Indonesia Faces Growing Fiscal Pressure Amid Rising Debt Interest Burden

Structural Factors Driving Fiscal Challenges

Indonesia's increasing debt interest burden is not a sudden development but rather the result of structural factors that are now pressuring the government's fiscal space. M. Rizal Taufikurahman, Head of Macroeconomic and Finance Center at Indef, identified two primary factors contributing to this situation. First, the global interest rate hikes following monetary tightening in developed countries have made refinancing government debt more costly, particularly for Surat Berharga Negara (SBN) or government securities. Rizal noted that "the refinancing cost has increased significantly because global interest rates have risen, while most of our financing is market-based."

Pandemic-Driven Debt Accumulation

The second factor is the significant accumulation of debt during the pandemic period. During this time, Indonesia's budget deficit expanded to over 6% of GDP, leading the government to secure large amounts of debt financing. Now, as some of this debt begins to mature, it must be refinanced at higher interest rates, further straining the government's finances.

Implications for Fiscal Policy

The combination of these factors is putting considerable pressure on Indonesia's fiscal policy. The increased cost of debt servicing is reducing the government's fiscal space, potentially limiting its ability to fund development projects and provide social support. This situation highlights the need for careful fiscal management to balance the need for economic stimulus with the imperative of maintaining fiscal sustainability.