Government Deploys APBN to Reduce Impact of Increase in Interest Rates

"The current global uncertainty that we are facing is something we have experienced before. We will strengthen the usual synergy between our monetary and fiscal policies to maintain the momentum of economic growth," said Febrio when met at the Ministry of Finance building in Jakarta on Thursday (April 25, 2024).

Also read: Response to BI Rate Increase, Stimulus Needed

This time, the state budget will be deployed again to mitigate the spread effects of the increase in Bank Indonesia's benchmark interest rate. On April 24, 2024, BI decided to raise the benchmark interest rate by 25 basis points (bps) to 6.25 percent. The last time BI raised its benchmark interest rate was in October 2023 to 6 percent.

Febrio stated that the government now has various policy instruments to mitigate the impact of economic shocks. In facing the impact of the ripple effect from the increase in benchmark interest rates, existing policies in the state budget will be calibrated and strengthened.

He highlighted the Value Added Tax Burden Borne by the Government (PPNDTP) policy for the property sector that has been rolled out since last year. He said that the policy has been able to boost economic growth in 2023 to reach a level of 5.05 percent amid various uncertainties.

"So, for the future, we just need to strengthen the existing programs. "We are sharpening and strengthening the existing policies in the APBN that have been embedded in them so that they are more effective in maintaining growth momentum," he said.

To deal with the spillover impact of an increase in the benchmark interest rate, existing policies in the APBN will be calibrated and strengthened.

When asked for examples of policies that will be sharpened to mitigate the impacts of rising interest rates, Febrio did not elaborate. However, he ensured that the economy and the purchasing power of the community, especially vulnerable and poor groups, will not be disrupted.

"The policy doesn't always have to be new, so it's not a matter of needing a new or old policy. What is certain is that the APBN will be shock absorbing, the lower middle class will always receive social assistance so that we can anticipate the impacts that will occur in society. "Even if, for example, we face price fluctuations (as a result of rising interest rates), the poor and vulnerable will be protected," said Febrio.

Monitor fiscal space

Meanwhile, Coordinating Minister for Economic Affairs Airlangga Hartarto stated that the government will monitor the fiscal space to determine whether there are possibilities to provide new incentives in mitigating the impacts of the interest rate hike.

"Later we will see what fiscal space we can provide for incentives in the future, but with the decision of the Constitutional Court (regarding the results of the presidential election), there is certainty in the market so we hope that investment can continue to be encouraged," said Airlangga.

Also read: Entrepreneurs Value BI's Decision to Increase Interest Rates as Not Ideal

In principle, both Airlangga and Febrio agree that monetary tightening policy by BI is necessary to maintain the stability of the rupiah exchange rate amid the weakening trend of the rupiah caused by the policy of the United States Federal Reserve. The decision to raise the benchmark interest rate is called a "defense mechanism" that must be carried out by developing countries in the midst of current uncertainties.

According to Airlangga, Indonesia's economic fundamentals are still relatively stable to withstand the impact of the weakening rupiah. This can be seen from the sustained surplus of the March 2024 trade balance for 47 consecutive months, which ensures the balance of demand and supply of US dollar in the country is maintained.

However, no one knows what the future direction of US monetary policy will be and the dynamics of the escalation of geopolitical conflicts in the Middle East. Therefore, like it or not, Indonesia still has to take tightening measures to prevent the outflow of capital from the domestic financial market (capital flight).

"America created a strategy ofhigher for longer(increasing interest rates for a long time) to fight their inflation. The impact is that for a country like Indonesia it can attract capital out. "So, the defense mechanism implemented by BI is in the right corridor," said Airlangga.

Later we will see what 'fiscal space' we can provide for future incentives.

Indonesian Employers' Association (Apindo) Economic Policy Analyst, Ajib Hamdani, believes that there are three things that need to be mitigated by the government as a result of the increase in BI's benchmark interest rate. First, inflation arises due to an increase in the cost of production or cost push inflation which is driven by an increase in business credit interest rates.

Secondly, the weakening of people's purchasing power due to the potential increase in prices of goods. Thirdly, the economic slowdown that could make the target of 5.2 percent growth difficult to achieve.

"With such aggressive monetary policies, the government needs to create comprehensive and long-term oriented programs and policies to control inflation. Because, in general, raising the benchmark interest rate will certainly have economic challenges," he said.