry of Public Works & Housing only recorded a 13.97 percent (y/y) rise in spending, while the Ministry of Transportation reported a 12.3 percent (y/y) increase. These numbers are far below the overall average and seemingly go against Indonesian President Joko Widodo's intention to have infrastructure development as a top priority.
There could be two reasons behind relatively weak infrastructure development spending so far in 2018: (1) after a series of fatal accidents in government-led infrastructure projects, the government decided to somewhat reduce the pace of construction (which should lead to an improvement in workers' safety), and (2) the government has become more careful in terms of infrastructure spending in order to keep the budget deficit under control as it will need more funds for subsidy spending in the remainder of 2018.
Although we do not want to play down the urgent need for infrastructure development in Indonesia as well as the importance of reducing energy subsidies, the government's decision to take a more populist approach (by leaving subsidized fuel and electricity prices unchanged amid rising crude oil prices) is understandable given the upcoming elections (it certainly boosts Widodo's chances of reelection). However, after the elections are over, the government should again focus on reducing energy subsidy spending (as happened after the 2014 election), while raising attention to structural social and economic development. The best moment for reforms is always shortly after an election.