Widodo: Regions Need to Optimize Spending to Boost the Economy
A better-than-expected GDP growth figure in the second quarter of 2016 should not be a reason for Indonesia to become complacent. On the contrary, efforts to boost economic growth need to be continued. One of the keys to unlock accelerated economic growth is to optimize spending of government funds at the regional level. Alarmingly, some IDR 214.7 trillion (approx. USD $16.5 billion) of central government funds that are allocated to regional governments in the 2016 state budget are left untouched at bank accounts.
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 2015 |
• Boost industrial competitiveness through deregulation • Curtail red tape • Enhance law enforcement & business certainty |
| 2nd | 30 September 2015 |
• 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 2015 |
• Cut energy tariffs for labor-intensive industries |
| 4th | 15 October 2015 |
• Fixed formula to determine increases in labor wages • Soft micro loans for >30 small & medium, export-oriented, labor-intensive businesses |
| 5th | 22 October 2015 |
• Tax incentive for asset revaluation • Scrap double taxation on real estate investment trusts • Deregulation in Islamic banking |
| 6th | 5 November 2015 |
• Tax incentives for investment in special economic zones |
| 7th | 4 December 2015 |
• 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 2015 |
• 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 2016 |
• 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 2016 |
• Removing foreign ownership cap on 35 businesses • Protecting small & medium enterprises as well as cooperatives |
| 11th | 29 March 2016 |
• 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 2016 |
• Enhancing the ease of doing business in Indonesia by cutting procedures, permits and costs |
Various sources