Note: This article is the author\u2019s personal opinion and does not\nreflect the views of the CNBCIndonesia.com editorial team.<\/p>\n
The plan by the DKI Jakarta Provincial Government to issue regional\nbonds worth Rp3.5 trillion with a seven-year tenor is not merely\nintroducing a new financing instrument. If realised, the move would mark\na new milestone in regional financial management in Indonesia whilst\npaving the way for other regional governments with adequate fiscal\ncapacity to enter the bond market.<\/p>\n
Regional governments do indeed have the authority to issue bonds as\nan alternative means of financing development. In many countries,\nregional bonds have become a common instrument used to fund\ninfrastructure projects with long-term economic benefits.<\/p>\n
For Indonesia in particular, because this is a first experience, it\nis natural for the plan to spark various discussions about its benefits,\nrisks, and implications for national fiscal management.<\/p>\n
The question that then arises is whether debt-based financing has\nbecome a necessity. In public financial management, borrowing is one\nfinancing instrument when there is a mismatch between revenue and\nexpenditure needs.<\/p>\n
Government spending cannot simply be cut, especially when economic\ngrowth targets and development goals have been set. On the other hand,\nsome strategic infrastructure projects have characteristics that do not\nallow them to be postponed or built gradually through multiyear\nschemes.<\/p>\n
For Jakarta specifically, completing projects in stages risks\nprolonging traffic congestion, increasing economic costs, and worsening\npublic stress caused by construction projects that drag on for too long.\nThis is what gives the idea of creative financing its relevance.<\/p>\n
Bond issuance allows the government to obtain large funds upfront so\nthat projects can be completed faster and their economic benefits\nimmediately felt by the public.<\/p>\n
However, bond issuance is not an end in itself, but rather one\nfinancing instrument among others. Debt should only be used to fund\nprojects capable of generating economic and social benefits that exceed\nthe costs incurred.<\/p>\n
Financing through bonds is certainly not without risk. In How to\nManage Fiscal Risks from Subnational Governments, the IMF stresses that\none important principle in maintaining fiscal discipline is that\nregional government debt must not be guaranteed by the central\ngovernment. This principle stems from various international experiences\nin which regional governments faced financial difficulties due to\nexcessive debt accumulation.<\/p>\n
Interestingly, the IMF also acknowledges that, economically, central\ngovernments almost always provide an implicit guarantee for regional\ngovernment borrowing. Legally there is no obligation to rescue a\nregional government, but in practice the central government often still\nintervenes to safeguard public services, economic stability, and\nfinancial system stability.<\/p>\n
Such intervention can take the form of taking over regional\ngovernment debt, restructuring loans, increasing transfers to the\nregions, or providing emergency loans. Put simply, the issuance of\nregional bonds not only creates obligations for the regional government\nbut also has the potential to become a contingent fiscal risk for the\ncentral government.<\/p>\n
Another noteworthy IMF observation is that central governments in\nmany countries often focus more on controlling the amount of debt raised\nby regional governments rather than examining the quality of spending\nfinanced by that debt.<\/p>\n
Yet the root of fiscal problems often lies not in the size of the\nloan but in the effectiveness of how the funds are used. Debt used to\nbuild productive infrastructure clearly has different characteristics\nfrom debt that merely funds routine spending.<\/p>\n
Therefore, fiscal oversight should not stop at setting a maximum\nborrowing limit (debt ceiling), but should also ensure that every rupiah\nof debt enhances the region\u2019s economic and fiscal capacity in the\nfuture.<\/p>\n
The debate over regional bonds should not stop at whether regional\ngovernments may borrow, but rather how to ensure that such debt remains\nproductive without increasing fiscal risks for the central\ngovernment.<\/p>\n
Beyond these ongoing discussions, the presence of regional bonds will\nalso affect the dynamics of the national debt securities market.\nRegional bonds will most likely offer yields slightly higher than State\nSecurities (SBN) as compensation for their relatively greater credit\nrisk. That yield spread has the potential to attract some investors who\nhave until now invested in central government bonds.<\/p>\n
Admittedly, in the initial phase the value of regional bond issuance\nremains relatively small compared to the financing needs of the State\nBudget (APBN). However, if more regional governments follow DKI\nJakarta\u2019s lead, the domestic bond market will have a new investment\ninstrument with low risk characteristics but more attractive coupon\nrates. This is one aspect the central government needs to take into\naccount when formulating its APBN financing strategy.<\/p>\n
On the other hand, the existence of a regional bond market can also\nserve as a catalyst for deepening the domestic financial market.\nInvestors will have more investment choices, whilst regional governments\ngain access to more diverse financing. The challenge is ensuring that\nfiscal discipline is maintained so that competition for funds in the\nmarket does not drive excessive increases in regional debt.<\/p>\n
Optimising development financing does not always have to be done\nthrough additional borrowing. Regional governments\u2019 fiscal space can\nalso be expanded by strengthening Locally Generated Revenue (PAD) and\nimproving the quality of revenue management.<\/p>\n
One alternative worth considering is giving motor vehicle taxpayers\nthe option to pay their tax in advance for several years. Providing tax\ndiscounts or certain incentives could encourage the public to take up\nsuch a scheme.<\/p>\n
For regional governments, upfront payments will improve cash flow so\nthat financing needs through debt can be reduced. From a financial\ngovernance perspective, this scheme is also feasible because the\ngovernment accounting system already uses an accrual basis, meaning\nrevenue paid in advance can be recorded in accordance with prevailing\nregulations.<\/p>\n
However, the additional revenue must not be viewed as new fiscal\nspace for increased spending. Regional governments must manage it\ncarefully so they do not face fiscal pressure in subsequent years when\npart of the tax revenue has already been received in advance.<\/p>\n
In addition, regional governments also need to evaluate policies that\ncould erode their revenue base. One of these is the provision of\nincentives in the form of Motor Vehicle Tax exemptions for electric\nvehicles.<\/p>\n
This policy does have a worthy aim, namely accelerating the\ntransition towards cleaner energy and reducing dependence on fossil\nfuels. From a regional fiscal perspective, however, sustained tax\nexemptions also erode one of the main sources of PAD. For regions with a\nsteadily growing population of electric vehicles, such as DKI Jakarta,\nthis clearly poses a threat.<\/p>\n
Such incentives need not be abolished entirely. The government could\nconsider a more proportionate design, for instance granting tax\nexemption only at the point of purchasing a new vehicle or for a certain\nperiod, then gradually reinstating the annual tax. With this approach,\nthe goal of encouraging electric vehicle adoption is still achieved\nwithout permanently eliminating potential regional revenue.<\/p>\n
The stronger a region\u2019s fiscal capacity, the smaller its dependence\non debt-based financing should be. Bond issuance should be a strategic\nchoice to accelerate development, not a consequence of a weakening\nregional revenue base.<\/p>\n
The issuance of regional bonds is a step forward in diversifying\ndevelopment financing. This instrument can accelerate the provision of\ninfrastructure whilst reducing dependence on central government\ntransfers. Its success, however, is determined not merely by the\nregional government\u2019s ability to issue debt securities, but by the\nquality of its fiscal governance.<\/p>\n
The benchmark for the success of regional bonds is not how much money\nis raised, but how much economic benefit is generated for the public.\nInfrastructure that improves mobility, lowers logistics costs, boosts\nproductivity, and expands economic activity will strengthen a region\u2019s\nfiscal capacity. That way, the debt raised can pay for itself through\nthe economic growth it creates.<\/p>\n
Conversely, if bonds merely become an instrument to cover deficits\ncaused by poor spending quality and a narrow regional revenue base, then\nthe debt will simply shift the fiscal burden onto the future. In such\ncircumstances, the central government ultimately still risks bearing the\nconsequences through various forms of implicit guarantee, as the IMF has\nlong warned.<\/p>\n
Financing innovation and fiscal discipline are not two mutually\nexclusive options, but rather two prerequisites that must go hand in\nhand for regional bonds to truly become a sustainable instrument of\ndevelopment.<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/regional-bonds-between-financing-innovation-and-fiscal-discipline-1785743491", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }