JAKARTA (THE JAKARTA POST/ASIA NEWS NETWORK) - The Covid-19 pandemic has caused debt distress for many governments worldwide - Indonesia is no exception.
The twin crises of health and economy virtually have crippled the economy. Tight social-mobility restrictions caused the economy to contract by almost 2.2 per cent in 2020, slashing tax revenues at a time when the government needs more funds to fight the pandemic and finance social assistance programs for the vulnerable.
An unprecedented crisis certainly calls for an unprecedented bold measure. The government last year doubled the fiscal deficit to more than 6 per cent of gross domestic product (GDP).
The huge additional financing could be fulfilled only by borrowing from the domestic and international financial markets.
Consequently, government debts increased last year by almost 30 per cent to Rp 6.07 quadrillion (S$561.4 billion).
The Supreme Audit Agency (BPK) warned the government last week that it must be extra careful in applying for new loans because measured by the three indicators of debt vulnerability set out by the International Monetary Fund, the level of government debt has been worrisome, nearing the borderline of unsustainability.
The three groups of indicators measure the risk that current economic conditions generate over public debts, evaluate the government's ability to face upcoming contingencies considering certain expected circumstances and show the liabilities' market performance.
But the government likes to cite one widely used indicator, the ratio of total debt against GDP, to show its debt performance.
Indeed, the ratio, which jumped from only 30 per cent in 2019 to 40 per cent in 2020, was still below the legal ceiling of 60 per cent.
The ratio was indeed rather low when compared to Malaysia's 68 per cent, Thailand's 51 per cent, China's 62 per cent and India's 90 per cent.
But the debate on Indonesia's debt performance often overlooks two main vulnerabilities.
The government's borrowing cost, lately estimated at an average of 6 per cent a year (based on 10-year bond yields), is already among the highest in the region, with the Philippines paying an average of 2.9 per cent, Malaysia 2.7 per cent, Vietnam 2.4 per cent and Thailand 1.2 per cent.
The other vulnerability is Indonesia's very low ratio of tax revenues to GDP, which was estimated at an average of 10 per cent before 2019, among the lowest in the region and far below the minimum 15 per cent recommended by the World Bank for prudential fiscal management.
It's no wonder that the ratio of government debt interest payments against total revenues has almost reached the maximum level of 19 per cent, as set by the IMF, while the ratio of debt service (installment and interest payments) against total revenues, currently estimated at 46 per cent, has exceeded IMF-set ceiling of 35 per cent.
Given the protracted uncertainty about the pandemic and its impact on the economy, the most effective way of addressing the vulnerabilities in the short term is a bold tax reform to improve tax administration and tax policies in order to broaden the tax base.
Hence, it is most imperative for the government and the House of Representatives to speed up their deliberation of the omnibus bill on taxes so that all implementing regulations are in place for full-fledged enforcement by 2022.
- The Jakarta Post is a member of The Straits Times media partner Asia News Network, an alliance of 23 news media organisations.