The International Monetary Fund (IMF) said Monday that Indonesia's plan to increase sales of government bonds on the domestic market would be positive for the economy, but warned that excessive resort to the debt market could lead to crowding-out.
IMF senior resident representative for Indonesia Stephen Schwartz said the government should also consider the private sector in its bond-sale policy
It's a positive development, but, of course, there are some constraints that the government needs to have regard to," he told a discussion Monday on the future for Indonesian government financing after the recent disbandment of the Consultative Group on Indonesia (CGI).
Schwartz also warned that relying on the debt market to fund development projects would cost the government more as borrowing costs on the debt market were higher than those applied under the financing schemes offered by multilateral institutions and the donor community.
In addition to higher borrowing costs, he also warned of the prospect of crowding-out in the local debt market, a condition that would result in a rise in interest rates as the private sector would have to offer much higher bond yields to be able to compete with government bonds.
The government has decided to make debt instruments the major source of development financing following the dissolution of the CGI, and has pledged to continue reducing its foreign borrowing and instead maximize the use of local financing sources.
Besides issuing more global bonds, the government is hoping to raise Rp 40.6 trillion in net bond proceeds from the local bond market this year to help plug the budget deficit. Among these will be two treasury bill offerings, three retail bond offerings and Islamic bond offerings.
"I think it's very important to expand the bond market domestically and internationally," said Mahendra Siregar, the deputy for international economic cooperation at the Coordinating Ministry for the Economy.
Nonetheless, Mahendra said foreign loans would still be needed. The challenges in this regard, however, primarily concerned how the government could strengthen its institutions in order to clearly formulate its development priorities.
Meanwhile, World Bank country director Andrew Steer said Indonesia should set up an alternative forum to the CGI in which the government could state "what it wants" so that the donors could "come with a clear notion of what they can provide."
"In terms of poverty programs, education and so on, I do think there's a need for a mechanism for having useful discussions every year. The CGI working group on education and poverty actually played a very useful professional role, and it seems to me there needs to be some alternatives to that," he said.
"I'm sure we all agree it would be useful to find alternatives to the CGI in order to maintain a constructive dialog between the government and the international donor community," Schwartz added.
Mahendra said the government would always be open to discussions with its donors, but stressed that it had no plans to create another formal forum such as the CGI. "No, we consider it unnecessary, but we can have informal discussion forums, like this (seminar)," he said.
Finance Minister Sri Mulyani Indrawati had said that the government would turn to both the offshore and local bond markets to finance future development projects.
According to Mulyani, tapping the bond market would be much more favorable than taking out foreign loans from the exchange-rate, maturity and interest-rate perspectives.