Local Governments Urged to Seek Creative Financing Alternatives

The majority of local governments in Indonesia, ranging from regencies and cities to provinces, are experiencing low fiscal conditions, resulting in a high dependency on funds from the central government. The Director General of Regional Finance at the Ministry of Home Affairs, Agus Fatoni, stated that based on fiscal conditions, provinces and regencies/cities can be categorised into three levels: low, medium, and high. Most currently fall into the low fiscal category.

“This means local governments’ dependency on central government transfer funds is very high,” he said during a General Financial Discussion on Regional Financial Management and Creative Financing held in Yogyakarta on Thursday, 4 June 2026. Fatoni explained that a high dependency indicates weak fiscal health, whereas a higher proportion of Regional Original Income (PAD) signifies stronger fiscal independence. For instance, DKI Jakarta demonstrates strong fiscal health, with 80.71 per cent of its revenue derived from PAD, while transfer funds account for only 19.29 per cent.

Conversely, regions such as Papua and several others face weak fiscal positions, strengthening their reliance on the central government. Consequently, local governments are urged to be creative, including through the creation of alternative funding methods known as ‘creative financing’. Fatoni noted that fiscal conditions this year are facing various dynamics and declines due to global and local factors, necessitating optimised regional financial management through both revenue enhancement and more effective, efficient spending.

The Chairman of Commission II of the Indonesian House of Representatives (DPR RI), Muhammad Rifqinizamy K_arsayuda, suggested that regional financial performance should be measured by two indicators: revenue realisation and expenditure realisation. He noted that oversight often focuses solely on budget absorption without checking revenue realisation. He emphasised that when revenue is limited, expenditure control must be stricter, and revenue potential must be expanded through creative financing. However, he cautioned that implementing creative financing is difficult and requires supporting regulations.

Rifqi added that the DPR RI and the central government must provide local governments with the autonomy to manage themselves, enabling them to become attractive investment hubs and engage in inter-regional or international partnerships.

Esther Sri Astuti Soeryaningrum Agustin, Executive Director at the Institute for Development of Economics and Finance (INDEF), confirmed that many Indonesian regions lack fiscal independence. She noted that only a few, such as Central Sulawesi and North Maluku, show high fiscal strength due to downstream mining sectors. Esther argued that when central transfers decrease, local governments are directly impacted. She suggested that the solution lies in regional creativity, noting that many regional assets remain underutilised. To address stalled developments or underperforming assets, she recommended pursuing partnerships with the private sector or Regional Owned Enterprises (BUMD).