IO – The 2020 Financial Memorandum address, which is generally given nearing the Independence Day celebrations on 17 August, revealed that the Government is setting aside IDR 373.3 trillion of its budget for repayment of debt interest in 2021. This is a 10.2% increase over the 2020 debt interest budget, at IDR 338.8 trillion. On the other hand, the total of matured debt principals in 2020 is IDR 433.4 trillion. Matured debt does seem to be always “hidden away” from our National Budget – it is never announced clearly and firmly, even in the Financial Memorandum.
Matured debts are “hidden” in the “Debt Funding” component of the State Budget, along with the “Deficit Funding” and “Investment Funding” sub-components. In other words, the Government repays matured debts by allocating funds from the money earned through the issuance of new bonds, instead using a post in the State Debt.
Is this the right thing to do?
In fact, NO.
The Government is obliged to repay matured debts as well as their interest, and this repayment is made using earnings from taxing the public. The separation of debt interest, clearly mentioned in both the State Budget and the Memorandum, from matured debts that are “hidden away” from the Budget and never addressed, is a Government trick to give the impression that our debts are not that huge. If we add up the debt interest and matured debt for 2020 properly, the total 2020 debt service is IDR 772.2 trillion. If the Government had not split it, debt service would have been the biggest expenditure item in the State Budget.
Let us now discuss our ability to repay our debts. The Ministry of Health’s Fiscal Policy Committee (Badan Kebijakan Fiskal – “BKF”) projects 2020 tax earnings at IDR 1,404 trillion (lower than the previous projection at IDR 1,462 trillion). Covering 2020 debt service of IDR 772.2 trillion in full means losing 55% of tax earnings.
Imagine spending more than half (55%!) of tax earnings just to service debt, leaving only 45% of tax earnings and other (non-tax) earnings available for routine expenditures and development budget. If that is still insufficient, the Government must plunge further into debt to cover the deficit. It is a great cause for concern.
With the increasing trend for repayment of debt interest (a 10.2% increase from 2020 rates to those of 2021), deriving from the fat yield of Indonesia’s Government bonds, tax earnings will decrease in turn. If no drastic and rapid policies are imposed, it is possible for debt service to drain a whole three quarters of our tax earnings, or even the entirety of tax earnings! If this should happen, Indonesia will be 100% enslaved by its foreign debt.
With such an urgent condition, what drastic policies should we consider?
First and foremost, we need to renegotiate our debts. We can either do “debt to nature swap” or “debt switching”. In a “debt to nature swap”, we exchange our debt or loan service to Western countries with forest preservation efforts. The more Indonesia plants and preserves its forests, the more these Western countries will reduce (or even eliminate) our debts to them. In “debt switching”, we exchange high-yield bonds for lower-yield bonds. Our creditors are likely to accept this policy nowadays, because the interest rate trends in these advanced countries – these “top money market” countries – is down to near zero. Some countries have even imposed a negative loan interest rate trend.
We have tried both policies at different times in the past, and they both worked. At the moment, we need courageous officials, ones with strong negotiating skills, to deal with our advanced global counterpart countries and top market creditors. However, considering the skill and courage of our current financial officials and Government economic advisor teams, we really should not hope for much.