Debt and Growth

As of September 2020, the government’s debt stood at Rp 5.75 quadrillion. The debt to gross domestic product (GDP) ratio soared to 36.4 percent.

Approximately, 85 percent of the debt came from the government debt papers (SBN) worth Rp 4.89 quadrillion and 15 percent of the debt came from foreign loans. The majority of SBN was in domestic currency, amounting to Rp 3.62 quadrillion, while those in foreign currency denomination were Rp 1.26 quadrillion.

The government debt indeed raises alarms, reaching twice that of the 2020 State Budget (APBN). In terms of the ratio to gross domestic product (GDP), the increase was quite significant because a year ago the figure was still below 30 percent. The jump was quite significant after the pandemic, which lowered the prospect of tax revenue on the one hand, and increased the need for spending on the other hand.

Also read: The Burden of National Debts

The Covid-19 pandemic that hit almost all countries is one of the triggers for a quite aggressive debt increase. This means that the increase in debt has not only occurred in Indonesia but almost all over the world.

The spread of Covid-19, which is still difficult to tame, has made all affected countries implement mobility restrictions, even lockdowns, which have resulted in economic contraction. As a result, more than 50 countries are suddenly on the verge of recession, including Indonesia.

The decline and bankruptcy of a number of business sectors, accompanied by layoffs has forced governments in every country to launch economic stimulus and aggressive policies in the health sector. The goal is to reduce the transmission of Covid-19, maintain people\'s purchasing power and prevent bankruptcy in the business world, especially small and medium enterprises.

The economic stimulus, which varies in size in different countries, between 4 percent and 20 percent of GDP, inevitably has to be largely financed with debt.

Then the question is, is that much debt still relatively safe or is it already alarming or an amber light? So far, one of the parameters commonly applicable internationally to measure the level of debt security of a country is the ratio to GDP.

With this ratio, Indonesia\'s debt is still relatively safe. Comparatively, the ratio to GDP is still low compared to other countries. As an illustration, the debt-to-GDP ratio of the United States, after the Covid-19 stimulus package was launched, reached 131.2 percent, China 61.7 percent, India 89.3 percent, Malaysia 67.6 percent and Thailand 50.4 percent.

Also read: Extra Paradox in the Middle of a Recession

Meanwhile, the (government’s) debt dominated by SBN was also considered to be better than foreign loans, both multilateral and bilateral. This is because, by taking on debt through SBN, the government is assumed to have flexibility and autonomy. This is different from foreign loans, which usually come with conditions that dictate the interests of the lending institution or country, including determining the programs to be financed with the loan.

Beside, as frequently voiced out by supporters of the government, foreign ownership in SBN is currently decreasing considerably. In previous years, the share of foreign ownership in SBN was recorded at 37-39 percent. Currently, it is only 27 percent. This means that the risk of volatility due to global uncertainty that often causes foreigners to sell off can be reduced. Thus, when many foreigners sell the SBN, Bank Indonesia has to buy them so that prices would not fall drastically.

Also read: The Pandemic and the Debt Burden

Kompas/Priyombodo

Retail Government Bond investment offer series ORI 016 from the website of the Ministry of Finance, in Jakarta, Sunday (6/10/2019).

However, debt, regardless of type, always has weaknesses. That includes debt through the SBN, which tends to be more expensive and has a short term maturity. Meanwhile, foreign loans, especially multilateral loans, generally have very low interest rates and are long term.

With high yields and short term maturity, the sovereign bonds will burden the APBN every year, the amount of which continues to increase if, every year, the government also increases the issuance of SBNs to plug in the deficit tolerated by the law.

Another problem is the use of debt. As long as the funds obtained from debt are spent on financing development, theoretically it is assumed that there will be less problem with the resilience and endurance of the national budget. For example, for infrastructure development, strengthening the economy of micro, small and medium enterprises (MSMEs), or to increase the purchasing power of people, who have been hit by the Covid-19 pandemic.

Also read: Deficit Widens, Debt Increases

This means that if the debt is really used to provide added value to the economy, which will increase economic activity and economic growth, the movement in the rate of increase in debt will be in line with the movement in the rate of increase in economic growth.

In short, ideally, debt is not to finance consumption activities, such as raising the salaries for state apparatus, building government office buildings or financing projects that are not aimed at increasing the people\'s welfare and increasing economic activity.

KOMPAS/RIZA FATHONI

Workers are working on the construction of the Cibitung-Cilincing Toll Road Section 2 in Semper Timur, Cilincing, North Jakarta, Friday (13/11/2020).

If debt is used to finance projects or programs that will facilitate increased economic growth to be more aggressive and to move the people\'s economy, the addition of debt every year at a predetermined figure will not increase the ratio of debt to GDP.

Especially if the economic growth (GDP) moves very dynamically, for example 7-9 percent year on year. In fact, the tolerance for a budget deficit of 3 percent, which is then covered by debt, can reduce the debt-to-GDP ratio each year because the movement of debt is much lower than that of GDP growth.

The problem is, so far, the growth in government debt has tended to be far above the economic growth that has been achieved. With a very minimal growth rate on the one hand, while the debt growth rate is more than twice the economic growth every year, mathematically it will accelerate the ratio of increase in debt to GDP ratio every year.

Also read: One Uneasy First Year

This condition shows, first, the debt papers issued by the government are not functional in relation to the economic growth achieved, aka not being used for productive sectors. Second, there are problems in debt governance so that the public cannot test the effect of productive leverage on the use of debt on the economy. In other words, in addition to using debt to leverage the productive sectors, debt must also be managed properly, transparently and with tight controls.

This is because debt management is very important to prevent misuse of debt, including the potential for corruption. In this context, first, the government and the House of Representatives must provide certainty to the public before issuing debt securities of hundreds of trillions of rupiah every year.

KOMPAS.COM

Ronny P Sasmita

And second, the House, through its related commission, must really oversee the use of debt on a regular basis (for example per quarter) to ascertain whether any expenditure financed by debt has a productive effect on the national economy or, rather, the debt is used for operational expenditures due to the government\'s failure to increase state revenue from the tax side.

Ronny P Sasmita, Senior Analyst, Indonesia Strategic and Economic Action Institution.