Finance Minister Sri Mulyani Indrawati gets ready to brief the press on the state budget in her Jakarta office on Apr. 26, 2024. - Photo: Jakarta Post/ANN
JAKARTA (Jakarta Post/ANN): A government body responsible for the country’s development strategy has proposed to expand Indonesia’s outstanding debt to around 40 percent of gross domestic product (GDP) next year, which experts saw as a pragmatic move to accommodate new programs promised by the incoming administration.
It was stipulated in the 2025 government working plan (RKP) formulated by the National Development Planning Agency (Bappenas), which proposed lifting the debt-to-GDP ratio to between 39.77 and 40.14 per cent.
The proposed ratio would mark another high after the country touched 40.74 percent of GDP at the height of the Covid-19 pandemic in 2021, which the Finance Ministry has strived to gradually reduce, getting it down to 38.59 percent of GDP last year.
“In terms of financing strategy, we will manage it prudently and carefully, and undertake our strategy pragmatically and opportunistically,” said Finance Minister Sri Mulyani Indrawati in a press briefing on Friday regarding the government’s debt strategy.
The Finance Ministry’s Budget Financing and Risk Management Director General Suminto Sastrosuwito told reporters on Thursday that the RKP was Bappenas’ domain, while his ministry was in charge of a different document, the draft macroeconomic projection and fiscal policy (KEM-PPKF), which has its own proposed figures on the same matter.
Both documents, however, would be used as references in drafting the state budget bill, which the government would present to the House of Representatives on Aug. 16.
Bappenas’ undersecretary for economic affairs Amalia Adininggar Widyasanti told The Jakarta Post on Thursday, that “related ministries”, including the Finance Ministry, were involved in the calculation of macroeconomic projections in the RKP.
She suggested directing questions to the Finance Ministry when asked about fiscal prudence on the proposed expansion of debt to 40 percent of GDP.
The Finance Ministry’s Fiscal Policy Agency (BKF) head Febrio Kacaribu told reporters on Wednesday that the ratio was still under discussion in the relevant ministries, stressing that no decision had been made yet, as quoted from Kumparan.
Center of Economic and Law Studies (CELIOS) executive director Bhima Yudhistira Adhinegara told the Post on Friday that expanding the debt-to-GDP ratio was “counterproductive” and veering off the current fiscally prudent track.
Larger debt might translate to a negative outlook and, in a worst-case scenario, could lead to Indonesia’s government credit rating slipping, explained Bhima.
Investors used this credit rating to assess the creditworthiness of the Indonesian government, which could affect the borrowing cost.
“A 40 percent [debt-to-GDP ratio] would create pressure on the liquidity side because a wider ratio would suck up liquidity from the domestic market, such as from banks and individuals because they might be attracted by the return offered by the government,” Bhima said.
He explained this was as opposed to lending these funds to support real sectors.
Proposing such a high debt-to-GDP ratio might imply that the outgoing government was paving the way for president-elect Prabowo Subianto to execute his populist, expansive programs, like the national free lunch program for school children, he said.
He opined that Prabowo’s first budget would not allow his administration to afford everything. Instead, it would need to prioritize and cut spending in certain areas to finance its new programs.
Figures inside Prabowo’s campaign team have stated on numerous occasions that the expensive program would be financed by extending tax revenue through various means, but Bhima said he was doubtful, saying “the math doesn’t meet”, hence the government might resort to taking on more debt in the future.
Private lender BCA chief economist David Sumual told the Post on Friday that a 40 per cent debt-to-GDP ratio was still safe, but said that, using traffic lights as an analogy, it was a “yellow light” – something to be concerned about.
A 2003 law capped the government’s outstanding debt at 60 percent of GDP, which was put in place to safeguard the country’s fiscal governance and to avoid a crisis similar to one Indonesia faced in 1997-1998.
He hoped that the government would not exceed the 60 percent of GDP threshold, citing several studies that found having a high debt-to-GDP ratio would not necessarily translate to better economic growth.
David also added that increasing next year’s debt-to-GDP ratio may not be entirely due to the incoming administration’s programs, but it could be contributed to by some short-term external risks, such as a weakened rupiah exchange rate or prolonged high oil prices. - Jakarta Post/ANN
