IMF: Indonesia's Debt-to-GDP Safe at 29%, Room for Tax Revenue Growth
Last week, the International Monetary Fund (IMF) warned that global debt is now higher than before the global financial crisis. The IMF estimates that global debt reached USD $164 trillion, equivalent to 225 percent of global GDP, with China being a key booster over the past decade. The IMF warned that nations with high government debt are vulnerable to a sudden tightening of global financing conditions. This could disrupt market access and jeopardize economic activity.
Indonesia's debt ratio, however, remained safe at 28.7 percent of the country's gross domestic product (GDP) in 2017. This low level of debt is the result of structural prudent fiscal policies of the Indonesian government. After the traumatic Asian Financial Crisis, Indonesian policymakers implemented two key laws that prevent Indonesian debt to rise to alarming levels: (1) the government's budget deficit in the state budget is not allowed to exceed 3 percent of GDP, and (2) the country's debt-to-GDP ratio is not allowed to exceed 60 percent.
Despite the safe level of Indonesian debt, Vitor Gaspar, Director of the IMF's Fiscal Affairs Department, there is room for improvement, especially on the revenue-side. Gaspar said there is plenty of room for Indonesia to strengthen its tax to-GDP ratio. Currently, Indonesia's tax ratio stands at a weak 10 percent only. Thus, the recently completed tax amnesty program should not be the end but just the beginning of Indonesia's tax reforms.
When commenting on Indonesia's rising debt-to-GDP ratio in recent years, Indonesian Finance Minister Sri Mulyani Indrawati said the increase makes sense because the government's annual budget shows a deficit each year. Therefore, the nation's debt ratio is bound to rise accordingly. However, she emphasized that Indonesia's debt ratio is at a safe level. Indrawati added that a deepening of financial markets would be important from a fiscal point of view.
Debt-to-GDP Comparison in 2017:
Source: Bisnis Indonesia
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