The Indonesian government is faced with the challenge of closing a widening budget deficit while funding national economic recovery from the Covid-19 pandemic. Photo by F. Latief/ILO


As Covid-19 continues to advance into all provinces of Indonesia at a national rate of more than 3,000 new cases a day, the central government appears powerless to prevent its spread. And yet, the government has managed to push through a raft of new policies relating to institutions and budgets during this time, including budget policies that relate to the regions.


So what is going on?


Budget policy has undergone dramatic change since the Covid-19 pandemic reached Indonesia. Compared to 2018, when the government proudly achieved a budget with zero amendments, the 2020 state budget (APBN) has already been amended twice in three months, and more amendments are likely.


The budget deficit has also widened significantly, from negative Rp 307.22 trillion ($A28.5 billion) to negative Rp 1,039.21 trillion – or from 1.76% to 6.34% of gross domestic product.  A reform-era cap has been temporarily lifted, until 2023, allowing the budget deficit to exceed 3% for the first time since the 1998 Asian financial crisis.



Source: Ministry of Finance, analysed by Seknas FITRA


The government must now figure out how to bring the deficit back under 3% by 2023, while also financing national economic recovery from the pandemic, the cost of which has already swelled 58% higher than originally planned.


There are several ways to do this, and each carries its own risk. The government’s task is to find the option with the lowest risk and lightest financial burden over the long term.


One option is for the government to look for spare tax or non-tax revenue that has yet to be used to its full potential. Another is to adjust mandatory spending on health and education by identifying areas of least efficiency. Further options include repurposing funds from last year’s budget surplus, reducing the amount of state capital invested in state-owned enterprises, or improving the efficiency of spending in ministries and state institutions.


In fact, the government already tried this latter approach via its first budget amendment in 2020, and was able to recover Rp 73.3 trillion – but this contributed only slightly to the estimated Rp 695.2 trillion needed to finance national economic recovery.


Another option is to issue government securities, which although risky in the long term, is often the first policy choice. It may yet be the option chosen by a government looking for the fastest and easiest way out.


The next question is, what kind of budget politics will we continue to see through this pandemic? Why have tensions emerged between the centre and the regions in relation to reallocating and refocusing budgets to handle Covid-19? And what steps can the government take to anticipate worsening health problems, social vulnerability and economic adversity?

Tensions rising

Under normal conditions, amendments to the state budget are compiled by the government and submitted to the House of Representatives (DPR) for discussion. But in 2020, amendments to the state budget have occurred with little involvement of the DPR – the institution ultimately responsible for budgeting.


The DPR was involved in approval of an emergency regulation in lieu of law (Perppu No. 1 of 2020), which became the Law on State Financial Policy and Financial Systems Stability for Handling the Covid-19 Pandemic (Law No. 2 of 2020) –  but without any opportunity for meaningful discussion. This is a clear sign of the weakness of the DPR’s power in the face of the government.


Civil society has also been excluded from discussions on amendments to the 2020 state budget. The state of emergency spurred by the pandemic is consistently cited by the government as justification for taking action without seeking input via public consultation. This may have been an acceptable excuse for the first amendment made to the state budget this year, considering that fast and decisive action on budget policy was needed in the early days of the pandemic. However, it should not have been the case for the second amendment.


As a result of lack of input from stakeholders, many budget policies have been counterproductive to efforts to prevent and manage the impact of Covid-19. One example is the chaotic implementation of the social safety net policies, because of out-of-date data on beneficiaries. Another is pre-employment card policies that are prone to conflicts of interest and corruption. A third is policies for national economic recovery that exclude farmers and fishers.


As for budget policy on the regions, all provinces, districts and municipalities have been painted with the same brush, regardless of conditions on the ground – that is, regardless of whether they are designated red, yellow, or green zones for rates of Covid-19 infection. This has caused turmoil in the implementation of budget policies intended to manage the pandemic in the regions.


The new policies require regions to refocus large portions of their budget into Covid-19 response, including Special Allocation Funds – funds transferred from the central government to regional governments – that are otherwise intended to finance certain health and family planning services. Government at all levels throughout Indonesia have also been forced to reallocate as much as 50% of goods and services expenditure and 50% of capital expenditure in their regional budgets (APBD) to tackling the pandemic.


Based on calculations carried out by the Indonesian Forum for Budget Transparency (Fitra), regional governments could recover up to Rp 36.09 trillion for Covid-19 response and recovery by reallocating funds transferred from the central government, plus another Rp 278.94 trillion by reallocating funds from within their own budgets.


So have the regions followed through on this opportunity? Apparently not. As of May, only Rp 85 trillion had been gathered by regional budgets to counter Covid-19, far below expectations. About 380 regions have been penalised for failing to adhere to the new budget policies by having their central government transfers delayed, reducing funds by 35% per region.


The main reason why regions have disregarded directives from the central government is because of their poor ability to manage financial matters, compounded by severe contraction of regional revenue as a result of Covid-19 – especially in regions dependent on tourism. Bali, for example, experienced a contraction of 26.6% from its pre-pandemic total revenue of Rp 6.6 trillion, while Jakarta’s revenue contracted by about 46.34 per cent from a total of Rp 87.95 trillion.

Finding a way forward

Considering that the pandemic is already entering its seventh month, the government should design a more comprehensive grand plan through the newly formed Covid-19 Handling and National Economic Recovery Committee.


To do this, it must be open to input from various stakeholders, including CSOs, academia, and media that focus on policy and budget issues. Many CSOs at the national level have already conducted research into the effectiveness of government policies in handling the pandemic. This can inform government evaluations and become a reference for improving policy.


The government also needs to listen more carefully to voices from the regions to design a more tailored response. Differences in fiscal capacity, dependence on central transfer funds, and prevalence of the disease in communities should be the basis for budget policy evaluation and decision-making.


Synergy between central and regional government policy is another crucial issue, especially in terms of accelerating and improving the management of health, social protections and economic recovery into the future.


Finally, governments and government institutions can learn from, and reallocate budget to, innovations in handling Covid-19 that have been developed by the regions. For example, Bangka Belitung province has come up with a citizen monitoring bracelet (using an application called “Fight Covid-19”) that is used to track citizens entering Bangka Belitung via the airport and seaports, and ensure their compliance with quarantine and other measures to prevent the spread of the disease.


North Maluku province has made a breakthrough with “travelling markets” to ensure that local economies can continue to function while avoiding the spread of Covid-19 through clusters in traditional markets. Central Java has formed a “jogo tonggo” (“look after your neighbours”) taskforce at the neighbourhood level as way to decentralise responsibility for handling Covid-19.


The bottom line is that the government needs to focus not only on increasing the uptake of Covid-19 funds, but also on how these funds are used by the regions. Consultation with the public and their representatives can only improve these decisions. As the health crisis deepens, it is no longer sufficient for the central government to take full control of budget decisions under a declared state of emergency. Covid-19 is going to be a lasting challenge in Indonesia, requiring long-term planning and action. Full participation by all stakeholders is needed to ensure that the community can feel safe, and the wheels of the economy can keep on turning.



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