Improving Public Debt Management
In the OIC Member Countries
105
4.1.6 Republic of Indonesia
A) Public Debt DynamicsAfter the Asian Financial Crisis in 1997/98, during which the debttoGDP ratio had shot up to
more than 70% (World Bank 2016a), relative debt levels had fallen quickly and significantly
after the relatively swift recovery of the Indonesian economy. They continued to decrease
throughout the first decade in the 2000s and reached their trough in 2011 and 2012 at 23.1
and 23% respectively (see Figure 416). Since then, general government debt has risen faster
than GDP with the debttoGDP ratio reaching 27.4% in 2015 and being projected at 27.7% in
2016 (Directorate General of Budget Financing and Risk Management 2016a).
This has several reasons. First, commodity prices which had rebounded after the Global
Financial Crisis started to decline in 2011, which reduced export proceeds in particular
because a large part of manufacturing has been resourcebased. Growth slowed from around
6% in 2010 to around 5% thereafter. Oil prices started to decline from around $110 per barrel
in March 2014 to around $45 in the second half of 2016, which further reduced government
revenues. While these developments would have reduced tax and nontax revenues in any
case, a second factor is that expeditious restructuring of the economy towards sectors that
have gained comparative advantage as a consequence of altered relative prices is hampered by
inadequate infrastructure and rigid labor markets (HamiltonHart and Schulze 2016, IMF
2016, World Bank 2016b). Thus, the decline in growth and in revenue is more persistent than
it otherwise would have been. Third, since mid2011 the Indonesian Rupiah (IDR) has
depreciated substantially from 8500 IDR/$ in early August 2011 to 13500 IDR/$ at the end of
2016, thereby raising the domestic value of the foreign currencydenominated part of the
outstanding debt. At the same time tax revenues were falling due to declining growth rates and
decreasing commodity export proceeds. Fourth, tax administration has traditionally had
substantial unrealized efficiency potentials and, in relation to this, tax compliance has been
relatively low. As a consequence, revenuetoGDP figures have been low in international
comparison; in 2014 it was below 11% (IMF 2014). Even though multiple efforts are under
way to enhance revenues, notably a tax amnesty and various initiatives to improve tax
compliance, tax administration and the tax system, reforms will bear fruit only in the medium
term. Fifth, the new administration, which took office in October 2014, has placed emphasis on
overhauling the insufficient infrastructure, which has put further pressure on the budget. The
budget deficit as a share of GDP has been 2.6% in 2015 and it is projected by the government
to be 2.41% in 2017 (Ministry of Finance 2017).
Although the budget deficit has widened and the outstanding debt increased, the overall debt
levels are not yet alarming. If the increase in debt over GDP is temporary and might eventually
be brought down again, in particular if funds are invested productively and spur growth, the
recent increase in Indonesia’s indebtedness is no reason for concern.