This content is from: Local Insights

Access to foreign loans restricted

Under Government Regulation 2/2006 on Mechanisms for Procurement of Loans and/or Receipt of Grants and Distribution of Foreign Loans and/or Grants (GR 2/2006), state ministries or government institutions, non-state ministries, local government and state-owned enterprises may no longer be able to apply for and receive foreign loans or grants directly.

Only the central government (that is, the president of Republic of Indonesia) is authorized to conduct foreign loans. This authority is extended only to the minister of finance.

A foreign loan is defined as any state income, whether it is in the form of rupiah, foreign exchange or foreign exchange transferred into rupiah, or in the form of goods or services from the foreign loan grantor that must be repaid under certain terms and conditions. A foreign grant differs from a foreign loan in that a foreign grant need not be repaid.

Foreign loans and grants can be received from a foreign country, a multilateral institution, foreign financial institutions and other institutions, and domestic financial institutions that operate outside Indonesia.

The regulation covers several types of foreign loan:

  • Soft loans are loans that can be categorized as official development assistance (ODA) loans or concessionaire loans, granted by a country or a multilateral institution for economic development purpose or to raise social well being of the borrower country, that partially have an element of foreign grants of at least 35%.
  • Export credit facilities are commercial loans granted by financial or other institutions in an exporter country and guaranteed by an export credit guarantee agency.
  • Commercial loans include foreign loans granted under the terms and conditions applicable in the market without any guarantee from an export credit guarantee agency.
  • Mixed loans combine two or more of the above elements and can consist of a grant, soft loan, export credit facility and commercial loan.

To obtain a foreign loan or grant from the central government, state ministries must submit a proposal of prioritized projects to be financed by the foreign loan or grant. Local government and state-owned enterprises must submit their proposed investment activities. Such proposals are submitted to the minister of national development planning or the chairman of Bappenas, who will then submit these proposals to the president.

When approved after consideration by the president (and the governor of Bank Indonesia), the projects proposed will be included in the list of development activities and deemed appropriate recipients of foreign loans or grants. The minister of finance will use the list to determine allocation of loans from the government as generated by the foreign loan or grant. The minister of finance's decision must be taken before negotiations with a foreign creditor or grantor begin.

State ministries must submit quarterly reports to the minister of finance and minister of national development planning, the chairman of Bappenas, regarding the procurement of goods and services, use of the loan and progress of physical activity. This is intended to prevent misuse of the fund. To uphold transparency and accountability, the minister of finance will publish information regarding the foreign loan or grant, including:

  • the loan or foreign grant policy;
  • the sum of the foreign grant and foreign loan position, including the type of foreign exchange, due structure, and interest rate;
  • the source of the loan or foreign grant; and
  • the type of loan or foreign grant.

GR 2/2006 has received many negative comments since its promulgation. Some say that, by issuing GR 2/2006, the government intends to cut off procedures under Law 17/2003 on State Finance, which provided that, before accepting a foreign loan or grant, the government must obtain the approval of the people's consultative assembly (DPR).

Rahmat Bastian

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