Press Release

The economic strategy of the new government that came to power in October 2014 was to redirect spending from wasteful subsidies to investment in infrastructure. The first part of the strategy was achieved quickly when President Joko Widodo eliminated USD 18 billion in fuel subsidies in December, which freed up about USD 15 billion for public investment after subtracting the loss in tax revenue from lower prices for the country’s oil and gas exports.

Three main problems have emerged with this strategy. First, although USD15 billion may sound like a lot of money, it is a drop in the bucket relative to Indonesia’s infrastructure backlog, and to the size of the economy. At about two percent of economic output, this amount of extra spending is not enough accelerate economic growth.

The second problem is though relatively small, additional public investment budget turned out to be very difficult to realize. Land clearance remains a serious problem. Kompas reported that half of the irrigation projects planned by the government delayed due to land clearance issues. Similar problems also occur in the construction of highways, ports, and electricity. In addition, government spending stooped below the target in the first half of 2015, due to bureaucratic obstacles. This year spending has been even slower than normal as the new government has taken time to settle in.

The third problem is the government's budget is based on revenue growth of 30 percent over last year. The ambitious target is actually difficult to achieve even if the economy is strong. With the slow growth it is becoming certain that the target will be difficult to achieve.