Is Additional Foreign Loan Allocation Needed for the Defence Sector?

Anomalies appear to have become a normalised condition in the government’s current fiscal policy. Rather than reducing spending to escape the threat of a budget deficit exceeding three per cent of GDP, the government is continuing several spending activities that have been criticised by various parties. The subsiding of global geopolitical turmoil has not eased pressure on the Indonesian economy, given the market’s lack of confidence in the government’s fiscal policy. The rupiah’s exchange rate against the US dollar remains under pressure, while the market awaits S&P Global Ratings’ assessment of Indonesia’s government debt. Defence spending is one of the major expenditures currently undertaken by the government, with a pure rupiah budget placed under the Ministry of Defence and the State General Treasurer totalling Rp 335 trillion. Another source of pure rupiah funding comes from a Domestic Loan of Rp 54 trillion, which is budgeted for the 2025-2029 period. There is also a Foreign Loan allocation of US$34.8 billion, which has received a Financing Source Determination from the Minister of Finance. The execution of this US$34.8 billion determination in the form of contract activation cannot be carried out this year because it requires companion pure rupiah funds equivalent to US$5.2 billion. The issuance of the Blue Book, Green Book, List of Special Activities, and Financing Source Determination all within the same year is another anomaly in the government’s current fiscal policy. The large foreign loan allocation for defence spending for 2025-2029 is not surprising, as the previous era’s quota was US$34.7 billion, although it was cut to US$25 billion under President Joko Widodo before being raised again after President Prabowo Subianto took office. However, the amount for the 2025-2029 period is also an anomaly because the government’s fiscal space is increasingly narrow, with other programmes also deemed priorities and non-negotiable. Expecting lenders to finance 100 per cent of the foreign loans is impossible, considering market distrust, the downgrade of Indonesia’s debt outlook by Moody’s and Fitch Ratings, and the possibility of a sovereign credit rating downgrade this year. Should a global rating agency downgrade Indonesia’s debt, it would take several years to restore the rating, especially if it falls to non-investment grade. The effort to realise US$34.8 billion in spending will face challenges related to market distrust of the government’s fiscal policy. Such spending will also increase Indonesia’s debt risk, as US$14 billion is planned to come from Foreign Private Creditors, which typically charge much higher interest rates than loans under the Export Credit Agency scheme. Furthermore, there is the challenge of providing companion pure rupiah funds to support the US$34.8 billion determination when fiscal space is increasingly narrow and the rupiah shows no sign of strengthening significantly against the US dollar. Given the lack of transparency regarding the use of foreign loans in the defence sector, it remains questionable whether the list of expenditures receiving the financing determination is truly necessary or whether purchases are made without considering effectiveness, including operational integration with various other defence equipment. Referring to the experience of weapons system acquisitions during President Susilo Bambang Yudhoyono’s second term, a foreign loan quota of only US$6.5 billion enabled Indonesia to procure first-tier NATO military equipment such as the AH-64E Apache, Leopard 2A4, CAESAR 155 mm, and M109A4BE. There are doubts that the current administration can replicate the achievements of the 2009-2014 period with a US$34.8 billion allocation, due to immature defence planning and strong parochial interests in defence spending in recent years. For instance, the plan to import F-15EX fighter jets has remained mere discourse since 2020, not because the government lacked fiscal space, but due to a lack of genuine intent to realise the effort. The question regarding the current foreign loan allocation is not whether the budget is sufficient to meet defence needs until the end of this decade, but whether the loans are being used effectively and efficiently. The issue of effectiveness and efficiency in the use of foreign loans does not appear to be a current emphasis, neither in terms of debt risk management nor the positioning of weapons systems within the broader defence framework. While the utilisation of the US$34.8 billion foreign loan will need to be scrutinised over the coming years, there are reportedly aspirations for an additional allocation of around US$10 billion to US$15 billion, which if realised would bring the total foreign loan allocation until 2029 to US$50 billion. Should such aspirations be realised, the exposure of the foreign loans would burden the Ministry of Defence’s budget from 2030 to 2050, as interest and principal payments would come from the ministry’s capital expenditure budget. If these aspirations are genuine, it raises the question of whether there are defence equipment acquisition plans that cannot be accommodated by the US$34.8 billion loan, or whether there are inefficient spending plans within the Medium-Term Foreign Loan List.