The way forward: Prabowo inspects the Main Guard of Honour led by Major Azham Mohamad at the National Palace in Kuala Lumpur. Back home, some economists are questioning Jakarta’s initiatives that they say lack clarity on funding sources. — Bernama
JAKARTA: At the 100-day mark of President Prabowo Subianto’s administration, there is concern that development programmes that rely heavily on public spending could turn out to be more expensive than planned and accelerate government debt accumulation.
Wen Chong Cheah, a researcher at the Economist Intelligence Unit (EIU), said that next year’s forecast based on the president’s policies to date indicated a financial deficit of more than 3%, which could last for the duration of his five-year term to 2029.
“Prabowo has already announced his intention to raise the financial deficit ceiling – we expect that announcement to be made later this year.
“This will have negative implications for the Indonesian rupiah and Indonesia’s bonds, raising investors’ concerns over financial sustainability in the medium term,” said Cheah.
Prior to his inauguration, Prabowo said he would be more “daring” in financial management and added that pushing government debt to 50% of gross domestic product (GDP) would be safe. Government debt hovered at around 40% last year.
Following the financial and monetary crisis that swept the country in 1997 and 1998, Indonesia passed a law in 2003 to cap the annual state budget deficit at 3% of GDP and accumulated debt to 60% of GDP.
Keeping the budget on track within those limits means the government must strike the right balance between spending and generating revenue. But the Prabowo administration has embarked on big-ticket programmes without any clear direction on revenue expansion so far.
Prabowo’s flagship free nutritious meal programme, which targets 82.7 million schoolchildren and other recipients nationwide by 2027, is estimated to cost the state 460 trillion rupiah per annum once it reaches full-scale implementation.
It is to be rolled out in stages, and Prabowo agreed with the previous administration’s 2025 budget allocation of 71 trillion rupiah for the programme before taking office in October.
However, the government recently signalled it might need an additional 100 trillion rupiah for this year’s rollout, which was made more likely on the president’s insistence that the programme be fully implemented by the end of 2025.
To make financial room for the extra expenditure, last Thursday, Prabowo issued a presidential instruction that mandates all ministries and state agencies to identify spending items that could be cut to raise an estimated 306 trillion rupiah combined.
State Secretary Prasetyo Hadi said on the same day that the belt-tightening “could be prioritised” for the free meals programme.
The president and his aides are also pushing to construct or renovate three million houses and apartments a year in another flagship programme, with most of the funding initially expected to come from the private sector.
Recent statements from government officials suggested, however, that this programme also could be heavily reliant on the state budget. “These initiatives lack clarity on funding sources and execution mechanisms, raising concerns about financial sustainability,” said the EIU’s Cheah. “The bloated cabinet budget further exacerbates these concerns.”
The intuitive way to fund these costly programmes is to boost state revenue by intensifying tax collection, which almost happened when the government braced the public and businesses to expect a percentage point increase in value-added tax come Jan 1. Its last-minute U-turn on Dec 31 threw out its chance to rake in an additional 75 trillion rupiah in tax revenue this year.
Issuing more bonds, on the other hand, would put additional strain on annual budgets to service outstanding government debt.
More than 3.74 quadrillion rupiah in government debt is set to mature during the Prabowo administration, some 800 trillion rupiah of which must be paid off annually in the first three years, according to the latest data from the Finance Ministry, released in May 2024.
“Yes, the debt maturity is a concern, especially given the ambitious spending plans and limited revenue generating measures,” said Cheah, noting that the government’s bet on refinancing, in addition to ongoing high global interest rates, could ultimately increase debt servicing costs.
He also said that while the free meals and housing programmes’ reliance on public spending might stimulate short-term economic activity, “it risks financial imprudence if revenue generation does not keep pace with expenditure”.
Paramadina University economist Wijayanto Samirin said that rising debt, high interest rates and non-conducive global situation created a “near perfect financial challenge” and necessitated Prabowo to be a good manager to avoid a “downward death spiral” of debt.
Bank Permata chief economist Josua Pardede said the high amount of maturing debt stemmed from the “special case” of the Covid-19 pandemic that led to heightened financing needs.
“If debt is used to finance productive spending with a high multiplier effect that can spur economic growth, the debt-to-GDP ratio will shrink on its own and the need for financing will become more controlled,” Josua said.
“Going forward, what we need to look at is not just the amount of debt, but also what it’s for. We must avoid robbing Peter to pay Paul,” he said. — The Jakarta Post/ANN
