Debt, debt, debt, so much chatter has been expounded on this topic. Is taking on debt bad or good? Is borrowing to buy a house bad? What about taking a loan for education? Or borrowing to build roads and bridges for society?

Imagine a family of four: Pak Budi, his wife Rahmi and daughters Eki and Andini. Pak Budi and Rahmi are both farmers from Karawang with an income of Rp 2 million (US$145) per month, just enough to pay for food, basic amenities and no savings. Eldest daughter Eki, a very intelligent young lady has won a placement with the University of Indonesia (UI).

But Pak Budi has to fork out a total of Rp 20 million for her first two years in UI, a very hefty sum for the family. Pak Budi’s neighbor Ibu Ratna, a childless widow, has always been fond of Eki and just recently amassed a sum of money through selling her grandparents’ house.

Ibu Ratna decides to lend the Rp 20 million to Pak Budi and Eki but they agree that this Rp 20 million will be paid back over five years together with interest totaling Rp 40 million. Eki is now determined to graduate well and obtain a well-paying job in order to repay the loan due to Ibu Ratna. Clearly in my view this is an example of productive debt being put in place. That is a loan taken for future production of higher income generation/cost savings compared to interest.

Productive versus non-productive debt: Productive debt is defined as value adding debt for future long-term production of higher income generation or cost savings above the interest paid on the debt.

Examples of productive debt are loans taken out for capital expenditure for machinery that increases a company’s productive capacity, capital expenditure for infrastructure that reduces logistics cost (directly and indirectly through greater time efficiency), capital expenditure on R&D and intellectual property rights. Non-productive debt are loans taken out to support consumptive non-productive expenditure such as, energy subsidies, housing loans (arguable) or buying a smartphone on installment.

Indonesia’s debt is among the lowest in the world (ranked 36 out of 219 countries/regions with the lowest debt as percentage of GDP). Indonesia’s public debt to GDP ratio stood at 29 percent as of 2017 and this has risen from a low of 23 percent in 2012 according to International Monetary Fund data. During the post-1998 crisis period this debt stood as high as over 80 percent in 2000 and we are now well below that level.

This 29 percent is definitely one of the lowest figures globally (see chart on Public Debt as percentage of GDP) as globally G7 debt is 120 percent, the whole of Asia Pacific stands at 81 percent with our neighbors, the Philippines (35 percent), Thailand (42 percent), Malaysia (56 percent) and Singapore (111 percent); Indonesia indeed ranks among the countries in the world with the least amount of debt at 36th out of 219 countries.

Debt has gone to productive spending especially in infrastructure and education. Since 2015, a large shift in government spending has taken place, out of energy subsidies (fuel and electricity) and toward infrastructure, education and health spending.

Total spending for subsidies has declined from Rp 342 trillion in 2014 to 95 trillion budgeted for 2018, with a large proportion shifting to more productive spending. We believe infrastructure, health care and education are the keystones of Indonesia’s long-term economic and social sustainability.

Health care is a basic need, when we are sick we are not able to work efficiently. Without education we will not be able to do work productively. Without good roads, trains and ports in place, the cost of doing business in Indonesia will be much higher relative to other nations.

Embracing productivity. That brings us to the next important point, why do we need to work efficiently, productively and at a lower cost? This is due to the nature of today’s globalized world, where trade is dependent on a country offering better value compared to other countries. The only option for doing so is to be competitive, that is being productive, individually, as corporations and as a country.

The extreme reverse of economic competitiveness is to regress, close diplomatic and trade relations and become an isolated nation, locked away in a casket where it is safe, dark and motionless, akin to damnation. Examples of such countries exist in today’s world, North Korea, a country majorly dependent on foreign aid and where its citizens face chronic shortages of food and medical supplies.

Indonesia needs more productive debt not less. In 2017, Indonesia’s ranking in the Global Competitiveness Index within the infrastructure category rose to 52 from 62 in 2015. Yet Indonesia is still behind Thailand and Malaysia. Clearly there is a need to build more infrastructure. The same can be said for health care and education. Remarkably our debt is at a low level, which gives us as a country enough capacity to take on more productive debt for productive spending for the long-term sustainability of the nation. The alternative to this is to stop investing in productive spending and over time become globally uncompetitive as a nation, driving Indonesia slowly toward irrelevancy.

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The writer is a head research analyst at Bahana Sekuritas.

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