Friday, March 29, 2024 | 14:49 WIB

The State is practically bankrupt

IO – Our country’s economy and finance have been dragging through a prolonged crisis for years. This is obvious from several simple indicators: 

First, the current transaction balance has been in constant deficit for a long time, for greater and greater amounts. In other words, our domestic dollar reserve is flowing out of the country in order to cover the deficit. Such a condition should have weakened the Rupiah exchange rate, but it has strengthened instead. This is not because the Indonesian economy has gotten better, not because our economic fundamentals have strengthened, but because the Government performed its “magiconomics”. It performs economic acrobatics by loading up with more foreign debt to cover current transaction balance deficits. Abracadabra! The Rupiah exchange rate did get stronger because of this financial “doping”. 

Second, tax income rates continue to worsen. The tax income ratio to the GDP continues to decrease – it is now at the critical level of a mere 8% of the GDP. At the end of March 2020, this ratio has gone even lower to 7.14%. We cannot sustain this financial condition for a long time. If this serious condition goes on, we will soon face a recession. 

Persistently low tax income has ballooned the State Budget deficit from IDR 226.7 trillion in 2014 to IDR 353 trillion in 2019. This year, the budget deficit will swell even bigger to IDR 1,000 trillion. Consequently, Government debt will continue to burgeon, which will naturally burden the State Budget even further. Loan interest liability continues to swell, going from IDR 133.4 trillion in 2014 to IDR 275.5 trillion in 2019. From January to May 2020, loan interest liability has increased even further, to IDR 145.7 trillion. A worst-case estimate looks at a IDR 350 trillion compound loan interest liability by the end of the year. 

Naturally, the ratio of loan interest liability to tax income increases drastically in consequence. At the end of May 2020, the ratio became 27.7%. In other words, for each IDR 100.00 earned in tax income from the people, IDR 27.70 will be used to pay loan interest liability. This will trigger a State Budget crisis, as there is not enough left to cover the necessary budget items. Even worse, most of these loan repayments flow out of the country, further increasing current transaction balance deficit. 

This financial condition means that our country is technically being bankrupted. The Corona pandemic will only accelerate the bankruptcy rate, as it will generate more Government debt, triggering the attendant loan interest liability to skyrocket. The Corona pandemic may seem to have “saved” Indonesia’s finance because the Government Regulation in Lieu of Law No. 1 or 2020, currently enacted as Law No. 2 of 2020, allows our State Budget to suffer unlimited for three years, i.e. until 2022. On the contrary, this law merely speeds up our country’s descent into bankruptcy. We can expect State Budget deficits until 2022 to soar, as the Government will presumably utilize this controversial Law to generate as much debt as possible and to just drive the economy without caring about deficit limits. 

On the other side of the equation, tax income remains under pressure. This means that the loan interest liability ratio to tax income constantly increases – it might even go as high as 30% this year. By 2022, it is entirely possible for loan interest liability to exceed 35% pf tax income. This is because apart from increasing debts, Corporate Income Tax rates went down from 25% in 2019 to 22% this year, and will dip again to 20% in 2021 and 2022. Taxes for large companies already registered on the Exchange are even lower. In 2023 and thereafter, budget deficit is limited to 3% of the GDP again. It will be too late, however. By then, economic growth will have slowed down, even stagnated. Tax income will continue to drop, and an advanced economic crisis will be upon us. 

SOCIAL CULTURE

INFRAME

LATEST ARTICLE

POPULAR