Indonesia: Government to front-load social, rural spending to boost household expenditure

  • The government will front-load its spending on social welfare and rural development to boost household expenditure in an effort to counter the potential economic impacts of the coronavirus epidemic.
  • Finance Minister Sri Mulyani Indrawati said the front-loaded spending was necessary to minimize the potential impacts of growing global economic uncertainty on the country’s GDP.
  • At a press briefing in Jakarta on 8 Feb 20, she said that a large portion of the year’s social spending, for programs such as the Family Hope Program (PKH), School Operational Assistance (BOS) for elementary and high schools, the non-cash food program as well as village funds for rural development, would be disbursed in the 1Q20.
  • “We will increase social spending to prevent household spending from falling,” she explained.
  • Front-loading means the government will disburse a larger portion of its yearly allocation for certain programs and projects earlier in 2020.
  • The slowdown in the last three months of 2019 was caused by a decline in household spending, which accounted for more than 50% of the country’s GDP growth during the period.
  • Center of Reform on Economics (CORE) director Mohammad Faisal estimated that the economic growth rate would fall to 4.9% in 2020 from 5.02% in 2019.
  • This, he argued, was primarily because the coronavirus outbreak that emerged in late Dec 19 in Wuhan, China, was expected to increase pressure on a global economy that had already been burdened by the prolonged United States-China trade war and growing US-Iran tensions
  • Despite the virus outbreak, Bank Mandiri analysts have confidence the government’s plan to front-load social welfare and rural development spending will help keep household spending strong in 1H20.
  • The government said it would disburse village funds in three phases, as it did in 2019. However, 80% of the funds will be disbursed in 1H20, a 60% y/y increase.
  • The change will mean USD9.5bn will be disbursed for village funds in the first half of the year, 18% higher than over the same period in 2019.
  • The front-loaded spending, coupled with expectations of an improved rice harvest in Mar – Apr 20 thanks to better weather, is expected to provide enough support for the household spending growth to remain at 5% in 2020.
  • However, as the coronavirus infection count and death toll continues to rise, Bank Danamon economist Dian Ayu Yustina said in a research report published on 6 Feb 20, that the global economy may take time to recover, as the outbreak would force China to place some of its cities under quarantine and close flight routes.
  • While the forecast for the virus’ impact on the Indonesian economy might be bleak, Dian said Indonesia was less vulnerable than other countries because of its relatively low trade with China, which receives only 16% of Indonesia’s exports.
  • She predicted GDP growth in 2020 to remain steady at 5% in 2020 with household spending to grow at 4.9%.

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