The Covid-19 pandemic since early 2020 has caused economic related problems, including government debt. Mitigating and alleviating the pandemic have enlarged budget deficit and financing needs that must be fulfilled through debts. It happens in countries worldwide, includes Indonesia. According the Ministry of Finance, until October 2021, total government debt reached Rp6,713.24 trillion, accounted for 39.69% of GDP. This amount increased 10.5% from Rp6,074.56 trillion in December 2020, and the ratio to GDP reach 39.84% .
Indonesia’s Supreme Audit (BPK) has warned the government on the mounting debt. According to BPK, the debt service ratio or debt to revenue has reached 46.77% at the end of 2020, higher than the International Monetary Fund (IMF) recommendation of around 25-35%. Likewise, the ratio of interest payments to state revenue is 19.06% or higher than the IMF’s recommendation of 7-10%. Debt-to-finance ratio is 369%, higher than the IMF’s recommendation of around 90-150%.
The government argues that an increase in debt is unavoidable to deal with the impact of the COVID-19 pandemic and restore the country’s economy. The escalated debt was issued to finance social assistance, subsidy for the low-paid workers, fiscal stimulus for businesses, vaccination, and payment for the treatment of Covid-19 patients and incentives for medical forces.
The government will withdraw debts of Rp973.6 trillion in 2022 and the debt to GDP ratio would rise to 43.1%. The ratio is targeted to fall to 42.8% (2023), 42.48% (2024), and 41.82% (2025). State budget deficit will also be reduced in accordance with the mandate of the State Finance Law: 3% to GDP at the highest. In 2021, the deficit would be 5.25% and drop to 4.85% in 2022 before reaching below 3% of 2.68% in 2023 and 2.23% in 2025.
While the reason for escalated debt is well understood, a concern is on the cost of debt especially interest payment. The government will pay debt interest of Rp405.9 trillion in 2022. The interest payment-to-revenue ratio has steadily swelled in the past decade, from 7.51% in 2012 to an estimated level of 22.05% in 2022. The Indonesian policymakers will continue to face difficult choices in balancing between economic and public finance risks. Improving the capacity to collect taxes is major prerequisite to pursue such a balance.