Indonesia's fiscal plans on track despite virus surge, finmin says

JAKARTA, Aug 6 (Reuters) - Indonesia’s plans to gradually taper its pandemic-induced fiscal support will not change, even though the government has had to adjust spending plans to fight a devastating new COVID-19 wave, its finance minister told Reuters on Friday.

Jakarta will still aim to gradually reduce the budget deficit to under 3% of gross domestic product (GDP) in 2023, in line with current laws, while also keeping this year’s and next year’s deficit plans at 5.7% and a 4.5% to 4.8% range, respectively, Sri Mulyani Indrawati said in a Zoom interview.

The cap was waived from 2020 to 2022 to make room for pandemic relief measures.

The world’s fourth-most populous nation has been battling a surge in COVID-19 cases, driven by the more infectious Delta variant of the coronavirus. Its caseload of 3.57 million and over 102,000 deaths, as of Thursday, is the second highest in Asia.

There have been calls to widen the budget deficit to provide more protection for the poor, while rating agencies have warned any loosening of the country’s hard-won fiscal discipline could bode ill for its credit ratings.

“When rating agencies predict that this will all translate into rising (fiscal) deficit, we say we will make efforts so that the deficit does not increase,” Sri Mulyani said, adding that multi-billion dollar cuts in the budget will be made to accommodate bigger spending for health and welfare programmes.

She also argued that the strategy is needed so that Indonesia’s policy is in line with advanced countries like the United States, with the Federal Reserve already discusing tapering its bond buying programme. Early tightening by the Fed such as withdrawing stimulus and interest rate hikes could spark capital outflows from still-weak emerging economies.

Calling the divergence of recoveries between developed and developing nations as “an extraordinarily big challenge”, she said Indonesia must catch up so that when global liquidity shrinks, “we’re also in a position where we can begin to consolidate policies or at least we’re not too far from there.”

To do that, the government must work hard to achieve its ambitious vaccination target, she said.

Indonesia aims to vaccinate 208 million, or about 77% of its population, by next year, but since its inoculation drive began in January less than 23 million people have been fully vaccinated.

Sri Mulyani said the campaign’s weakness at the beginning was due to supply constraints, but Indonesia is now set to receive a large number of vaccine doses into December.

Higher vaccination rates will be key for Indonesia to maintain its recovery momentum, she said, arguing economic activities will pick up after the new COVID-19 wave is brought under control.

Data on Thursday showed Indonesia pulled out of recession in the second quarter, with the economy growing 7.07% year-on-year, but analysts say the recent surge in infections and extended anti-virus measures could sharply brake activity in the current quarter.

The finance ministry’s growth outlook for the July-September quarter is between 4% to 5.7% and 4.6 to 5.9% for the final quarter of 2021. (Reporting by Gayatri Suroyo; Editing by Kim Coghill)