Strangled by debt
In February 2022, Rp6,222 trillion (88 percent) of the Rp7,014 trillion government debt was in the form of sovereign bonds. And during the Jokowi government, Rp4,415 trillion (70 percent) was issued.
The average coupon rate on Rupiah-denominated bonds issued by the Jokowi administration is 7 percent to 8%, with maturities ranging from three to 40 years. When the principal of Jokowi-era bonds is multiplied by the 7% interest rate, the annual interest payment amounts to Rp309 trillion.
So, if the government states that the total interest payments in 2022 is Rp405 trillion, then Rp309 trillion or three-quarter of total interest payments will be on bonds issued by the Jokowi administration.
Since her reappointment as a cabinet minister by Jokowi, Finance Minister Sri Mulyani has been highly aggressive in issuing high-interest-rate bonds. As a result, interest payments have continued to rise year after year since her appointment as the government’s “debt architect” in 2016, as indicated in the table below.
Interest payments were barely Rp156 trillion in 2016, just a few months after Sri Mulyani took over the Finance Ministry. During her time in office, however, it continued to rise year after year, eventually reaching a 2.6-fold increase in 2022.
Paying off debt, on the other hand, entails not only paying the interest but also the principal. Regrettably, the government does not always make data on principal payments available. The principal was Rp293 trillion in 2016. This was not disclosed in 2017. The government declared in 2018 that it has paid the principle of Rp396 trillion. The data was lost again in 2019 before returning in 2020, totaling Rp444 trillion. The government will “conceal” how much was paid for the principal in 2021 and 2022.
There is an impression that the government is withholding information on the amount of principal paid each year because it is afraid that if the principal is revealed, the amount of debt that must be repaid each year, the massive principal plus interest, also known as “debt service,” will shock the public.
For example, we may calculate the amount of debt service in 2018 and 2020, which are Rp654 trillion and Rp758 trillion, respectively. It’s massive! Especially when compared to the same year’s tax revenue data. Tax income was Rp1,315 trillion in 2018, and Rp1,072 trillion in 2020. We can then calculate that debt servicing obligations accounted for 50% of tax receipts in 2018, and that this grew to 70% in 2020. We don’t know how much debt service was paid in 2021 and 2022, unfortunately.
Even though the data utilized here is a particular debt service ratio for foreign debt, which excludes domestic debt, Bank Indonesia (BI) releases debt service ratio (DSR) data every year in Indonesia’s Foreign Debt Statistics (SULNI). Tier-1 DSR, defined as “the ratio between payment of principal and interest on external debt relative to current account profits,” was on average 28 percent between 2015 and 2021, according to this data.
Below is a chart showing Indonesia’s DSR during Jokowi administration.
The computation of Tier-1 DSR is based on guidelines from international financial institutions such as the World Bank and the IMF, according to BI. As a result, we’ll now apply international criteria to determine whether Indonesia’s DSR is within safe levels.
According to the World BankIMF’s Debt Sustainability Framework (DSF), for lower-middle-income countries — Indonesia has rejoined the upper-middle-income country a few weeks ago — the upper limit is 23%. If we look at Indonesia’s average Tier-1 DSR for the past seven years, which is around 28%, then Indonesia’s DSR has far exceeded the upper limit. This means that based on the World Bank-IMF’s DSF, Indonesia is categorized as high risk.
The DSF also provides an upper limit for another indicator, namely the debt service to export ratio. Indonesia’s debt service to export ratio was 36% in 2020. This exceeded the DSF limit of 21%. So based on this indicator, Indonesia is also in the high-risk category.
Below is a graph that explains Indonesia’s debt service to export data in the past few years. FIGURE-1
The gist is that Indonesia’s debt burden during Jokowi administration has put pressure on state revenues, and the country has been classified as high risk by the World Bank and IMF.
The method to measure a country’s risk using the DSR indicator is much more reasonable than using the ratio of total debt divided by GDP. The debt service ratio indicated a country’s ability to pay its debt, exports or current account at any given time; it has the money specifically allotted to pay off its loans.
Is it feasible that economic transactions in society, measured in GDP statistics, may be cashed to pay our debts, for those who still use the debt to GDP ratio? I seriously doubt it. Obviously it doesn’t make sense.
And it’s also inappropriate to compare the overall debt. Because next year it’s not the entire debt that we have to pay off but only the principal and interest that concern the policy makers. They are not thinking about debt that will still mature in 40 years.
Thus, it is time for us to use the DSR, instead of Debt to GDP ratio.