ABSTRACT
The coronavirus disease 2019 (COVID-19) pandemic has caused a global crisis like no other. The global economy contracted by 3.5% in 2020 compared to growth of 2.8% in 2019. Similarly, Indonesia’s economic growth contraction for 2020 was 2.07%, compared to 5.02% in 2019. All over the world, countries faced the challenges of protecting both lives and livelihoods during the pandemic, while at the same time walking a thin line between narrowing fiscal space and increasing debt burden. Liquidity trap conditions experienced globally created added pressure on fiscal policy as it could significantly undermine the effectiveness of monetary policy. Indonesia has managed the pandemic relatively well and has maintained stable ratings in 2020, indicating solid and prudent macroeconomic management. Nevertheless, more than one year into the pandemic, countries must face the hard reality of the short-term nature of fiscal and monetary policy and the need for medium-term fiscal sustainability to ensure sustainable recovery. This chapter highlights Indonesia’s fiscal policy in response to the pandemic. Specifically, we underscore three main issues: the macroeconomic impact of the pandemic, how fiscal policy mitigates the economic impacts of the pandemic on both the supply and demand side, and medium-term fiscal sustainability and lessons learned for further reform.
