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Warning about our debt trap
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Sri Mulyani speak at an international event of the National Committee for International Cooperation and Sustainable Development (NCDO) (Flickr/Sebastiaan ter Burg)
W
e should magnanimously take Finance Minister Sri Mulyani Indrawati’s warning about the risk of the government falling into a deeper debt trap as a timely urgent call for tightly prudent debt management and more concerted austerity measures on the part of the public sector.
Her statements in regards to the steady increase of the budget’s primary deficit should be accepted as a wake-up call for the government to improve its spending efficiency, step up tax collection and expand the tax base.
Indeed data at the Finance Ministry showed that the primary balance of the state budget worsened from a surplus of Rp 9 trillion (US$690 million) in 2011 to a deficit of Rp 53 trillion in 2012. This deficit steadily increased to
Rp 99 trillion in 2013 and Rp 142 trillion in 2015. It is estimated to fall to Rp 105.5 trillion this year, but is projected to rise slightly to Rp 111 trillion next year.
Why is the increase in the primary deficit so worrisome?
A primary deficit is different from a fiscal deficit, which in government accounting is defined as an excess of total budget expenditures over total budget receipts, excluding borrowings, during a fiscal year.
During most of Soeharto’s three decades of ruling, the government incurred a fiscal deficit but not a primary deficit because the fiscal deficit was incurred to finance investment, thus increasing the economic assets and expanding the country’s capacity to service its debts.
But a primary deficit does not finance productive activities, thus adding nothing to fixed assets.
The difference between fiscal deficit and primary deficit reflects the amount of interest payments on public debt incurred in the past. Until 1998, the fiscal deficit was covered mostly by borrowings from foreign creditors, the bulk of which was in the form of soft loans with very low interest rates and long maturity.
As the foreign borrowings were booked into total revenues and the primary balance was mostly positive (in surplus), theoretically the state budget then could be classified as balanced with zero fiscal deficit.
But now as Indonesia has risen to the category of a middle-income country, it is no longer entitled to soft loans or development aid and its borrowings have been made mostly from the domestic financial market with much higher interest rates.
But both primary and fiscal deficits have to be tightly controlled at sustainable levels to avoid the vicious debt trap cycle, even though the ratio of government debt to gross domestic product (GDP) has steadily fallen from almost 100 percent in 2000 to 26 percent last year.
The fiscal deficit is still projected to increase to Rp 332.8 trillion or 2.41 percent of GDP next year from an estimated Rp 296.7 trillion this year. This fiscal deficit has to be financed by borrowing, and borrowing creates problems not only with payment of interest but also with repayment of loans.
As the government borrowing increases, its liability in future to repay debt principal along with the accrued interest also increases.
