Politicizing Debt
Andreas Lako
During the presidential campaign, Prabowo Subianto and his success team have enthusiastically made accusations that government debt is currently in a serious state and has the potential to plunge Indonesia into poverty and bankruptcy by 2030.
Recently, Prabowo also accused Finance Minister Sri Mulyani Indrawati of being the "Debt-Creating Minister" and earlier, he also labeled President Jokowi "king of debt", because government debt had increased considerably in the first four years of his leadership.
The question is, is it true that the government has incurred serious debt that could cause Indonesia to descend into poverty and bankruptcy? The answer: False! The results of my study (2019) show that these negative accusations contain serious misunderstandings. The accusation could also backfire for Prabowo.
Extensive misinterpretation
From the results of my 15-year analysis on the Central Government Financial Report (LKPP), it turns out that the accusation that the government debt of Rp 4.418 quadrillion (2018) is in a serious state and has the potential to push Indonesia into poverty and bankruptcy is an exaggeration; it also contains serious and broad misinterpretations. Why? Three main benchmarks must be met to conclude whether state debt and finances are healthy or in financial distress.
First is the ratio of government debt to gross domestic product (GDP). The debt-to-GDP ratio has averaged 28.6 percent during the first four years of the Jokowi-Jusuf Kalla government. Even though this ratio is higher than the 24.04 percent under Susilo Bambang Yudhoyono (SBY) in 2010-2014, it is still far from the maximum 60 percent as provisioned in Law No. 17/2013 on State Finance.
In addition to the debt ratio, the State Budget (APBN) deficit can be used to assess the health of state finances. The policy of adding annual debt thus far has been based on the budget deficit. Under the Jokowi administration, the budget deficit has also remained below the 3 percent as the law provisions at 2.58 percent (2015), 2.49 percent (2016), 2.5 percent (2017) and 1.76 percent (2018).
According to these two legal provisions, the health of our state debt and finances still remains within a reasonable rate and is safe. In other words, government debt remains in healthy condition and is very far from symptoms of seriously illness as the Prabowo camp has alleged.
It should be acknowledged that Indonesia\'s current debt ratio is the lowest in ASEAN and also among the lowest in the world. The debt ratio of the majority of developed countries in the world, such as the US, China, Japan, Britain, Germany, Canada, Australia, India and South Korea, is far higher than Indonesia’s. These countries are able to advance and prosper because they use their debt for investment and financing. They are also able to repay their debts because they managed their debts properly. There is no sign that these countries will go bankrupt and fail due to debt.
The second indicator is the government\'s ability to pay its short-term liabilities and maturing debts. It must be understood that Rp 2,898.38 trillion (52.24 percent) of the Rp 4.418 quadrillion in government debt (2018) is the legacy of the SBY government. In early April 2018, President Jokowi said that in addition to inheriting large debts, his government was also burdened with an annual debt interest of around Rp 250 trillion. This would mean an additional debt of Rp 1 quadrillion over four years.
The Jokowi-Kalla government thus had Rp 1.52 quadrillion in additional debt, which was used for infrastructure and other investments, and also used to pay off the debts from the SBY government that had matured, along with their interest costs. On several occasions, Sri Mulyani has said that 44-70 percent of the new debts the Jokowi government had accrued had been used to pay the matured debts of the previous government.
Therefore, the several strong statements that presidential candidate Prabowo and his success team have made, blaming President Jokowi for significantly increasing government debt in the last four years, were actually based on a broad misinterpretation.
Even though it was burdened with the large debt it had inherited from the previous government, the Jokowi-Kalla government was always able to repay its short-term obligations and matured government debt in a timely manner in 2015-2018 through the State Budget. Never have we heard President Jokowi or Finance Minister Sri Mulyani complaining about or failing to settle the government’s obligation to pay matured debts. This shows that our country is actually in a healthy and safe financial condition.
The third indicator is the effective use of government debt in meeting short-term obligations, increasing strategic investment and operational capacity, and realizing state priorities. As I discussed in “Understanding Government Debt” (Kompas, 6/18/2018), the new debt in the Jokowi-Kalla era was primarily used to cover the state budget deficit and strengthen government liquidity in meeting short-term obligations.
We should be grateful to the government, because Indonesia could avoid the risks of a financial crisis and the threat of a "default state" in 2015-2018 due to our high debt-to-asset ratio (DAR) of above 70 percent.
Besides using the new debt in the Jokowi-Kalla era to pay short-term liabilities, it was also used to fund strategic investments in massive infrastructure projects throughout Indonesia, such as roads, airports, seaports, irrigation and electrification. Its aim was to improve efficiency, productivity and operational efficacy of economic and non-economic activities, and to maintain social justice and national unity while improving public welfare in the long term.
In 2017-2018, the greater public began feeling the benefits of these investments. Economically, their positive impacts began improving the efficiency, productivity and effectiveness of economic and non-economic activities for the people, businesses and government. These improvements can be seen, for example, in the rapidly increasing value of GDP from Rp 10.570 quadrillion (2014) to Rp 14.737 quadrillion (2018), or a 39.42 percent increase, in increased economic growth from 4.88 percent (2015) to 5.17 percent (2018), as well as in state revenue growth from Rp 1.550 quadrillion (2014) to Rp 1.666 quadrillion (2017) and to Rp 1.942 quadrillion (2018).
GDP, economic growth and state revenues are expected to increase rapidly in 2019 and in the coming years as infrastructure projects are completed and used for a variety of economic activities in the community and the business world. These increases will in turn increase the government\'s capacity to pay debts, reduce the budget deficit and the debt-to-GDP ratio, raise the state\'s financial position and improve public welfare.
Boomerang effect of politicizing debt
From the perspective of signaling theory, the subjective statements of presidential candidate Prabowo, who has politicized government debt, could boomerang and have a detrimental effect on him. In addition to revealing his poor knowledge of government debt to the public, his harsh criticisms could even be taken as a “signal of fear" by the people. They might even judge that he is actually worried and afraid that if he were elected president, he would be burdened by inheriting large debt from the Jokowi government.
In short, Prabowo’s attempt to politicize government debt in order to corner Jokowi is a “signal of unpreparedness” to the public. Ready or not, whoever is elected the President of the Republic of Indonesia on April 17 must be prepared to accept and bear the burden of government debt. He must be able to pay the old debts that have reached maturity.
Prabowo should learn from the wisdom of the Indonesian presidents of the past. When B.J. Habibie was installed as president in May 1998, he inherited debt of Rp 551.4 trillion from the Soeharto government. On Oct. 20, 2004, when SBY was installed as president, he inherited debt of Rp 1.298 quadrillion from the Megawati government. And when Jokowi was installed as president in October 2014, he inherited debt of Rp 2.898 quadrillion from the SBY government.
None of them ever complained, became pessimistic or politicized government debt as a heavy burden that could potentially impoverish the people and force Indonesia into bankruptcy. (Andreas Lako, Accounting Professor, Soegijapranata Catholic University, Semarang)
