AROUND the world, governments are racing to borrow. Every country, regardless of its first or third world status, is helpless before the Covid-19 pandemic. They need to borrow quickly. There are not enough money readily available in many country’s coffers to fight the outbreak.
In the Latin American region alone, 14 countries are queuing up to borrow from the International Monetary Fund (IMF), putting their hopes on various additional lending facilities. The United Kingdom even made a radical breakthrough: the Bank of England will directly finance an increase in government budget, thus removing the need to sell bonds to the market. Putting it more blatantly, Bank of England is printing money for the British government so that it can immediately give additional stimulus or cover healthcare costs that have ballooned due to Covid-19 pandemic.
Indonesia must also take on additional debt. The government is planning a new Rp405 trillion budget to overcome the pandemic. Besides shifting funds from other budget allocations, the government has no other choice but to look for more debt to cover the additional needs. The explosion in budget deficit will be incredible, reaching Rp853 trillion this year, almost triple the previously planned of Rp307.2 trillion.
In matters of debt, Indonesia has even already claimed a title. Indonesia is the first country to issue pandemic bonds in US dollars. The country managed to sell three series of bonds even though the circumstances are highly uncertain. And it did not pull any punches: Indonesia took on US$4.3 billion of debt, with one series maturing in 50 years. This is the first time that the country has sold a 50-year dollar denominated bond. Our problems today will be the burdens of our great grandchildren.
The cost of borrowing in this difficult times will not be cheap. The coupons of the three series are 3.85 percent, 4.2 percent, and 4.45 percent respectively. And in the primary market, investors are still asking for discounts. The government had to give even higher yields, which ended up at 3.9 percent, 4.2 percent and 4.5 percent.
Consequently, the government’s fiscal capacities in the coming years will be smaller. There will be higher expenditure for debt interest which will reduce the government’s ability to invest and drive the economy forward.
Putting it into perspective, for the three bond series, the government will have to pay US$177.3 million interest every year or Rp2.84 trillion if we assume the exchange rate to be stable at Rp16,000 per US dollar. The interest payment just for these three bond series is already bigger than the ministry of research and technology’s budget for the entirety of 2020, which was cut to only Rp2.47 trillion.
The current circumstances have forced Indonesia to turn to the cruel market. This exorbitant cost should remind government officials that the budget cannot be used needlessly. Every rupiah must work towards restoring the economy, and not towards populist political programs or promises made during election’s campaigns.
The government should also rethink various large scale vanity projects. It would also be noble to sacrifice every extra comfort normally afforded to government officials. As far as it could, the government must avoid taking additional expensive debt in the fight against the pandemic.
As an alternative, the government can borrow from multilateral institutions. The World Bank, for example, has lent US$300 million to Indonesian government to support the budget. The World Bank has also committed a total sum of US$14 billion fast track financial support in response to Covid-19. Indonesia can borrow from this source more aggressively instead of selling bonds to the market.
Borrowing from multilateral financial institutions will definitely be far cheaper. Politically, this will be an unpopular choice for President Joko Widodo. But rather than burdening future generations with heavy interest payments, we should be laying aside all political posturing and narrow-minded nationalism.