2024-07-13 16:55:27
There is a country that is currently very noisy because of the policy of introducing free school meals for students. It is Indonesia, which is about to have its next president inaugurated in October. Why is it so controversial to feed growing children? However, if the number of children to be fed exceeds 80 million, it is a different story.
There are signs that the economic policy of the next Indonesian government will be significantly different from that of the current government. Today, Indonesia’s Free School Meals DebateLet’s take a look.
*This article is the online version of the Deep Dive newsletter published on the 12th. Subscribe to Deep Dive, the ‘economic news that you’ll get hooked on as you read’ newsletter.
Free school meals cost 39 trillion won a year?
“We will provide free lunch and milk to ensure equal distribution of nutrition from the womb.”
Free school meals were a key promise of Prabowo Subianto, the Indonesian presidential candidate who ran in February. The goal was to “improve the quality of human resources” by providing free lunches and milk to elementary, middle, and high school students, and nutritional support to infants and pregnant women. The target population is 82.9 million people in total. This is 30% of the total population (275.5 million people).It is a huge project. Except for some private schools, Indonesia does not have school meals. People have to bring their own food from home. From now on, schools will provide balanced, nutritious meals. Parents will be very happy about it. The free school meal promise is considered one of the key promises that led to Prabowo’s victory in the presidential election.
However, as the time to prepare for the free school meal program approaches, controversy grows. The biggest issue is the budget. According to the plan of President Prabowo’s campaign, the cost of one meal is 15,000 rupees, or about 1,300 won. Target It would cost 460 trillion rupiah (about 39 trillion won) to feed everyone. I’m goingHere is the calculation. Since Indonesia’s central government spending budget this year is 2,467.5 trillion rupiah (about 210 trillion won), it would take a fifth of the budget to make it feasible. Most of the country’s social welfare budget (497 trillion rupiah this year) would have to be spent on free school meals.
Of course, free school meals will not be implemented across the board next year. It will take time to establish a supply chain and production system. The plan for a phased implementation of free school meals will come out after President Prabowo takes office in October. It is likely to be implemented starting with schools in remote areas next year. Last month, the current government’s Finance Minister Sri Mulyani Indrawati announced 2025The budget allocated for free school meals in the government budget for next year is 71 trillion rupiah (approximately 6 trillion won). That means only about 15% of the total can be used to feed the population. Still, 71 trillion rupiah is much larger than the budgets of the Indonesian Ministry of Finance (48.7 trillion rupiah) and the Ministry of Transport (38.6 trillion rupiah) this year.
Other path than sound finance
Should we provide free school meals even if it costs such a huge amount of money? Economists continue to raise the question.
Teuku Rifki, a macroeconomic researcher at the University of Indonesia, tells the BBC: “Is it really appropriate to allocate Rp71 trillion to free meals? We have other urgent issues like health, childcare, infrastructure.”
“This program should be implemented because it increases Prabowo’s chances of victory,” says Yenti Noorhidayat, founder of the Center for Law and Budget Studies. It would be better to use the budget to help people increase their income (rather than providing free lunches).”
Free school meals are a sign that Indonesia’s fiscal policy will change. It is a very sensitive issue for foreign investors. The Joko Widodo (or Jokowi for short) administration has pursued conservative fiscal policies, which has helped it gain investor confidence. If the national debt ratio rises again and the fiscal deficit expands, it will be a big negative for emerging market bond markets. This is also the background for the rise in the Indonesian rupiah exchange rate (currency depreciation) and the rise in government bond and state-owned enterprise bond yields (bond price decline) over the past few months. Investors were hoping that the next president, Prabowo, would be “Jokowi 2.0,” but the current atmosphere is completely different.
The recent interview with Hashim Jojohadikusumo, a close adviser to President-elect Prabowo, by the FT has turned these market suspicions into certainty. Incidentally, Hashim is an Indonesian tycoon and Prabowo’s younger brother (Prabowo’s full name is Prabowo Subianto Jojohadikusumo).
Hashim The next government will increase government debt to 50% of GDP to boost spending.He said that he would gradually increase the debt ratio, which is currently at 39%, by 2 percentage points per year. Hashim told the FT, “The goal is to increase the government’s revenue while also increasing the debt level,” and “The World Bank also considers 50% to be a prudent level.” This is the first time since the election that a close associate of Prabowo has officially announced a plan to increase government debt.
Why are we sensitive to a debt ratio of 50%?
Of course, there will be this kind of reaction. Isn’t a debt ratio of 50% really good? Last year, our country exceeded 50%. Southeast Asian countries such as Malaysia (60.4%), the Philippines (60.9%), and Thailand (61%) also exceed 50%.
Indonesia is A country that is particularly strict about government debtIt is. Since 2003, the government debt ratio has been limited by law to not exceed 60% of GDP. There is also a law that limits the fiscal deficit to not exceed 3% of GDP.
It’s so hard to regulate Because I suffered so much from debt in the pastIt is. Right after the Asian financial crisis in 1997, Indonesia’s government debt snowballed as the value of the currency plummeted. The government debt ratio soared to 85.4% at one point. At that time, Indonesia was on the verge of national bankruptcy, and in 2001, its national credit rating fell to CCC (S&P). That country has now recovered its debt ratio to 39% and its national credit rating to BBB.
if If Indonesia’s debt ratio rises to 50% again, it would be the first time since 2004.This is what it will be. That’s why the number 50% is uncomfortable. However, when he was a candidate, Prabowo said about the debt ratio, “Up to 50% is no problem, and we are respected around the world because we have never defaulted on our debt.” His basic position is that the debt ratio needs to increase further in order to increase the economic growth rate from the current 5% to 7-8%. The ‘multiplier effect’ where increased government spending leads to economic stimulusis aimed at.
This logic is not wrong economically. However, it is bound to be unpalatable to foreign investors who remember the financial crisis 20 years ago. So, the Prabowo administration has a card to play to ease these concerns: a plan to increase tax revenue.
Indonesia is A country that collects unusually low taxes, with a tax burden ratio of only 10% of GDP.Yes. That’s because there are so many loopholes in the tax collection system and so much tax evasion. President-elect Prabowo’s goal is to raise the tax burden rate to 16%, similar to other Southeast Asian countries (for reference, Korea is 32%, and generally, the higher the advanced welfare state, the higher it is).
But is it as easy as it sounds to collect more taxes? It is difficult to increase the number of taxable income and raise tax rates. The Jokowi government also set a similar goal several years ago, but the tax burden rate has remained stagnant.
So there is continued talk that the Prabowo camp is also considering another option: entering the tropical jungles of Borneo. Reducing the budget for the construction of Nusantara.
Nusantara transfer after October?
You may have heard that Indonesia is building a new capital in the middle of the jungle, away from the current capital Jakarta, which is sinking. Plan to move to a remote area on Borneo Island, 1,200 km awayThe name of this new capital is Nusantara.
The capital relocation is a large-scale long-term project that President Joko Widodo has been pursuing as a lifelong priority since his re-election in 2019. The plan is to invest a total construction cost of 466 trillion rupiah and complete the project by 2045.The first building to be built and occupied in Nusantara this year is the presidential palace. President Joko Widodo has promised to declare Nusantara as the official capital on August 17, 2024, the 79th Independence Day. Several Korean companies are also participating in the Nusantara construction project.
However, there were many doubts about whether the construction would proceed smoothly. Above all, it was because investors could not be attracted. A binding contract was signed. There are no foreign investors yetBut, that was inevitable because no one was sure whether the project would not lose momentum even if the president changed.
And the project is already showing signs of creaking. The plan is starting to be delayed. On the 8th, President Joko Widodo The presidential decree declaring Nusantara as the official capital may be announced in October rather than August, depending on the situation on the ground.He told the press, meaning that the schedule could be delayed until after the inauguration of his successor, Prabowo. President Widodo said, “Is the water ready? Is the electricity ready? We don’t want to impose something that is not ready. We have to assess the progress on the ground.”
It is not unusual for President Joko Widodo, who had promised just a month ago that “water will be ready (in the new presidential office) by July,” to change his words so drastically. Will President-elect Prabowo, who will take office in October, actually take over the ambitious Nusantara project of the previous administration? To be honest, it is not a very popular project. Brian Lee, an analyst at Malaysia’s Maybank, points out: “Prabowo has barely mentioned Nusantara publicly since the election. With such ambitious spending plans, you have to prioritize.”
President-elect Prabowo, who had been garnering votes by promising to “continue Jokowi’s policies” during his presidential campaign. However, the atmosphere is already tense. We will have to wait and see how much more news he will create after the inauguration ceremony in October. By. Deep Dive
This is already the third deep dive into the Indonesian economy (Indonesia Nickel Edition June 2023, Indonesian Presidential Election in February 2024 Note). This is probably because it is a country that attracts the attention of Korean companies and investors due to its abundant resources and large population. To summarize the main points:
– Ahead of the inauguration of the new president in October, Indonesia is in the midst of a debate over free school meals. A budget of 6 trillion won has been set for next year alone to gradually implement free school meals, a key pledge of President-elect Prabowo. To provide free lunches to 82.9 million people as planned, 39 trillion won will be needed per year.
– Where will this money come from? It seems likely that the government will borrow money. In a recent interview with the Financial Times, Prabowo’s younger brother announced plans to increase the government debt ratio from 39% to 50%. This is the exact opposite of the Jokowi government, which restored financial market confidence through sound fiscal policy.
-Jokowi’s ambitious capital relocation project may also be shaken. The presidential decree declaring Nusantara as the new capital was originally scheduled to be announced in August, but now the story has changed to say it could be after October. It seems like a lot will change with the president.
*This article is the online version of the Deep Dive newsletter published on the 12th. Subscribe to Deep Dive, the ‘economic news that you’ll get hooked on as you read’ newsletter.
Reporter Han Ae-ran [email protected]
2024-07-13 16:55:27