Comment on “Fiscal Sustainability in Indonesia: Policies and Progress”

The COVID-19 pandemic imposed extraordinary demands on the use of fiscal policy. Expansionary fiscal policies were required to support households and firms amidst severe economic contractions brought about by mobility restrictions to control the spread of the pandemic. At the height of the pandemic in 2020, Indonesia spent an estimated 115 USD billion or 11.35% of its GDP. Consequently, the country's central government's debt-to-GDP ratio rose from 33.7% in 2019 to 42.9% in 2020 and 44.4% in 2021 (World Bank, 2022). The Indonesian economy would have contracted by more than 2.1% in 2020 in the absence of these expansionary fiscal policies. Now that the economy has recovered, the policy focus has shifted to shoring up fiscal space to secure greater fiscal sustainability.

Fiscal sustainability entails the ability of a government to meet its current and future financial obligations. From an analytical perspective, fiscal sustainability entails the government meeting its flow budget constraint over time.

The various elements of Indonesia's fiscal sustainability are qualitatively discussed by Adrison (2024). Adrison begins with a comparative analysis of fiscal sustainability across Indonesia, Malaysia, and Thailand covering the period 2010–2019. Fiscal sustainability is measured by a ceiling (maximum) for the ratio of primary fiscal deficit to GDP (Burnside, 2005). The results show that fiscally sustainable is achieved in all three countries. The value of the computed average ratio is very low compared to the value of the ceiling ratio—2% of the ceiling for Indonesia, 18% for Malaysia, and 15% for Thailand. These estimates appear too low given the importance attached to fiscal reforms in these countries during the pre-pandemic period. Furthermore, data from the International Monetary Fund also shows that the primary balances (as a percentage of GDP) of both Indonesia and Thailand have been declining since 2005 (IMF, 2023).

In the main body of the paper, Adrison's discussions focus primarily on the two key elements of the primary balance, namely, central government revenues and expenditures. The key challenges to increasing government revenues that are documented by Adrison (2024) are all daunting, sobering, and intractable. A key challenge is the extent of the informal sector in Indonesia. Even though the percentage of self-employed workers in the labor force has declined over time, it has stagnated at around 50%. Theoretically, this problem can be addressed by Adrison's proposal that the national identity card system be synchronized with the tax identification system. There need to be greater political will to implement this and the other reforms recommended by Adrison. The fact that the two-term Jokowi government, which operated on a political base comprising a grand coalition in the parliament, could not undertake effective tax reforms does not bode well for Indonesia.

On the other elements of fiscal sustainability, Adrison points to the increase in interest payments. This is worrisome and puts additional pressure on the Indonesian government to improve its fiscal primary balance in the medium-term. Seiniorage was extensively used to monetize the government's deficit through the National Economic Recovery Program (NERP), especially in 2021. As a result, the monetary base increased by 19% (or 15% in real terms) in 2021 (CEIC, n.d.).

Given the possible recurrence of systemic shocks in the future, more research should be undertaken to investigate the efficacy of targeted use of the NERP on selected sectors such as health, social protection, and micro, small and medium enterprises during the pandemic.

There are other factors that will affect the country's fiscal sustainability. Higher interest rates on the government's debt will put additional pressure on the government to increase the primary balance or/and the use of seiniorage. Exchange rate could also affect fiscal sustainability if the government debt is denominated in foreign currency. However, for Indonesia, this risk might be limited by the fact that approximately only 11% of the government's debt is denominated in foreign currency (IBP, 2023). Higher growth rates will enhance the country's fiscal sustainability, ceteris paribus. The declining investment-to-GDP ratio in recent years could rule out a sudden acceleration in economic growth. This suggests that, in the absence of any deep fiscal reforms to improve its primary balance, the Indonesian government should continue to be fiscally conservative even though the debt-to-GDP ratio is below the current legal limit of 60%.