High Debt Ratio Causes Inflation And Weakens The Economy

Rupiah (photo: dock. Antara)

JAKARTA - The Center for Market Education (CME) sees the Indonesian public surprised by the discourse of President-elect Prabowo Subianto to increase the ratio of government debt to the highest level in the last two decades. In addition, it is reported that the elected president plans to increase the debt ratio by 2 percentage points every year over the next five years.

CEO of the Center for Market Education Carmelo Ferlito said the increase in debt ratio will bring the debt-to-GDP (Gross Domestic Income) ratio from 39 percent to almost 50 percent at the end of his presidency.

Although later denied, Carmelo conveyed that the discourse suddenly raised concerns about Indonesia's finances because previously, President Joko Widodo assured investors and the public about the sustainability of the capital city of the archipelago (IKN) project worth 32 billion US dollars.

As for the last few years, the budget deficit has significantly increased the debt-to-GDP Indonesia ratio, from what was originally below 25 percent in 2013 and around 30 percent before the pandemic, up to 39.7 percent in 2020 and 41.1 percent in 2021. and the current debt-to-PBD ratio is in the range of 39 percent.

Country Manager Center for Market Education Indonesia (CME-ID) Alfian Banjaransari hopes that the government will be careful in responding to this discourse. First, increasing debt causes higher inflation, which reduces people's purchasing power.

According to Alfian, even though the community supports government spending financed by debt, the budget deficit increases the amount of money circulating in the community (M2).

"When the amount of money circulating grows beyond GDP growth, this will cause inflation which will effectively make people poorer," he explained in his statement, Monday, June 24.

Meanwhile, Alfian conveyed the second reason related to the reaction of the capital market. When the government spends more debt, this increases demand for loan funds, and thereby raises interest rates.

According to Alfian, higher interest rates cause more funds to be provided but reduce the amount absorbed by the private sector. As a result, investment in the private sector is reduced.

Alfian said this led to reduced investment and increased consumption. High interest rates reduce long-term investment profitability.

When more economic output is consumed now and less is invested, the economy will grow slower, reducing future output. This actually shifts the debt burden to future generations.

Alfian explained that when the government borrows more and interest rates rise, the current generation consumes more economic output, leaving less for future investment.

Alfian added that this slower growth rate means that future generations will inherit not only debt but also a weakened economy.

"They will be faced with higher taxes or reduced public services to manage debt, making their economic situation more difficult. This scenario threatens the aspirations of "Indonesia Gold 2045", because a weak economy will undermine the economy towards 2045," he explained.

Alfian advised the Government to sit down with the public, in this case parliament, and review Law no. 17/2003 on State Finance to seek a more careful breakthrough in managing public debt.

"For example, debt is not only tied to GDP (which is prone to inflated due to government spending), but also to government revenues, Debt Service Coverage Ratio (DSCR), and state assets," he said.

Alfian conveyed that a more composite approach would provide a more comprehensive picture of real fiscal conditions while ensuring long-term economic stability.

Meanwhile, Alfian said that this breakthrough step would maintain Indonesia's financial future in the midst of the challenge of achieving Indonesia Gold 2045.

"Instead of increasing spending, the government needs to focus on economic restructuring to produce an economy centered on the innovation of the private sector as the main driver of the economy," he said.