Indonesia Unveils New Lending Rules to Boost Local Development Projects

Hadisur Rahman, JadeTimes Staff

H. Rahman is a Jadetimes news reporter covering Asia

---

Image Source: REUTERS/Willy Kurniawan

Indonesia has introduced new regulations allowing the central government to lend directly to local authorities and state-owned enterprises to support the nation’s development agenda. The measure aims to improve access to affordable financing for infrastructure and public welfare projects across the country.

The new policy, signed last month and released publicly this week, outlines that loans may be granted after assessing the potential financial risks and the government’s fiscal capacity. According to the document, the initiative seeks to “provide cheaper funding for central government infrastructure projects and other development programs carried out by provincial and district administrations.”

President Prabowo Subianto’s administration has been reshaping the country’s fiscal structure as it prioritizes social welfare and defense spending. The 2026 “regional autonomy” fund allocation to local governments has been reduced by 20% to 693 trillion rupiah ($41.82 billion), a move that has drawn criticism from local leaders concerned about shrinking budgets.

Provincial and district officials have warned that they might need to increase local taxes to compensate for the funding cut, raising fears of public discontent. Prabowo has justified the reduction, saying it is necessary to fund his flagship social program that provides free meals to 83 million children and pregnant women, while also accommodating higher defense expenditures and keeping the national deficit below the legal cap of 3% of GDP.

Under the new lending framework, loans will be financed through the central government’s budget and must receive parliamentary approval. Borrowers are required to demonstrate sound financial performance, and state-owned firms must secure the consent of their stakeholders before applying.

Each loan must have a tenure longer than 12 months, and local governments must obtain their own parliamentary approval before borrowing. The regulation also specifies penalties for late repayments, which will be determined in agreement between the lender and the borrower.