Will Indonesia be Doomed like Sri Lanka?
Prof. Dr. Mohammad Nur Rianto Al Arif, S.E., M.Si.
Professor at UIN Syarif Hidayatullah Jakarta / Secretary General of the Indonesian Lecturers Association (DPP Asosiasi Dosen Indonesia) / Assistant to the Presidential Special Envoy for Food Security
Indonesia, as a developing country with the largest economy in Southeast Asia, is currently facing intense fiscal pressures.
In the aftermath of the COVID-19 pandemic and amid a global crisis involving trade wars, geopolitical conflicts, and uncertainties in energy and food prices, the Indonesian government has been compelled to increase public spending through deficit financing.
During this period of economic recovery, new concerns have arisen: How healthy is Indonesia’s debt condition? Could Indonesia fall into bankruptcy like Sri Lanka?
These questions have become more relevant as government debt has risen to over IDR 9,187.7 trillion in the first quarter of 2025, with the majority of IDR 7,181 trillion (78.15%) coming from government bonds.
Although Indonesia’s debt-to-GDP ratio remains below the legal threshold of 60%, which is currently under 40%, hidden fiscal risks demand careful attention.
This article discusses Indonesia’s debt structure, potential fiscal risks, the possibility of a debt crisis, and lessons from Sri Lanka’s economic collapse to avoid similar pitfalls.
The Debt Dilemma
Government debt is essentially a fiscal instrument to cover budget deficits. In recent years, Indonesia has increasingly relied on debt to fund infrastructure, energy subsidies, education, healthcare, and social assistance programs.
When tax revenues fall short, debt becomes an unavoidable option. However, it also creates a burden of interest and principal repayments that strain the budget.
Interest payments alone have reached IDR 257.08 trillion for January–June 2025 and are projected to hit IDR 552.1 trillion by year-end; it is almost 16% of total state spending. This leaves less fiscal space for productive spending and raises the risk of a debt spiral if not managed prudently.
Hidden Fiscal Risks
Fiscal risk refers to the potential deterioration of public finances due to structural imbalances between revenue and expenditure. This risk arises from dependence on debt, declining revenues, poor spending obligations, exchange rate volatility, and global economic uncertainty.
One key indicator is the primary balance: the difference between revenues and expenditures excluding interest payments. A persistently negative primary balance signals that the government must do it over and over, a red flag for fiscal health just to cover another hole of debt.
Indonesia also struggles with low tax revenue. The country’s tax ratio remains stagnant at around 10%, far below the ideal 15% for a developed nations. This narrow tax base undermines the state’s ability to finance spending without relying on debt.
On the expenditure side, most of the budget is rigidly allocated to mandatory spending such as civil servant salaries, subsidies, debt interest, and regional transfers. Flexible spending for education, new infrastructure, and research often remains low.
In this context, the government faces with these options: increase borrowing or cut spending—both of which have downsides.
Lessons from Sri Lanka’s Debt Crisis
In 2022, Sri Lanka defaulted on its foreign debt of over USD 51 billion, triggering its worst economic and political crisis. Foreign reserves collapsed, imports of food and fuel halted, inflation soared, and mass protests erupted—they are totally doomed.
Key triggers of Sri Lanka’s collapse included:
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Heavy reliance on short-term foreign debt
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Chronic fiscal deficits from excessive subsidies and populist tax cuts
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Failure to diversify an economy dependent on tourism and remittances
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Poor debt management, including massive loans from China for infrastructure
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Reserve depletion to defend the currency
Although Indonesia’s situation is different, the warning signs are clear.
How to Avoid
Indonesia must not be lulled by its currently “safe” debt ratio. What matters is the trend and the ability to repay.
Key strategies to avoid a crisis include:
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Prudent debt management by balancing foreign and domestic debt, as well as short and long-term debt.
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Diversifying revenue sources by reducing reliance on volatile commodities and strengthening the tax base.
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Avoiding populist fiscal policies that undermine state revenues.
Indonesia remains relatively safe, thanks to its large economy, stable monetary system, and healthy foreign reserves. Yet, fiscal crises often lurks in the dark before suddenly revealing itself.
Reform, Regroup, and Reborn
Tax reform is crucial, even if unpopular. Increasing the tax ratio is fundamental to fiscal sustainability. Efforts such as integrating national ID (NIK) with tax ID (NPWP), digitizing tax administration, and reforming income tax must accelerate and be applied fairly.
Increasing taxes does not simply mean raising rates but also improving compliance, closing loopholes, and optimizing tax incentives.
On the spending side, the government must reevaluate these priorities:
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Energy subsidies must be precisely targeted
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Massive defense, infrastructure, and bureaucratic spending should be scrutinized thoroughly
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Welfare programs should focus on human capital investment rather than purely consumptive cash transfers
The government should also apply the Golden Rule where borrowing should only prioritize long-term investments (infrastructure, education, technology) rather than excessive subsidies.
Strengthening domestic financial markets is essential to reduce dependence on foreign investors and multilateral institutions. Enhancing trust in domestic government bonds (SBN) is also the key to fiscal resilience.
Warning Signs of a Debt Spiral
Indicators that must be closely monitored include:
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Persistent negative primary balances
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Growing reliance on new debt to pay interest
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Rising debt service ratios relative to revenue
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Declining market confidence in repayment ability
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Politicization of fiscal policy at the expense of economic logic
External shocks such as Middle East conflicts, US–China tensions, or oil price spikes could worsen fiscal pressure through Rupiah depreciation, higher import costs, and global interest rate hikes. If fiscal foundations are weak, these shocks could accelerate economic collapse, especially during political transitions.
Indonesia is not yet on the brink of bankruptcy like Sri Lanka, but the coast is still not clear. A debt crisis builds up over years of unsustainable fiscal policies and failure to reform.
Conclusion
The Prabowo administration must learn from Sri Lanka’s tragic example to avoid passing this time bomb to future generations.
With prudent steps like bold tax reforms, spending efficiency, and careful debt management, Indonesia can continue to grow without falling into the abyss.
In an uncertain world, fiscal health is the cornerstone of economic sovereignty.
(This article was originally published on kompas.id, Monday, August 4, 2025)