Debt is the main spotlight towards the end of the current administration under Joko Widodo (Jokowi) and Jusuf Kalla. The central government’s debt rose 69 percent to Rp 4,416 trillion in 2014-2018, which was higher than 55 percent in 2010-2014. Is this large amount of debt harmful to Indonesia?
Finance Minister Sri Mulyani said the public should not only see the debt in terms of its large value, but also its purpose. “If they only look at the debt value side, they will lose the context,” she said in Jakarta, Tuesday (1/29).
According to her, debt is required to maintain economic stability, such as when experiencing pressures of commodity prices and negative export growth. Debt is also used to build infrastructure, reduce poverty, and maintain economic growth.
Basically, debt is used to cover any deficit in the state budget (APBN). An ambitious government development program requires large funds, while the state revenue sources are still lacking.
State Finance Law No. 17/2003 does allow the existence of budget deficit, but it is limited to a maximum of three percent of Gross Domestic Product (GDP). Debt is the main solution in financing the deficit. However, Sri said Indonesia’s debt is still low and within safe limits.
The law limits the amount of debt to a maximum of 60 percent of GDP. Last year, it was 29.8 percent. Indonesia’s debt-to-GDP ratio is among the lowest in the world. The ratio shows that Indonesia still has the ability to pay off debt even though it is large in nominal terms.
The Economist from University of Indonesia Faisal Basri admitted Indonesia still has a low debt-to-GDP ratio. However, he said debt measurement is not enough just by looking at this ratio. Other indicators will show that Indonesia's debt is still vulnerable and threatens state finances.
Faisal compared Indonesia with Japan, whose debt ratio reached 230 percent of GDP. Japan’s debt is indeed eight times higher than Indonesia, but it provides debt to other countries, including Indonesia, in the form of securities and direct loans. Japan is also the second largest holder of US debt after China.
Interest rates on bonds issued by the Japanese government are also very low. The 10-year Japanese government bonds are having zero percent yield, one of the lowest in the world, and almost entirely bought by its own citizens. Thus, funds for interest payments remain circulating in the country. This is why the debt burden does not have a major impact on Japan’s macroeconomic stability.
On the contrary, Indonesia is a pure debtor. The number of Indonesian government bonds held by foreign investors is relatively high at 39 percent, the largest among emerging market countries that have 25 percent on average. “This is why Indonesia’s economy is very prone to external turmoil,” Faisal wrote on his personal website, Monday (1/27).
High Debt, Low Productivity
According to the Finance Ministry, debt is increasing because the government is intensifying infrastructure development. The benefits of the development can be seen in the next three to four years, such as efficiency in logistics costs, ease of investment, reliable human resources, and strong communication networks. “All of this requires huge costs. State spending is used for productive things, so it can boost improvement in productivity,” Finance Ministry Spokesperson Nufransa Wira Sakti said.
However, the Economist from the Institute for Development of Economics and Finance (Indef) Bhima Yudhistira shared a different insight, saying that Indonesia’s debt is less effective because it is not directed at productive matters. This can be seen from the debt-to-service ratio (DSR) at 24-26 percent, one of the highest among developing countries.