The recently elected Indonesian President, Prabowo Subianto, has announced a bold economic strategy that involves allowing the nation’s debt-to-GDP ratio to rise to 50%. This decision is contingent upon the administration’s ability to significantly increase tax revenues. According to Prabowo’s brother and adviser, Hashim Djojohadikusumo, Indonesia could maintain its investment-grade rating even with a higher debt-to-GDP ratio.
Hashim Djojohadikusumo highlighted the core strategy behind this decision, emphasizing the importance of simultaneously boosting revenue while raising the debt level. He specified that this would involve measures such as implementing new taxes, excise taxes, obtaining mining royalties, and increasing import duties.
Upon the announcement of Prabowo’s economic plans, there were mixed reactions from the public. Concerns emerged regarding the potential impact of increased borrowing on Indonesia’s financial stability. This uncertainty led to a decline in bond prices and a depreciation of the rupiah against the dollar.
Prabowo’s economic team in Jakarta initially denied reports suggesting a significant rise in the debt-to-GDP ratio. They reiterated the government’s commitment to adhering to current fiscal rules, which cap the budget deficit at 3% of GDP and limit the debt-to-GDP ratio to 60%. However, the team did not provide a clear explanation of how the proposed increase would align with these regulations.
Despite the initial pushback, Prabowo has maintained his stance on raising public debt levels to fulfill campaign promises. He has also expressed intentions to elevate the tax-to-GDP ratio significantly. With his inauguration set for October, there is growing anticipation surrounding the implementation of these economic strategies.
Recent reports have indicated that Prabowo has assembled a team to assess options for bypassing the existing fiscal deficit and debt-to-GDP ratio restrictions. This move suggests a willingness to explore unconventional financial strategies to fund his proposed initiatives. However, there remains uncertainty about the feasibility and implications of such an approach.
Indonesia’s upcoming shift in economic policy under the new administration presents both opportunities and challenges. The decision to allow the debt-to-GDP ratio to increase to 50% reflects a strategic move to spur economic growth and resource mobilization. However, the success of this approach will hinge on the effective implementation of revenue-enhancing measures and careful management of fiscal constraints. As Prabowo prepares to assume office, all eyes will be on how his economic agenda unfolds and its impact on Indonesia’s financial landscape.