Indonesia's Fiscal Support Should be Tapered as Economy Recovers-Finance Minister

MACROECONOMICS - JAKARTA. As Indonesia's economy recovers from the pandemic, fiscal stimulus should no longer be a dominant factor driving growth, its finance minister said on Wednesday, signaling authorities will stick with their fiscal consolidation plans.

Sri Mulyani Indrawati was responding to a question at an investment forum about whether the government was considering extending the period during which it can design annual budgets with a deficit of more than 3% of gross domestic product.

The budget deficit ceiling was waived for three years from 2020 to allow bigger spending and debt to help Southeast Asia's largest economy weather the pandemic impacts.

The ceiling will be reinstated next year, which some lawmakers and economists say could be difficult with the recovery not yet on a firm footing.

"If the momentum of the recovery continues (to be) strong across the board ... then the support from the fiscal (side) should not become the most dominant one," Sri Mulyani said.

Indonesia on Monday reported 3.7% GDP growth for 2021, in what the minister said showed a broad-based recovery from a 2% contraction in 2020.

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The government targets 5.2% growth this year, but Sri Mulyani said the economy faces headwinds from global monetary tightening and moderating commodity prices to a COVID-19 resurgence.

Authorities, she said, will be open minded in policymaking, but the government needed to restore the fiscal space for any future shock.

"We need to continue to support the recovery until it's really stable and sustainable," she said, highlighting the importance of fiscal discipline.

This year's budget deficit will likely narrow to near 4% of GDP, compared with an initial forecast of a 4.85% gap, Sri Mulyani said, expecting bigger revenue from tax reforms passed by parliament in late 2021.

Last year's fiscal deficit was 4.65% of GDP, much smaller than the government's expected 5.7% deficit, as state revenue got a boost from record exports amid high commodity prices.