Considering Bilateral Loan Offers for Defence Spending

Note: This article is the personal opinion of the writer and does not reflect the views of the CNBC Indonesia editorial team.

Since 2020, Indonesia has undergone a transformation into a highly attractive market for the global defence industry outside the United States, owing to government policy allocating large amounts of Foreign Loans (PLN) for defence equipment procurement.

The wide-open market door has been exploited by players from Europe, South Korea and Turkey, while the United States has not optimally exploited the Indonesian market, reportedly for several reasons.

The government’s policy of drastically increasing spending on weapons systems from abroad also creates business opportunities for banks and financial institutions that have previously been creditors to Indonesia. Big names such as BNP Paribas, Credit Agricole CIB, Banco Bilbao Vizcaya Argentaria (BBVA), Banco Santander and Korea Exim Bank are recorded as lenders in various activities to modernise Indonesia’s defence forces.

In addition, Export Credit Agencies (ECAs) also play an important role, enabling Indonesia to gain access to a range of high-quality defence equipment with proven performance. In any case, ECAs exist to support exports of military equipment produced by their home countries.

For Indonesia, the ECA mechanism offers distinct advantages in weapons import programmes, given the lower interest rates, the guarantees provided and the risks borne by those institutions. There is also the Foreign Private Creditor (KSA) scheme, which is more expensive and higher-risk overall, yet is preferred by the current Indonesian government because it can accommodate matters that cannot be accommodated within the ECA framework, such as procuring weapons systems of questionable quality.

The Financing Decree (PSP) of US$34.8 billion for the 2025-2029 period for the Ministry of Defence, issued by the Minister of Finance in May 2026, differs from similar documents published between 2021 and 2025. The difference lies not only in the fact that the current PSP adopts a bulk-budget approach without detailed activities and programme values, but also in that it covers an entire Blue Book period at once.

Likewise, the PSP is valid until the end of the 2025-2029 medium-term period, compared with the 12 PSPs of the 2020-2024 era which were only valid for roughly one year after issuance. Another distinguishing feature, absent from the previous US$34.7 billion PSP, is the accommodation of a bilateral/multilateral loan scheme to support defence force modernisation activities with a programme value of US$982.8 million.

The use of bilateral loan schemes has been extremely rare for Indonesia, with the acquisition of Russian fighter jets during the presidency of Susilo Bambang Yudhoyono recorded as the only procurement using such a pattern. Traditionally, ECA and KSA mechanisms are the two frameworks Indonesia has always applied in defence force modernisation.

It is rare for countries exporting defence equipment to Indonesia to offer bilateral loan facilities to support their defence industries. Bilateral loan frameworks are usually extended by donor countries to Indonesia for financing sectors related to welfare, not for funding activities in the defence sector.

Since Jakarta intensively pursued its defence force modernisation programme in 2010, no Western country, or country close to the West, has offered a bilateral loan mechanism. With the bilateral/multilateral loan allocation of US$982.8 million available in the PSP, will that debt also be used to purchase military equipment?

It appears that this funding facility takes the form of a soft loan that will be used not for the acquisition of defence equipment, but for the procurement of medical equipment for defence purposes. The donor country of the bilateral loan is a European country known commercially for its excellence in medical equipment.

Given the fact that in the past 15 years only Russia has ever extended bilateral loan facilities to Indonesia in the defence sector, might there be bilateral loans, including soft loans, for that sector in the future?

So far, there appear to be efforts to offer bilateral loans, in the form of soft loans, to Indonesia from certain countries linked to the 2025-2029 defence force modernisation programme. This is part of efforts to promote the export of certain defence systems to Indonesia. Regarding this bilateral loan proposal, there are several matters Indonesia should consider.

First, the urgency of the bilateral loan scheme. Any bilateral loan offer for defence spending must be examined carefully from all angles, including debt management, the government’s fiscal capacity, the urgency of the loan and defence planning needs themselves.

Is there truly an urgent element in defence planning that requires Indonesia to accept the bilateral loan option? If there is indeed urgency, is there no alternative to the bilateral loan offer without altering the PLN posture in the defence sector until the end of this decade?

Second, the potential increase in defence-sector PLN. The Ministry of National Development Planning/Bappenas has already set the PLN allocation for the Ministry of Defence at US$34.8 billion, with the Minister of Finance having issued the PSP for the 2025-2029 Special Blue Book.

If the bilateral loan offer is accommodated, the PLN quota would rise again to approach, or even reach, a total of US$50 billion. This assumes no cancellation of PSPs already issued by the Minister of Finance, since no party wishes to see the programmes listed in those documents annulled.

Third, the terms and conditions of the debt. From the perspective of loan terms, how favourable would it be for Indonesia if it were interested in the bilateral loan offer for the defence sector?

Is there a grace period, and would the interest rate and loan tenor not burden the defence budget in the 2030 to 2050 era? It should be remembered that during that period the Ministry of Defence must also repay the principal and interest on debt drawn down to finance weapons systems spending in 2020-2024.

Fourth, the benefits for Indonesia. From the defence industry perspective, what benefits might Indonesia gain if it accepts the bilateral loan offer? This issue is important because the technological characteristics of the defence equipment proposed for purchase under the bilateral loan facility are advanced, with limits on the technology that can be transferred to Indonesia.

Technology transfer is a combination of, and balance between, export licences, the future competitiveness of the exporting country, the recipient country’s ability to absorb the transferred technology and its capacity to safeguard technology that is not given away freely.