Analysing the Debt Financing Plan for Defence Spending up to 2029
Indonesia’s fiscal and monetary conditions are not in good shape at present; some even describe them as flashing a yellow warning light. The SAL funds, which help government liquidity when state revenues fall short, now stand at Rp120 trillion at Bank Indonesia.
Meanwhile, another Rp300 trillion has been distributed to several banks in the form of on-call deposits. Meanwhile, Bank Indonesia’s foreign exchange reserves have continued to decline since December 2025, from US$156.5 billion to US$148.2 billion in March 2026.
On the other hand, the Iran versus United States and Israel war has drastically altered the global economic situation, where the closure of the Strait of Hormuz, impacting rising oil prices, has long and wide-ranging ripple effects across all aspects of the global economy. The impact of rising naphtha prices has been felt by Indonesian society, while the increase in unsubsidised diesel fuel prices has affected the manufacturing, mining, and other industries.
It is common knowledge that the government has several priority programmes with massive budgets, namely MBG, KDMP, and defence spending. While budgets for other programmes have been cut, these three programmes have not faced any reductions, although the number of days for the MBG programme has been reduced to five.
Several parties have criticised the government’s policy of exempting these three programmes from budget cuts amid global economic uncertainty and the threat of the state budget deficit exceeding three percent of GDP. This has led to conclusions from various quarters that these three programmes are flagship initiatives of the government, so under any circumstances, MBG, KDMP, and defence spending will not face budget cuts.
Defence spending has continued to increase in recent years, including the addition of BA BUN budget allocations used for such activities. The 2026 state budget, which is the first to be 100 percent prepared by the current administration, reflects this.
For the first time since Law No. 17 of 2003 came into effect, there is an allocation of BA BUN as a defence budget contingency fund worth Rp150.5 trillion, or a backup to the Ministry of Defence’s BA of Rp187.1 trillion.
Although before 2026, the use of BA BUN for defence spending had already occurred, as seen in several Central Government Financial Reports, those funds were not initially categorised as a defence budget contingency.
Increases have also occurred in the allocation of Foreign Loans (PLN) and Domestic Loans (PDN) for the 2025-2029 period, to US$34.8 billion and Rp54 trillion respectively, from previously US$34.7 billion and Rp45 trillion in the 2020-2024 period.
The planned spending of US$34.8 billion sourced from PLN needs to be scrutinised amid the government’s increasingly narrow fiscal capacity at present. According to the plan, the Ministry of Defence will spend this debt in three fiscal years, namely 2026, 2027, and 2028, with large debt withdrawals occurring in fiscal years 2027 and 2028.
As a consequence, in those two years, a not insignificant amount of pure Rupiah funds will also be needed to be used as down payments. Will the fiscal capacity in the 2027 and 2028 state budgets be better than this year amid the global economic uncertainty in 2026, which shows no signs of improving?
In addition, this year’s planned PLN withdrawal, which is claimed to be smaller than next year and 2028, still needs to be examined considering the factors of the Indonesian government’s debt outlook set by Moody’s Ratings and Fitch Ratings, the depreciation of the rupiah exchange rate against the US dollar, and the need for pure Rupiah Accompanying Funds (RMP).
The Ministry of Defence’s tendency to prioritise the use of Foreign Private Creditor (KSA) schemes over Export Credit Agencies (LPKE) will make debt costs even more expensive when the Indonesian government’s debt outlook is negative. There is no guarantee that debt costs using LPKE will not be affected by the outlook set by the two rating agencies, but before Moody’s Ratings and Fitch Ratings downgraded the outlook, debt costs from LPKE were far cheaper than KSA.
Procurement contracts using broker airlines are certain to adopt KSA designs and not LPKE, such as the plan to import 12 PC-24 aircraft, which are reportedly to be used as training aircraft for prospective turboprop transport pilots.
Regarding RMP funds, this year’s and next year’s RMP needs not only come from acquisition contracts financed by PLN 2025-2029, but also from purchase contracts funded by PLN 2020-2024 that have not yet become effective to date.
The question is whether sufficient RMP funds are available to finance procurement contracts from two Strategic Plans (Renstra) at once this year? Or will RMP funds be taken from BA BUN funds categorised as defence budget contingency?
Although legally the Ministry of Defence is allowed to adopt contracts without RMP, that does not mean debt costs become cheaper because the portion that should be borne by Indonesia through RMP funds will be burdened by the lender into the debt costs that must be paid by Indonesia as the borrower.
From a supervision perspective, the PLN quota of US$34.8 billion in lump sum form without details of programmes and programme values also raises questions. Is Indonesia ordering various defence equipment from abroad that consists of bespoke or custom products not used by other countries, so a confidentiality clause is applied?
For example, ordering a semi low-observable version of the Rafale or an AEW&C aircraft that adopts electronic equipment