Deflation, Ramadan, and Fiscal Incentives: Weaving Hope Amid Indonesia's Economic Challenges

By Muchamad Irham Fathoni, a Directorate General of Taxes officer

Indonesia faces an unusual economic phenomenon in early 2025: sustained deflation since late 2024. The Central Statistics Agency (BPS) recorded month-to-month (mtm) deflation of 0.76 percent in January 2025 and 0.48 percent in February 2025. BPS data indicates the Consumer Price Index (CPI) has been consistently declining since November 2024, with food commodities, transportation, and communication sectors as the primary contributors to this deflation.

This phenomenon is considered anomalous given that, based on historical data, inflation typically occurs during Ramadan and Eid al-Fitr periods. For instance, at the beginning of Ramadan 2023, inflation was recorded at 0.18 percent on a monthly basis, while at the beginning of Ramadan 2024, inflation was recorded at 0.52 percent. According to historical records, year-on-year deflation previously occurred in March 2000 at 1.10 percent, predominantly driven by declining food prices. However, the current deflationary trend demonstrates a more consistent pattern, with BPS and Bank Indonesia reporting that Indonesia experienced deflation for five consecutive months from May to September 2024.

The deflation occurring in Indonesia in early 2025 exhibits several distinct characteristics. First, it is primarily driven by declining global food and energy commodity prices. Second, the strengthening of the rupiah against the US dollar has contributed to lower import prices. Third, this deflation is occurring amid Bank Indonesia's accommodative monetary policy intended to stimulate economic growth.

Deflation approaching the Ramadan month signals fundamental economic issues. Citizens are exercising greater caution in their spending due to economic uncertainty or income reduction, whether from layoffs or economic conditions unfavorable to wage growth. Despite the government's supply-side price interventions—assuming seasonal trends in January and February should have elevated demand—consumer demand has not increased significantly. Deflation has ultimately become a real phenomenon, indicating that Indonesia's demand is experiencing serious deceleration.

When consumers collectively postpone consumption in expectation of continued price decreases, aggregate demand contracts significantly. This forces producers to reduce production output and implement workforce efficiencies, resulting in increased unemployment rates. Rising unemployment further suppresses consumer purchasing power, creating a deepening deflationary cycle. In the long term, this condition may reduce Indonesia's potential economic growth from the projected 5.2% to only 3.8-4.2% for 2025-2026.

Facing the threat of prolonged deflation, the Indonesian government has implemented short-term fiscal stimulus measures to stimulate aggregate demand. One such effort involves providing Government-Borne Value-Added Tax (PPN DTP) for property purchases, with a 100% PPN DTP scheme for home transfers from January to June 2025 and a 50% PPN DTP for transfers from July to December 2025. This incentive applies to home purchases up to Rp5 billion, applicable to the first Rp2 billion of the value.

Beyond the property sector, the government has offered incentives for environmentally friendly vehicles, including 10% PPN DTP for battery-based electric motor vehicles (KBLBB), 15% Luxury Goods Sales Tax (PPnBM) DTP for imported KBLBB in CBU and CKD forms, 0% import duty for KBLBB CKD, and 3% PPnBM DTP for hybrid motor vehicles. To directly enhance public purchasing power, the government has provided Income Tax Article 21 DTP incentives for labor-intensive sector workers with salaries up to Rp10 million per month.

If deflation persists long-term, its consequences could be severely detrimental to the economy. The economy risks becoming trapped in a difficult-to-break deflationary cycle, where price decreases encourage consumption postponement, further suppressing prices and economic activity. Companies will implement extensive efficiency measures, including mass layoffs, to survive amid weak demand. The real value of debt will continue to increase, making repayment burdens significantly heavier and potentially causing waves of non-performing loans and bankruptcies. Continually declining tax revenues may force the government to reduce spending, further exacerbating the economic downward spiral.

Amid this situation, Ramadan offers hope as a potential catalyst to break the deflationary spiral. Historical data shows that during Ramadan, Indonesian consumption patterns undergo significant transformation, increasing by an average of 12.7-18.9% compared to normal months. This phenomenon, known as the "Ramadan effect," creates a surge in aggregate demand that can counterbalance deflationary tendencies in the economy. Bank Indonesia studies indicate that since 2018, inflation during Ramadan has consistently been 0.4-0.7% above the monthly average, indicating substantial consumption momentum.

Consumption structures during Ramadan possess expansive characteristics that support economic stimulus transmission. Econometric analysis shows that the multiplier effect of consumption expenditure during Ramadan reaches 1.6-1.8, higher than normal periods, which only achieve 1.3-1.5. This means that every Rp1 trillion increase in consumption during Ramadan has the potential to generate economic output growth of Rp1.6-1.8 trillion. Interestingly, Ramadan consumption characteristics impact not only the demand side but also stimulate the supply side of the economy through predictable seasonal demand surges.

However, with the persistent deflationary conditions, it remains to be seen whether Ramadan consumption patterns in 2025 will follow historical trends or undergo significant changes due to ongoing economic pressures. If this deflationary phenomenon continues, especially after temporary government policy interventions, it indicates that public purchasing power is indeed under pressure, potentially affecting the effectiveness of the "Ramadan effect" in driving economic recovery. Ultimately, success in addressing deflationary challenges and improving the economy will heavily depend on synergy between prudent government policies and active participation from all societal segments—a collaboration that aligns perfectly with the spirit of mutual cooperation inherent in Ramadan values and Indonesian culture.*

*) This article is the author's personal opinion and does not reflect the attitude of the agency where the author works.

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