Red Tape Holds Up $50 Billion Needed to End Indonesia Slump

Indonesia’s bureaucratic red-tape is preventing almost $50 billion in fiscal support from being disbursed to virus-hit businesses and health care workers, risking a deeper economic slump amid a surge in cases.

The government has spent less than 5% of the 87.6 trillion rupiah ($6 billion) set aside for priority health care because of delays in verification and approval processes. Some 85% of 120.6 trillion rupiah in tax-breaks and other benefits for companies has yet to be allotted, official data show.

The slow spending has frustrated President Joko Widodo, who is borrowing record amounts to finance the stimulus and has threatened to revamp his cabinet if ministers failed to speed up disbursement. The delays are a worry for businesses too, as they brace for a possible recession in Southeast Asia’s biggest economy.

“We are running out of time to save the economy,” said Rosan Roeslani, chairman of the Indonesian Chamber of Commerce and Industry. “The government’s stimulus spending is super slow.”

Red Tape Holds Up $50 Billion Needed to End Indonesia Slump

Nowhere is the failure to get the stimulus going more evident than in the country’s health sector. The government announced cash incentives for health workers in the frontline of Covid-19 fight, but only about 20% of 120,000 eligible nurses have got the benefits. That’s partly because hospitals haven’t recommended workers for the incentives or the local governments aren’t issuing rules, according to Harif Fadhillah, chairman of the Indonesia Nurses Association.

Hospitals too are struggling to get reimbursement for the cost of treating Covid-19 patients because of the multiple layers of approvals and verifications required, said Ichsan Hanafi, secretary general of the Indonesia Private Hospitals Association, representing about 1,300 members.

SectorsPercentage Spending by June 24
Health care4.68%
Social safety nets34.06%
Incentives for businesses15%
Micro-, small and medium enterprises22.7%
Corporate financing0%
Ministries & regional governments4%

The delay in spending is already having an impact on growth, according to Roeslani, who forecasts a contraction of 4% to 6% in the second quarter, worse than the official estimate of a 3.8% decline. The economy could enter a technical recession because it may shrink in the third quarter too, he said.

Jokowi, as the president is known, has earmarked 695.2 trillion rupiah in stimulus to help cushion the blow of the pandemic. He’s abandoned a fiscal deficit ceiling of 3% of gross domestic product, with his government pushing the central bank to finance a large part of the spending.

At a cabinet meeting on Tuesday, Jokowi said accelerating government spending in the third quarter was key to reviving economic growth and ordered ministers and officials to prioritize purchase of domestic goods to support local industries.

Having secured Bank Indonesia’s help this week in funding the fiscal deficit, the real work now begins in disbursing the money to spur growth, said Ryan Kiryanto, chief economist of PT Bank Negara Indonesia.

“Now the biggest work is to ensure that this large prepared budget and financing is truly implemented for the public and businesses so that it can effectively restore the level of demand and the overall economy,” he said. “The large budget for health should be really utilized so that the potential of virus second wave that can devastate the Indonesian economy does not happen.”

Red Tape Holds Up $50 Billion Needed to End Indonesia Slump

Finance Minister Sri Mulyani Indrawati expects economic recovery to begin in the third quarter and gather further momentum in the final quarter with the government boosting spending. The budget deficit may narrow to a range of 4.17% to 4.7% next year and drop below 4% in 2022, Indrawati said Tuesday.

With much of Indonesia still in the grip of the pandemic, efforts to jump-start the economy by relaxing social distancing rules are faltering. Jakarta, which began easing partial lockdown rules from early June, saw a spike in new infections at traditional markets and public transport, forcing authorities to extend restrictions by two weeks. East Java, the second-most populous province, has emerged as the nation’s newest virus hotspot with authorities only enforcing loose social distancing rules.

“The rest of 2020 will present risks as Indonesia takes its chances of restarting the economy with Covid-19 still prevalent in the country, especially in red zones such as parts of East Java, home to many foreign-funded factories, power plants, seaports and infrastructure projects,” Achmad Sukarsono, lead analyst for Indonesia at Control Risks, wrote in a report.

In addition to battling the slump in consumption and consumer confidence, companies are finding it hard to access working capital from banks, crippling efforts to revive production, Roeslani said. The government needs to immediately address bureaucratic hurdles delaying restructuring of loans of micro-, small and medium enterprises, private and state companies, he said in a statement last week.

“The risk of a permanent paralysis in some elements in the business world cannot be ruled out if efforts to revive purchasing power and production power are not undertaken,” Roeslani said. “A policy program and stimulus that is fast in implementation, right on target and the overall measurable size is very important for the future of the nation.”

©2020 Bloomberg L.P.

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