Indonesia’s Response to Covid-19 Outbreak

By Esther Sri Astuti SA | May 21, 2020

This pandemic has and will have a larger impact on the national economy. Many people will see a drastic decrease in their incomes and loss of their livelihood and many may lose their lives. Indonesia is predicted to experience a recession, even a depression. 

Martin sanchez j2c7yf223 Mk unsplash 900x600

The World Health Organization (WHO) announced COVID-19 as a global pandemic on March 11, 2020, due to its spread rapidly from Asia to the Middle East, and the United States of America. In Indonesia, there were 11.597 people treated; 864 people dead and 1,954 recovered as of May 4, 2020 (Worldometers, 2020). This number is dynamic, based on the spread of COVID-19 in Indonesia. Based on the FT analysis of the European Centre for Diseases Prevention and Control (2020), the graph in Indonesia will rapidly increase. Some sources stated that it will peak in the month of Ramadan and Eid Al-Fitr. Therefore, it is vital that the government policy during Ramadhan and Eid Al Fitr supports health and economic sectors to control the number of COVID-19 each day (flatten the curve). Baldwin and Di Maura (2020) stated that flattening the curve will happen if there are containment policies, such as lockdown, social distancing, business closure and other containment policies.

The ferocity of COVID-19 has not only taken the lives of victims infected by this virus but is also crippling the economy. The Ministry of Finance predicted that there will be a drop in economic growth by around ‑0.4 percent to 2.3 percent. To anticipate that condition, the government has allocated stimulus funds three times – Rp 8.3 trillion, Rp 22.5 trillion, and Rp 405,1 trillion. The total stimulus funds for COVID-19 management which have been spent by the government is 2.5% of the Gross Domestic Product (GDP) of Indonesia. The amount of this stimulus is relatively small compared to other countries, for example, China (RMB 1.3 trillion), USA (USD 2 trillion or 10% of GDP), Germany (EUR 822 billion or 24% of GDP), France (UUR 300 trillion or 13% PDB), Thailand (THB 518 billion or 3 % of GDP), Malaysia (RM 256 billion or 6.7% of GDP) and Singapore (SGD 54,4 billion or 10.9% of GDP).

The government of Indonesia has also issued a policy to manage the pandemic through Regulation in Liew of Law (Perppu) No.1/2020 on state financial policy and financial system stability for COVID-19 pandemic management. This pandemic must immediately encourage the government to utilise various funds and fund reallocation. As mentioned in Article 2 in the Perppu no. 1/2020, the government will conduct various budget adjustments of inter-organisation units, inter-function, or even inter-programmes and shift it to manage COVID-19. The source of funds, which can be used, is the remaining budget (SAL); endowment fund and accumulated education endowment fund; funds which are managed by the country under certain conditions; funds which are managed by General Service Agency and/​or the share of government’s capital in state-owned enterprises. Further, the government can also issue government debt papers (SUN) and what is called a state valuable sharia letter’, specifically for the purpose, to be bought by Bank Indonesia, state-owned enterprises, corporate investors and retail investors. The government may also use other sources including those from foreign countries.

The government should reallocate half of the budget on infrastructure to overcome the pandemic, as stated in the State Budget (APBN) 2020, which is as much as Rp.419.2 trillion. If it is compared to the infrastructure budget, endowment and accumulation of educational endowment is only one-seventh – Rp 60 trillion of it.

The government should not use educational endowment fund to manage this pandemic; this fund must be used for the education sector. More so because education is one of the sectors that will support the growth of the economy (Chapman and Withers, 2002; Barro, 1991; Lucas, 1988). Investment in education means that education will increase the number and the quality of the workforce, so, through education, productivity will also increase. Therefore, the government must urgently provide subsidies and guarantee that education must carry on. This is also in line with Article 3 (of 1945) of the Constitution which stated that every single citizen has the right to get and undergo basic education and the government must finance it.

With regard to the national economic recovery programme, it may be considered that the total public debt in 2019 is Rp.9.818,54 trillion which consists of central government debt of Rp. 4.700,5 trillion, SOE’s debt in the finance sector is Rp 4.125,04 trillion and SOE’s debt in the non-financial sector is as much as Rp. 944,92 trillion (SUSPI Bank Indonesia, 2020). The issuance of debt letters means widening the deficit, increasing the burden for interest payments, prolonging the payback time and narrowing the fiscal capacity of the state. In fact, if rupiah depreciation is continued, it will increase the interest on government debt securities so that SOEs may have poorer efficiency and performance.

The escalation of debt will widen the deficit to more than 3 percent. Moreover, Article 27 has protected policy-makers and politicians from criminal charges so that they are courageous to take action. Article 27 is prone to be abused by those who are in power. In other words, there are moral hazards in taking the additional risk due to the relatively lower consequences of the action taken (in comparison with the risk).

The options, besides debt, that can be determined by the government are, reducing spending on non-essential items, such as business trips, meetings, and events. The government should review the Pre-employment Card Programme because it is ineffective and is nothing more than a waste of the state budget in the midst of the COVID-19 outbreak. Further, the government should provide extra spending to support more food security, ensure income security during this outbreak, enhance access to affordable healthcare, and contribute to preventing poverty as well as unemployment.

Next, the conversion of half of the village fund to a Special Allocation Fund (ADK) for the management and mitigation of the spread of COVID-19 in villages as stated in Article 2 in Regulation in Liew of Law (Perppu) No.1/2020) is part of the mitigation measure taken by the government. First, the village fund can be allocated to poor people in the villages or workers affected by layoffs, or migrants who come back from the cities to villages. Second, the village fund must be used for productive actions that encourage food production, for example, to provide subsidies for agricultural inputs (fertilizer, pesticides, agriculture tools). Third, it can be used to accelerate the distribution of food materials from villages to cities so that food stocks remain intact in the country. This is important since the prices of food items in the cities have risen and there is scarcity in this regard.

The changes in the corporate tax in the country may create another challenge since it will cause the tax ratio to decrease. There would be a need to increase the tax ratio next year to finance the state budget, because of the reduction of tax revenues and Non-Tax State Revenues (PNPB) this year. Moreover, the trend in the tax ratio shows a decline since 2008 and it continues even in 2018 and 2019 too. The tax ratio declined from 13.31 in 2019 to 10.50 in 2018 (World Bank and Ministry of Finance, 2019). This pattern may continue. The use of tax incentives will be obtained only if people pay their taxes.

Next, the Ministry of Finance is expected to utilise increased food stock. Moreover, there is also a risk in terms of productivity in agriculture due to climate change and hence, the chances of crop failure could be greater (McKinsey Global Institute, 2020). Besides, the COVID-19 pandemic may decrease investments, inhibit access to food, decrease the production capacity in the food industry, and decrease food stock that is available from foreign countries as well as inhibit the distribution of food. The continued availability of food stock is urgent to control the volatility in food prices. It can also cause inflation. Hence, food imports from other countries should happen quickly and the continuity of food distribution is absolutely important during this time. The Ministry of Finance is expected to ease the import of personal protective equipment, medicines, vitamins and medical devices, but the availability of these items is still less than the quantity that is needed.

The continuation of the spread of COVID-19 in Indonesia is a cause for concern, and it does not seem to have yet reached its peak. This pandemic has and will have a larger impact on the national economy. Many people will see a drastic decrease in their incomes and loss of their livelihood and many may lose their lives. Indonesia is predicted to experience a recession, even a depression. Government intervention in this regard may have two impacts. Either this regulation may mitigate the impact on the economy caused by COVID-19, or it may, given the great opportunity, result in corruption, ineffectiveness, and a decline in the national economic output.

Disclaimer: The views and opinions expressed in this article are those of the author/​s and do not necessarily reflect the official policy or position of Azim Premji University or Foundation.


Esther Sri Astuti S.A, Program Director of INDEF, Lecturer of the Faculty of Economics and Business, Diponegoro University, Semarang, Central Java, Indonesia.