Will Indonesia’s US$1.5 billion stimulus lift its economy?

The two-month plan to boost spending may miss its target, as analysts doubt its impact on informal workers and the middle class

Indonesia’s latest US$1.5 billion stimulus package may fall short of reviving sluggish household spending or propelling the government’s ambitious 8 per cent growth target, analysts have warned.

Southeast Asia’s biggest economy posted only a 4.87 per cent year-on-year growth in the first quarter this year. The momentum of Islam’s holy month of Ramadan and Eid al-Fitr, which fell within the period, could not lift public spending, an anomaly that has sparked concerns among officials.

In response, President Prabowo Subianto’s administration earlier this month rolled out a 24.4 trillion rupiah (US$1.5 billion) stimulus package aimed at lifting consumer spending during the school holidays in June and July.

“The president decided to launch the stimulus package to maintain the momentum of economic growth while strengthening domestic resilience to global pressures,” finance minister Sri Mulyani Indrawati said on June 2. “We hope that in the second quarter, economic growth can be close to 5 per cent.”

The government would finance 23.59 trillion rupiah of the two-month package, with the remainder contributed by the private sector, she added.

Among the measures are discounted train, plane and ferry tickets, reduced toll fees, rice and staple food aid for 18.3 million poor families, and cash payments of 600,000 rupiah to 17.3 million low-income workers earning under 3.5 million rupiah per month.

‘Not too much kick’

Several economists who spoke to This Week in Asia expressed doubts over the package’s effectiveness, pointing to its limited scale and focus.

Esther Sri Astuti, executive director at Jakarta-based think tank Institute for Development of Economics and Finance, said that the package overlooked the country’s middle class, the backbone of its US$1.3 trillion economy.

“The stimulus is only to drive household consumption among the lower-middle class. For the upper-middle class, it’s not too much of a kick, so this package will not be effective,” she said.

“The middle and upper-middle class do not need rice assistance, or a salary subsidy of 300,000 rupiah per month. They diligently pay taxes, so they might need tax subsidies, or credit instalment interest subsidies. These will be more [beneficial] for them.”

Last year, Indonesia’s statistics agency BPS revealed that there were 47.85 million people categorised as middle class, down from 57.33 million in 2019. The middle class and aspiring middle class contributed to 81.49 per cent of domestic consumption, BPS said.

The cash subsidies also neglected informal labour such as outsourced workers and freelancers, according to Bhima Yudhistira, executive director at the Centre of Economic and Law Studies.

“Cash assistance is given [to workers listed in the] Employment Social Security Administration database, while many informal workers are not members [of the social security]. Many of them are victims of lay-offs, but they do not receive any stimulus at all,” Bhima said.

Informal workers made up around 58 per cent of all Indonesian workers last year, according to BPS.

The cash aid of 600,000 rupiah for two months is also seen as “not in line with the rising cost of living” and the income disparities between regions, the Institute for Economic and Social Research at the University of Indonesia said.

“In big cities like Jakarta, Surabaya, Medan or Batam, the cost of living pressures for low-wage workers are much heavier, so the nominal uniform assistance received by workers in these cities has a much smaller real impact than in areas with lower living costs,” the institute wrote in its latest “Labour Market Brief”, published this month.

Another think tank, Centre of Reform on Economics (Core), argued that the discounts on transport tickets are unlikely to bump travel volume. When cheap tickets were offered during the Eid holiday season in April, 154.6 million people travelled, a 4.69 per cent decline compared to last year’s Eid period, Core said, citing data from the Ministry of Transport.

Core predicted that economic growth in Indonesia this year would be in the range of 4.6 to 4.8 per cent, in line with the World Bank’s estimate of 4.7 per cent.

Universal subsidy

Economists lamented the government’s decision to annul the policy to slash the electricity tariff, which further narrowed the scope of recipients of the stimulus package. Electricity amounted to 10 per cent of Indonesian households’ spending each month, Core said.

“The electricity tariff discount is universal in nature, meaning that formal and informal workers can all enjoy the stimulus,” Bhima said. “We suggest that there is also a stimulus in the form of electricity tariff discounts for labour-intensive industries, up to 40 per cent. The industry must also be assisted by the government, not just consumers.”

He also recommended bringing down the value added tax from 11 per cent to nine per cent, which could “immediately” boost public spending and offset any potential decline in tax revenue. Another suggestion was that Jakarta should raise the non-taxable income threshold to 7.5 million per month, instead of the current cap at 4.5 million, so that workers would have more disposable income.

If the current stimulus package failed to boost economic growth, it would dampen investors’ appetite to do business in the country, particularly in sectors such as retail, food and beverages, automotive and tourism, Bhima said.

“The government no longer has the ammunition to withstand the sluggish domestic and international demand. That is why the current stimulus is small and temporary, as the state budget is in severe deficit,” he said. “The only ones who can help investors are themselves, so they will be more cautious in the future. They can’t rely on the government.”