Indonesia's $100 billion budget: Is debt an issue?

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ImageI have received many encouraging responses to my first blog. Thank you. This time, let's look at Indonesia's budget. Last year, Indonesia's budget reached the magical threshold of US$100 billion. With total expenditures of Rupiah 985 trillion and an average exchange rate of 9,750 Rupiah per US dollar, Indonesia's government spent exactly US$101 billion.  In 2009, the budget may not increase and will likely decline in US$ terms. With the global financial crisis the Rupiah has depreciated against the US$, similar to most other developing countries currencies. However, it is safe to assume that in the next few years Indonesia will have a budget which exceeds US$100 billion and is set to reach its own magical threshold of Rp 1,000 trillion in the near future.

One of the most contentious topics over the past decade has been Indonesia's debt and the role of international institutions. Some still think Indonesia has a debt problem and that loans from international institutions, such as the World Bank, have contributed to Indonesia's previous debt burden. The opposite is true, and here's why.

First, let's look at Indonesia's debt. Indonesia's debt levels have declined at an unprecedented rate. As mentioned in my previous blog post, Indonesia is possibly a world-record holder in debt reduction – at least of any large country in recent history – with debt levels declining from 80 percent (2001) to close to 30 percent (2008). In 2001, Indonesia's government had to spend 23 percent of its budget on debt service. Today, it is down to 11 percent, freeing up enormous potential for spending on Indonesia's development.

This performance is remarkable even within East Asia, a region which has generally done well the past decade. Most major countries have kept their debt levels stable. Some countries, like the Philippines, kept their levels stable at relatively high levels (although also declining markedly since 2005); others, like Malaysia, kept debt levels at moderate levels; meanwhile, China stayed in a low range of below 30%.  Indonesia is the only country that shows a continued and sharp decline in debt levels and is poised to be one of the countries in the region with the lowest debt levels (see chart 1).

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Second, let's look at the role of financing by international institutions such as the World Bank and other development partners. Financing by these international partners has been surprisingly stable over the past 15 years. It has been below or around US$5 billion, except during, and shortly after, the 1998 crisis. During the same period, Indonesia's budget increased from an estimated US$30 billion (1995) to US$100 billion today. In short: in the past, donors made an important financial contribution to Indonesia's development program; today, it is Indonesia's own resources that are driving 95 percent of expenditures (see chart 2).

Click image to see larger version.

Loans from official lenders, although declining in relative terms, have actually helped to reduce Indonesia's debt.  How is this possible? The main reason is that loans from institutions such as the World Bank are much cheaper than borrowing from the national and international bond markets, the costs of which have increased substantially in recent years. Like almost any other country Indonesia is borrowing to finance its (modest) deficit, to refinance its stock of debt and to attract specific investments, including investment in the infrastructure and social sectors. Had it not been for official lenders, Indonesia would have needed to borrow from other sources at higher interest rates, thus increasing its debt level compared with where it is today.

So where is the problem? Debt is clearly not the main problem, but there is no reason for complacency. Before the 1997/98 Asian crisis, Indonesia also had low debt levels that exploded almost overnight when its banks failed. In addition, recent months have demonstrated that even strong performing developing economies can face difficulties in raising funds.

In my next post, I'll look more closely at what Indonesia is spending its resources on today and the country's opportunities for the next five years.

Image credit: scoobay at Flickr under a Creative Commons license.

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