THE PERILS OF MOUNTING GOV’T DEBT How the rich get richer and the poor get poorer

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GOV’T DEBT

Debt burden and welfare 

Debt burden is closely related to the welfare of the Indonesian people. First of all, what is clear is that high debt burden will hamper the capacity of the state budget (APBN) to fund community welfare programs. 

One example is how Jokowi administration continues to cut fertilizer subsidies for farmers. The government announced it would cut Rp7 trillion in fertilizer subsidy while we know that farmers are still among the poorest in this country. Poverty in rural areas (13%) is almost double the poverty rate in urban areas (7%). Another example is the government’s plan to revoke electricity subsidies for 15.5 million poor customers, which they argued would save Rp22 trillion. 

So, from the two examples above, the government plans to save as much as Rp29 trillion by sacrificing farmers and the poor. Meanwhile, we all know that at the same time, the budget for interest payments increased by Rp60 trillion from Rp345 trillion to Rp405 trillion. 

Where does the interest payments go? According to SULNI, US$148 billion (Rp2,072 trillion) or 72% of central government’s total external debt (US$205 billion or Rp2,870 trillion) is used to pay Rupiah- and foreign currency-denominated sovereign bonds to private creditors who comprise high-net-worth individuals, foreign companies, and foreign investment banks. At least 33% of government interest payments goes to these foreign entities. 

The remaining 67% of course goes to domestic wealthy individuals, private companies and SOEs and banks — those who enjoy trillions of “interest subsidies” from the government. 

Why is it called interest subsidy? Because the interest rate on Indonesian bonds is higher than those of other countries with lower credit ratings. The difference is around 3%-4% when compared to countries such as Vietnam and the Philippines. So, at the same time that state budget allocation for people’s welfare is cut, it is used to subsidize the rich at home and overseas. This is a harsh reality that the Indonesian people face today. 

This explains the phenomenon discussed at the beginning of this article: why the Jokowi administration is drowning in debt, but the poverty rate has only decreased by 1 million people in seven years and unemployment has actually increased by 1.9 million people. 

Cooking oil debacle 

Another reality that is no less harsh than the government’s debt is soaring prices caused by the government’s failures. The most visible case is the cooking oil shortage, despite Indonesia being one of the largest oil palm producers in the world. 

Below is data of oil palm production, consumption and exports the past few years (in million tons).

GOV’T DEBT

As the Indonesian proverb goes, we are like “chicken dying in a rice barn.” In the case of cooking oil, it is the ordinary people who suffer the most, while cooking oil tycoons benefit the most. 

The people have to deal with rising prices of other basic necessities and the hardships they are facing in life are getting worse. They are pushed to the corner, hit by the increase in electricity tariff and fertilizer prices, now the prices of basic foodstuffs due to higher cooking oil prices. The lower-class segment is very sensitive to increase in food prices as almost all of their income goes to food. 

Meanwhile, oil palm and cooking oil producers are having a field day. Most of them are in the same supply chain ecosystem. As revealed by the Business Competition Supervisory Commission (KPPU), the cooking oil market is dominated by at least four large oil palm business groups. These four companies are owned by some of the richest tycoons in Indonesia. KPPU has brought this matter to court. 

What we are witnessing is the greedy face of capitalism that knows no bound. These palm oil tycoons have actually enjoyed a lot of profits due to the global surge of oil palm prices. However, as if it is not enough, they still want to profit from cooking oil. This means that the share of cooking oil supply for domestic market has been exported to capitalize on higher prices. 

The government announced that it found indication of cooking oil being smuggled out of the country. Law enforcement officials have succeeded in thwarting the attempts. Civil society has also reported similar cases. 

But eventually the government gave up. The price of cooking oil, initially regulated using retail price ceiling (HET) has been surrendered to the free market mechanism. A market dominated by tycoons and their vendors abroad. The government could have been stricter with these tycoons During Gus Dur administration, then Coordinating Economic Minister Rizal Ramli succeeded in ordering oil palm producers to lower the price of cooking oil after it had been on the rise for several weeks. 

So, if the government is really there for the people, there should be no problem that they cannot solve. In this cooking oil debacle, the guilty parties are Coordinating Economic Minister Airlangga Hartarto and Trade Minister M. Lutf. Because of them, the state has been defeated by the market. It’s very strange to see that heads have yet to roll after recent fascos. 

Price spikes of other commodities 

Apart from cooking oil, price of soybeans has also increased significantly. But unlike oil palm, soybeans are indeed a rare commodity in Indonesia, so it has to be imported. A majority of Indonesian people eat products made of soybeans every day. Soybean are considered a cheaper source of protein. Unfortunately, now we can only import. We forget that in the past, Indonesia used to be able to produce up to 1.7 million tons of soybeans. 

The table below shows the historical development of soybean production and trade in Indonesia.

GOV’T DEBT

Unfortunately, soybean price is not the only problem that afflicts the people. Last month the public was shocked by the increase in global oil prices, as a result of the Ukraine war. This, of course, benefits oil- and gas-producing countries such as Russia, the Middle East, and Venezuela. 

So, the war benefits Russia, but not for Indonesia. State-owned oil and gas company Pertamina was forced to increase the price of Pertamax (RON92) and non-subsidized industrial diesel fuel, leading to scarcity. The government has no choice but to increase the price of Pertamax to Rp12,500, which prompted consumers to switch Pertalite, which also caused supply shortages. 

The war also caused the increase in global wheat prices. As we know, wheat is the basic ingredient for instant noodles, which have become the staple food for hundreds of millions of people around the world. 

The 11% increase in value-added tax and prices of various commodities will force MSMEs to increase the prices of their products. The government once again prefers to tax ordinary people than the rich, especially businesses enjoying windfall such as oil palm and coal. As is widely reported, recently the government rolled out Tax Amnesty 2.0 to forgive tax evaders. As a result, it has lost its credibility because tax compliance is at stake here. 

In essence, people are suffering from higher prices of basic necessities while the haves accumulate more wealth, as greed defeats humanity. It’s a crisis for the people, but prosperity for the rich. So, it came as no surprise that not too long ago the Corruption Eradication Commission (KPK) revealed that 70% of Indonesian officials saw their wealth increased during the Covid-19 pandemic. 

In Solo, it was reported that the wealth of Solo Mayor Gibran Rakabuming Raka, the eldest son of President Jokowi, saw his wealth up by Rp4 billion, as the number of poor people in Solo increased. During the pandemic, Indonesia also lost its status as an upper-middle income country, although it has recently reclaimed it. 

Gede Sandra

Rising discontent 

For the people, the future seems bleak, mired in economic crisis and poverty. So, it is only natural that they vent their anger on April 11, 2022. One international media, Red Fish, reported that the people’s resistance against Jokowi administration was sparked by an economic crisis. 

Amid the high tension of “street politics,” the Indonesian economy outlook does not seem to align with expectations. Hasn’t the government missed its economic targets several times? 

We should disregard the 5% GDP growth rate. Because loan growth needs be at least 10% -15 percent to increase GDP growth to 5%, the 6% loan growth from a few years ago would not be enough to generate necessary strong economic growth. 

However, given the current state of affairs, it is quite unlikely that major loan increase will occur. Currently, just 18% of bank loans go to SMEs, while 82 percent go to major corporations and state-owned enterprises (SOEs) that should already be able to raise cash through other means (such as issuance of corporate bonds or capital market fundraising). Despite the fact that MSMEs employ 119 million people, or 97 percent of the entire workforce, this is the case. The majority of bank loans, on the other hand, go to hundreds of enterprises that employ only 3% of the overall workforce. 

People are losing purchasing power owing to inflation, which occurs in all commodities, and are facing a cash shortage due to limited credit disbursement, making it harder to boost the local economy. As a result, there will be less demand for produced goods and services. The rate of growth would be slower than before the pandemic. 

The Jokowi administration, which is rapidly losing credibility, has no choice but to change the cabinet before the economic and political crises combine to create a perfect storm. Ministers who are responsible for the current economic and political instability should be fired. The Coordinating Economic Minister, the Coordinating Maritime Affairs and Investment Minister, the Finance Minister, the Trade Minister, and the Investment Minister are all at the top of the list. Their removal is also one of the demands of the April 11 demonstrators. 

Indonesia’s ability to exit the complicated and growing crisis is highly questionable unless the economic team is overhauled. If not, It’s possible that the history of New Order’s demise may repeat again.