The World Bank urged Indonesia’s government to take steps to maintain confidence in its creditworthiness as the Covid-19 pandemic causes debt levels to rise, the Jakarta Post reported yesterday.
Borrowing is expected to jump to 37% of gross domestic product this year from about 30% at the end of 2019, the report said, citing Ralph van Doorn, World Bank senior economist for Indonesia.
The government should reinstate a deficit ceiling and end the central bank’s partial financing of the deficit, he said.
Indonesia’s budget deficit is expected to widen to 6.27% of gross domestic product this year, more than double the 3% ceiling that President Joko Widodo abandoned two months ago as part of an emergency response to the virus.
The World Bank is among the agencies that Indonesia is exploring as possible funding options, others include the Asian Development Bank and Asian Infrastructure Investment Bank.
The government planned to seek $7bn from these institutions this year, Finance Minister Sri Mulyani Indrawati said in early April.
Indonesia’s central bank has for the first time been buying government bonds from the primary market to help finance the government’s response to the virus. Bank Indonesia governor Perry Warjiyo insists the bank will only act as a lender of last resort.
Indrawati has cautioned that the government will have to again revise the assumptions underpinning its budget as the coronavirus crisis has led to slumping growth and increasing spending.
The World Bank now predicts zero growth for the Indonesian economy under a baseline scenario, according to Van Doorn. Under a worst-case scenario, the economy could contract by 3.5%. Concern about growth and debt is rising less than two months after the government announced it was suspending the budget deficit cap, which had been in place since 2003.
The shortfall for 2020 was expected to widen to 5.07% of GDP, the government estimated at the time. The speed with which assumptions have been revised underscores the ferocity with which the virus is moving through the economy. As of Friday, Indonesia had 20,796 confirmed cases and 1,326 deaths from Covid-19.
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