Indonesia’s cabinet is discussing amending a legally imposed cap on the budget deficit, which would allow the government to spend and borrow more to stimulate growth in Southeast Asia’s biggest economy.
President Joko Widodo is holding talks on the matter, although for now, the current annual ceiling of 3% of gross domestic product remains, finance minister Sri Mulyani Indrawati told Bloomberg News on Wednesday in Jakarta.
The government is required by law not to breach the deficit cap, a rule introduced in 2003 in the aftermath of the Asian financial crisis to prevent a buildup of debt. There’s periodically been discussion about easing the restriction, but officials haven’t had much appetite in the past to tamper with the legislation. With governments around the world now increasingly stepping up stimulus to support growth, there’s scope for authorities to adopt a more flexible policy.
One option being considered by the cabinet is to change the deficit ceiling to an average of 3% over five years, enabling the budget gap to exceed 3% in any given year during that period. “That’s one line of thinking and the president is holding discussions about that,” Indrawati said on the sidelines of a World Bank event. “But for now we will continue to operate under the current legislation.”
The yield on the 10-year government bond jumped 4 basis points, the most in almost two weeks, following the comments from the finance minister. The rally prompted Indonesia’s central bank to intervene in the bond market. Three-month dollar-rupiah non-deliverable forwards rose as much as 0.5% to 14,090.
A change in the fiscal rule would be one of the most significant economic policy reforms in Indonesia in almost two decades. The deficit cap acts as a curb on growth, forcing the government to cut back on spending if revenue slumps.