On-lending in Indonesia: Past performance and future prospects

On-lending to sub-national governments in Indonesia has a long and generally disappointing history. Among other noteworthy problems, an insufficient amount of funds has been channelled through the system vis-a-vis capital financing needs, and loan repayments have proved poor. Aid agencies and government have recently invested substantial resources in attempts to improve the on-lending system; the resultant newly installed regulatory framework for sub-national borrowing is, however, unlikely to improve outcomes substantially. Developing sub-national government access to private capital markets would appear to constitute the way forward, although this will not come quickly or easily. A positive step in the right direction would be for government and aid agencies to embrace the anticipated change and work together to make the transition a successful one, rather than continue to tinker with reforms at the margin of a moribund system.