Indonesia has introduced new regulations enabling the central government to lend to local authorities and state-owned enterprises (SOEs) to fund development projects. The policy aims to provide cheaper financing for infrastructure and other provincial or district-level programs, while considering potential risks and the central government’s fiscal capacity.

The move follows President Prabowo Subianto’s decision to cut regional autonomy funds for 2026 by 20% to 693 trillion rupiah ($41.82 billion), a measure intended to free resources for priority initiatives such as free meals for 83 million children and pregnant women and increased defence spending, all while keeping the fiscal deficit below 3% of GDP.

Under the new rules, any loan must be funded by the central budget, approved by parliament, and have a tenure longer than 12 months. Local government loans also require approval from their respective legislatures. Borrowers must demonstrate sound financial health, and in the case of state-owned firms, stakeholder approval is required.

The policy is seen as a mechanism to maintain development momentum despite reduced local government transfers, though some local leaders have expressed concerns that shortfalls may force higher local taxes.