Sri Mulyani Started It – Now Can She Finish It?

IO – Following her appointment by Pres­ident SBY in 2005 as Minister of Fi­nance, Sri Mulyani Indrawati formed a Directorate General to maintain the na­tion’s debts. Previously, national debts had only been managed by an Echelon II Unit at the Directorate General of Budgeting. The Ministers of Finance who preceded Sri Mulyani always be­lieved that national debt issues could be handled by a Directorate (Echelon II Unit), because they refer to the GBHN (Garis Besar Haluan Negara – State Pol­icy Guidelines), positing that national debt is supplementary and temporary, so it needs only be handled at a Direc­torate level.

The implication here is that the State only incurs debts with multilat­eral agencies such as The World Bank (WB), UNDP, and Asian Development Bank (ADB) – or bilateral debts to spe­cific countries, in particular Japan. WB coordinated Indonesia’s creditors through the ‘Intergovernmental Group on Indonesia’ (IGGI) since 1967; it was then revised to the ‘Consultative Group on Indonesia’ (CGI) in 1992.

During the reign of the New Order under Pak Harto, and for several years afterwards (1967-2006), the Govern­ment adhered to a conservative GBHN policy of incurring debts with multilat­eral agencies and bilateral debts from countries who were part of IGGI/CGI. During the New Order reign, such a for­eign debt or loan was known by the eu­phemism of ‘Developmental Revenues’.

In fact, the IGGI/CGI foreign debt manifested the following general char­acteristics:

Soft, long-term loans;

Used not for routine budgeting, but for developmental purposes – i.e. the loans are used for projects that are mu­tually agreed beforehand by the credi­tor and the debtor (Indonesian Govern­ment), with some portion borne by the APBN (Anggaran Pemasukan dan Belan­ja Negara – State Income and Expendi­ture Budget) (matching funds). Only a small part of the foreign loans may be applied to government (own) programs (cash loans).

The amount of foreign loans (debts) is limited, so that its balance on the 1st of July 2017 was only Rp 721 T (including debts obtained from the Old Order (Orde Lama – Orla) Era, New Order (Orde Baru – Orba) Era, up to now.

These foreign loans are not in the form of Government Bonds (Surat Ber­harga Negara – SBN) (National Securities (Surat Utang Nasional – SUN)); thus, they cannot be traded or sold and purchased in the market, as it may tend to destabi­lize the market and depress the exchange rate of the Rupiah against foreign cur­rency.

The IGGI/CGI loan cannot be used for routine budgeting, or to pay down another loan’s maturing interest or prin­cipal, because its use is predetermined.

Because of this conservative ap­proach to foreign debt, when Indonesia suffered during the infamous mone­tary crisis (krisis moneter – krismon) in 1997/1998, the government did not have debts in SBN form, but only limited and controlled foreign loans (CGI Loans), so that the State finances managed to re­main safe and controlled. In fact, those who got into the deepest trouble were private parties with ballooning and im­prudent foreign currency debts, uncon­trolled by the government. The govern­ment’s major error at that time (after the resignation of President Soeharto) was to assume these huge private debts, specif­ically, the debts of banking and major entrepreneurs. By following IMF’s sug­gestion, the Indonesian government has become the garbage can recycling the rubbish of private irresponsibility.

The Ministers of finance preceding Sri Mulyani always tended to be more cau­tious when incurring debt, because other than adhering to the mandate of GBHN they also considered that the country is not ready to play around with SUNs like a developed country could. Previous Fi­nance Ministers were averse to SBN-type debts, because they were concerned that matters could get out of control, as this is a moral hazard, i.e., it is the politicians and bureaucrats who would joyfully use up these governmental loans, knowing that the burden of repaying them would be borne by a subsequent government – as notoriously took place in Greece.

However, since Sri Mulyani estab­lished the Directorate General of Debt Management during her first tenure (2005) and introduced SBN, both in foreign currencies and in Rupiah, the national debt in the form of SBN sky­rocketed out of control, so that the SBN balance on the 1st of July 2017 is Rp 2,979.5 Tn, or 4.13 times the amount of multilateral/bilateral foreign loans, at only Rp 712 Tn. It is almost certain that this ratio will continue to rise, because the amount of SBN debts continues to soar while multilateral/bilateral debts remain relatively stagnant.

Briefly, within only 10 years (from Sri Mulyani’s 1st tenure/SBY to Sri Mulyani’s 2nd tenure/JKW), SBN debts have now reached nearly Rp 3000 Tn, while decades-old foreign only marked Rp 721 Tn. Is it true that such a rapid rise of SBN may be justified by its ap­plication to developmental purposes? In-depth studies are required to trace down the direction of SBN, but in fact it seems that developmental projects showed more impact during the New Order reign, which actually did not rely on SBN whatsoever.

If only – again IF ONLY – the govern­ment remained steadfast to its principle that ‘debts are supplementary and tem­porary’, the current national debt would remain only around Rp 721 T, composed of foreign loans that do not have much potential as an instrument of either eco­nomic or political speculation, in com­parison with SBN, which are tradable in capital markets.

On the other hand, the SBN debts, which continue to rise worrisomely, do not seem to yield clear benefits or form of projects; in fact, it is strongly suspected that these funds are used to pay routine expenses and or to make payments on interest of old debts, as reflected in the APBN, where there is a primary balance deficit.

About 40% of the nation’s securities are held by foreign investors. To date, they favor SUN because these yield the highest returns in the Asian market. However, we think that in view of the difficulty in tax revenues and stagnant economic growth, sooner or later the SUN-holding investors will become ner­vous about the State’s ability to satisfy its obligation to repay both principal and in­terest. In 2017, tax income is expected to reach only 88% of its target of Rp 1,473 Tn, which is a serious shortfall.

In the 2018 RAPBN (Rencana Ang­garan Pemasukan dan Belanja Negara – ‘Planned State Income and Expendi­ture Budget’), some 40% of tax income is earmarked for repayment of principal

and interest on existing debts, leaving only 60% for routine budgeting and capital expenditures. Is this sufficient? Of course not; the government will thus issue more and bigger amounts of SUN, thus piling on existing debts.

However, with rising doubts about the ability of the State to generate enough income to cover SBN repayment, and the Debt Service Ratio (DSR) of Indone­sia reaching 40%, the State’s financial credibility will naturally become clouded. Also, the increase of US$ interest rate, at 25 basis points in December 2017 and in 2018, when it is estimated to triple, in line with the economic resurgence of the United States, means there is a huge potential for US$ to be vacuumed back to the US, thus weakening the Rupiah exchange rate. The Indonesian Govern­ment is expected to have trouble to ob­tain fresh debt from the market in 2018 (unless it further raises interest rates), and the Rupiah will continue to weaken. Under such circumstances, local inves­tors who prefer to maintain liquid posi­tions will hold on to more US$, which means even further pressure on the Rupiah.

The central issue is not the ratio of national debt to GDP, which is still below 30%, but in the inability (gap) between State expenditures and its ability to repay its debts. Such a discrepancy is easily seen in the level of State income growth, which is much weaker than na­tional debt growth. This APBN situation, where expenditures exceed income, is not uncommon, as other countries also deal with budget deficits. The critical issue is that expenditures continue to grow, while State income actually rela­tively decreases. This gives rise to a fear of financial collapse, or at least financial instability.

Despite the huge leak, however, the government actually still has room to make its budget expenditures more ef­ficient. President Jokowi recently stated that State income leaks or extravagance is unacceptable, with an actual sample: the cost of repatriating TKI (tenaga kerja Indonesia – Indonesian Expatriate La­bour) from abroad, which should have been only Rp 500 million, in fact used up Rp 3 billion. Such cases are widespread in expense reports all through the State. Referring to the statement made by Pres­ident Jokowi, instead of increasing debts extravagantly and chasing after taxes in­discriminately, it would be better for the Minister of Finance and the Chairman of Bappenas (Badan Perencanaan dan Pembangunan Nasional – the National Planning and Development Agency) to reform APBN expenditures as quickly as possible, despite challenges from vest­ed interest bureaucrats and politicians later on. Only by fighting such legal­ized extravagance (corruption) through APBN can we refrain from adding new debts and suppress the primary balance deficit.

Sri Mulyani’s efforts to increase APBN income are destined to encounter obsta­cles, in the context of a lackluster econo­my. On the other hand, the 16 economic policy package ‘breakthroughs’ do not seem to be able to exert any meaningful effect on economic growth. The packag­es are going nowhere, as they are still ‘garbage packages’, while there are also no direct breakthroughs that can boost State income. On the other hand, reduc­ing APBN expenditure is not easy either, as the users (abusers?) of the Budget would be unlikely to willingly abstain from budgets they are accustomed to enjoy.

In view of these obstacles, the Minis­ter of Finance, as the guardian of State funding, seems to (please excuse the frankness) simply take a shortcut, filling gaps in the APBN with new debts, with­out considering future consequences. The Minister of Finance has always had access to borrowing capacity, as debt ratio is still below ??? % PDB. It seems likely that Indonesia will be trapped in a debt crisis if the government, especial­ly the Minister of Finance, keeps doing ‘business as usual’.

The existing borrowing capacity is actually a legal technicality (Law No. 17/2003 concerning the State’s Financ­es) that permits taking on national debt, as long as it is below 60% GDB, and APBN deficits do not exceed 3% of GDP. It seems that the current Government is exploiting this legal technicality to the utmost, with consequences to be borne by future administrations, who will po­tentially suffer from a debt similar to that which transpired in Greece. Again, these are the very reasons that the predeces­sors of Sri Mulyani avoided playing in the debt free-market – the government is just not ready for it yet.

In fact, if the SBN debts have a lon­ger maturity period, a more competitive interest rate, optimal ratio against State income, and they are entirely directed to new development projects with high eco­nomic value, there would be no worries that this could turn into a debt trap, and project the shadow of a crisis as we now perceive. Unfortunately, Sri Mulyani, who is so progressive and has backed many efforts to take on SBN-style na­tional debt, is actually conservative and ineffective in breakthroughs that would increase State income and accelerate economic growth. It does not seem that she is ready for APBN Reforms.