Blended Finance Mechanism for COVID-19 Response, Focusing on Helping Sub-National Governments

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By Edwin Syahruzad

Who would’ve thought that COVID-19 would create a major disruption to the existing business around the world? Many countries have implemented lockdown which limits the movement of people, goods, and most of services. As a result, households’ consumption was greatly reduced, and this affected the demand from the global level to the household level. It forces businesses to decrease their production which significantly reduce the revenue these businesses are making. When they are no longer making profit, they can no longer pay for their employees and then there will be layoffs everywhere. As a result, banks and financial institutions will need to assume significant increase in credit risk caused by the crisis. Additionally, the increase of unemployment and poverty rate means the government fiscal capacity, both national and at the sub-national level, will be restrained as the existing resources will be funneled to activities that can curb further damage from happening. The people on the ground will be the one who suffers the most, especially those who are living under the poverty line.

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Source: PT SMI Economic Research Division.

To put into perspective on how bad the economic effect of COVID-19, let me tell you a story about Ahmad from Indonesia. Ahmad is the breadwinner of his family of four who lives in Enrekang, South Sulawesi, Indonesia. He works as a bus driver in town. Nonetheless, due to COVID-19, he doesn’t earn as much as usual. Since he’s not making enough money, he can barely feed his family, so they end up eating only rice with salt. As a result, his son got sick due to malnutrition, yet the nearest hospital requires two-hour drive from where he lives. The local government could not do much for people like Ahmad as they have limited fiscal capacity and highly dependent on grant transfer from the central government, at the same time, have limited health and infrastructure system in place to overcome the overwhelming side-effect of COVID19 in their region. Meanwhile due to the economic crisis caused by COVID-19, the central government’s revenue has decreased, budget deficit has increased, and many health and other public infrastructure projects that could create more employment, got delayed.

The economic impact of this major disruption is massive and could force many countries to fall into recession. Even those from developed countries cannot escape from it. Hence, this calls for collective actions by using innovative ways to resolve this global problem. This is where a global platform like Paris Peace Forum can be of a help.

We are very delighted that the Paris Peace Forum, a global platform where all development agencies around the world meet, has selected our program called “Regional Economic Recovery Program” as one of the projects to be showcased this year. This program is a long-term, low interest loan targeting the sub-national governments (SNGs) which are one of the badly affected economic agents in time of COVID-19. It is made possible thanks to blended finance coming from donor, national budget, and PT SMI’s own resources amounting to USD 357.14 million.

It has unique features that make it highly accessible for COVID-19 affected SNGs, such as generous grace period for the principal payment, exemption from feasibility study requirement and approval from the local parliament body.

The affected SNGs may use the loan to fund sectors such as water and sanitation, low-income housing, environmental infrastructure (i.e solid waste management, drainage/sewer system), logistic and transportation infrastructure (i.e. local road improvement), and social infrastructure (i.e. regional hospital and traditional market), which are badly needed in time of COVID-19. It offers financing alternative to SNGs to increase their fiscal capacity in conducting “countercyclical” policy, especially to fund immediate infrastructure needs during and post-COVID19, and thus able to help people like Ahmad.

We believe that our program can be considered as a best practice from Indonesia that offers a solution to tackle the economic problems caused by COVID-19 at the SNGs level. We hope that through Paris Peace Forum, it can inspire other countries to do the same.

Views expressed in this publication are the author’s and do not necessarily reflect the views of the Paris Peace Forum.

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Edwin Syahruzad, an Indonesian citizen residing in Indonesia, is currently the President Director of PT Sarana Multi Infrastruktur (Persero) (PT SMI). As the President Director, he is in charge of overseeing the overall operation of the company, including the development of the company’s long- term strategy and ensuring strict compliance to good corporate governance practices in all of the company’s operations. Prior to this, he served as the Director of Financing and Investment (2014- 2019) and the Executive Vice President/Head of Financing and Investment Division (2009–2014) of PT SMI. He graduated from University of Indonesia in 1993 majoring in Economics.

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