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World Bank forecasts profitable budget deficit to keep rising, income reforms may be effective.

TraderKnows
TraderKnows
06-24

In a recent forecast report released by the World Bank on Indonesia's progress, it stated that the budget deficit will increase from last year's 1.7% to 2.5%.

The World Bank stated on Monday that Indonesia's budget deficit is expected to increase this year and may further expand as President-elect Prabowo Subianto implements his policy agenda. However, reforms in revenue generation could keep the deficit within the legally mandated limit.

According to the World Bank’s Indonesia Economic Outlook report, the budget deficit is projected to widen from 1.7% in 2023 to 2.5% this year due to the impact of cost-of-living measures and declining commodity prices on the budget bottom line. The report notes, “With increased social spending and reduced windfall gains from commodities, the fiscal situation has slightly expanded.”

The deficit is expected to remain at 2.5% of GDP through 2025 as Prabowo begins implementing his campaign promises, before slightly narrowing to 2.4% in 2026. Indonesian law stipulates that the annual budget deficit must not exceed 3% of GDP, with the debt-to-GDP ratio capped at 60%.

Prabowo’s policies' impact on the deficit and debt ratio has exerted pressure on the rupiah and bond yields in recent weeks. Prabowo’s aides have repeatedly stated that he will adhere to fiscal rules.

According to the President-elect's team, Prabowo’s flagship plan is to provide free nutritious meals to students, which, upon full implementation, will cost 4.5 trillion rupiah (approximately $27.35 billion), equivalent to 2% of GDP. World Bank Senior Economist Wael Mansour commented in a media briefing, “These social programs are vital and can further enhance Indonesia’s human capital. Thus, ensuring their sustainability is crucial.”

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Inflation

Inflation refers to the phenomenon where the purchasing power of a country's (or region's) currency decreases, leading to a general rise in the prices of goods and services. It is reflected in the fact that, over a certain period, the same amount of money can only buy fewer goods and services.

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