Managing the Fiscal Space for Long-Term Defence Spending

Indonesia’s external debt increased by 36.52 per cent between 2014 and 2024; when President Susilo Bambang Yudhoyono ended his term, the debt stood at only US$293 billion. However, as President Joko Widodo left office in 2024, total external debt had soared to US$428 billion, with approximately US$200 billion consisting of government debt.

Economists have repeatedly warned the government that external debt has reached unsafe levels based on the Debt Service Ratio (DSR), which exceeded 47 per cent last year. According to the IMF and World Bank, a safe DSR ranges between 25 per cent and 35 per cent, representing the ratio of total principal and interest payments to total national revenue over a specific period.

Since 2020, defence spending utilising Foreign Loans (PLN) has increased nearly fivefold compared to the previous five years. While the PLN allocation for the Ministry of Defence was only US$7.7 billion in 2015, that figure surged drastically to US$34.8 billion in 2020.

To date, the PLN allocation for weapons systems procurement has been set at US$34.8 billion, which is the quota until 2029 based on the decision of the Minister of National Development Planning/Head of Bappenas. Whether this figure will remain stable until the end of the decade remains a major question mark if the changes to the Blue Book during 2020-2024 are used as a reference.

Despite the recent change in Finance Minister from Purbaya Yudhi Sadewa to Suahazil Nazara, the primary question haunting the Indonesian administration until 2029 concerns fiscal discipline. There is a sceptical view that the implementation of fiscal discipline is determined not by whoever holds the Finance Minister position, but by whoever serves as President.

With current priority spending covering Free Nutritious Meals (MBG), the National Development Plan (KDMP), and defence, alongside an increasingly bloated bureaucracy amidst international economic challenges affecting national revenue, is it possible for fiscal discipline to be practised? If the Finance Minister provides input to the President regarding fiscal discipline, will that input be heard and implemented through policy?

In 2021, while Indonesia was battling the Covid-19 pandemic and the state budget (APBN) experienced a deficit exceeding 3 per cent of GDP, the Minister of Defence proposed to the President and Finance Minister a defence spending programme worth US$124.9 billion for the 2020-2044 period, to be executed during 2020-2024.

That figure included US$79 billion for defence equipment, US$13.3 billion for interest payments over five stages of the Strategic Plan, and US$32.5 billion for maintenance and upkeep costs.

Aside from the staggering value, another controversy regarding the proposal was the implementation timeline, which was set to run only until 2024, even though the programme officially spanned 2020 to 2044. It is worth noting that at that time, fiscal discipline was still being applied by the government, so the proposal to use Foreign Loans as a funding source was rejected, even though a draft Presidential Regulation had been prepared.

Considering that defence spending is one of the current administration’s priority programmes with significant fiscal implications, it is not impossible that a similar idea to the one proposed in 2021 will resurface in the coming years. Briefly, such a programme would be labelled a long-term programme, yet the implementation period, particularly for weapons systems procurement, would only last about four years or even less.

It is important to understand that the national political constellation has changed compared to 2021, as has the direction of fiscal policy. There are several risks if the government decides to re-launch massive defence spending initiatives within a short timeframe, aligned with the presidential term as per constitutional rules.

First, the fiscal risk. Massive defence spending with such astronomical values—assuming figures not far from the 2021 proposal—would place immense pressure on the government’s fiscal space at a macro level. Such fiscal risk could prompt global rating agencies like Moody’s Ratings, Fitch Ratings, and S&P Global Ratings to downgrade Indonesia’s outlook or rating, with all the subsequent impacts on financial markets.

At a micro level within the defence sector, the potential fiscal risk is the closing of fiscal space for defence spending using the PLN scheme when the new administration takes power in the 2030s. A new President may be unable to implement defence modernisation through acquisition programmes because there is no longer any fiscal space available for further borrowing.

Meanwhile, the pure Rupiah allocation in the state budget (APBN), particularly for capital expenditure, will be used for years to service the principal and interest of debts, including those incurred since 2015. It must not be forgotten that from 2030 onwards, Indonesia will begin paying the principal and interest on the US$34.7 billion debt incurred during the 2020-2024 period.

Second, the risk to the reliability of defence equipment. One of the concerns in weapons system procurement programmes…