‘Perfect storm' on 2025 state budget

The Star

22-04-2025

JAKARTA: The United States' tariff policy is expected to add stress to an already pressured state budget, taking a toll on state revenues as the government maintains that its costly programmes must go on.
Syafruddin Karimi, an economist at Andalas University (Unand), told The Jakarta Post that ongoing developments spelled 'a perfect storm' for this year's state budget, raising even greater urgency for fiscal discipline to avoid future complications.
At this point, the country faced a risk of a widening deficit due to the combination of weakening exports amid a global trade war and a planned tariff concession to appease the United States, he said, which could together lead to a decline in state revenue.
'I assess that Indonesia's fiscal condition this year is under serious pressure and deserves extra attention,' said Syafruddin.
On April 2, US president Donald Trump imposed a 10% blanket tariff on imports from all countries, while higher duties were levied on dozens of select nations, including a rate of 32% for Indonesia.
The United States is Indonesia's second-largest export destination after China, and the two economic giants contributed respectively 10% and 23% in total export value last year, according to data from the International Trade Centre.
Jakarta sent a high-level delegation to Washington on April 16 in a bid to negotiate lower tariffs for Indonesian goods. The two sides agreed that the talks, which are slated to conclude within a 60-day period, would cover investment and trade partnerships as well as critical minerals.
On April 7, the Monday immediately following Trump's 'Liberation Day' tariffs, Finance Minister Sri Mulyani Indrawati said the Indonesian delegation planned to offer an exclusive tariff cut from 10% to 0.5% on some US goods and products.
Syafruddin said this offer could hurt the state budget to some extent, especially if it was not met with a clear reciprocal benefit from Washington, such as wider access to the US market, direct investments and concrete partnerships.
'Otherwise, this step will only benefit the United States without any meaningful impact on the domestic economy,' he said, adding that the talks should not seek mere temporary relief from US tariffs.
Josua Pardede, chief economist at private lender Bank Permata, told the Post that he hoped the tariff talks would result in Washington lowering import duties for Indonesia, which could boost exports and investments from the United States.
'The worst-case scenario is the trade war drags on, exports go down and commodity prices become sluggish while the rupiah continues to weaken and government bond yields rise,' he said.
'This could increase debt financing and force the government to widen fiscal deficit or slash spending.' Pardede added that tax revenue declined 8.8% year-on-year in the first quarter of 2025, which he attributed to weaker exports due to a slump in commodity prices after Trump introduced his tariffs.
Moreover, the government had issued 40% of its annual debt ceiling in the first three months of this year.
Sri Mulyani defended the move she described as 'front-loading', saying it was not 'because we don't have the money. It's part of the debt issuance strategy to anticipate uncertainties'.
As such, the fiscal deficit might widen this year if revenue collection did not improve in the next few months, Pardede said.
Syafruddin of Unand said the move indicated that the government was seeking to broaden the fiscal room early, which in turn signalled that policymakers were expecting fiscal pressure.
'All these dynamics mean the government has to undertake a precise fiscal strategy, to continue with strategic spending that has a high impact on consumption and growth,' he said.
Experts agree that the Indonesian economy must rely on government spending as its main growth engine this year, since restraining spending might intensify economic contraction, notwithstanding the importance of reining in deficit. — The Jakarta Post/ANN