crisis in Indonesia is currently worsening. The threat of recession is unavoidable due to the spread of the Covid-19 pandemic, which shows no signs of abating anytime soon.

According to a 2020 report from the Central Statistics Agency (BPS), Indonesia's economic growth contracted by 5.32 percent year-on-year in the second quarter of 2020. Furthermore, the latest release from the Minister of Finance projects negative economic growth of 2.9 percent in the third quarter.

The government has taken extraordinary measures, including prioritizing COVID-19 response within the 2020 National Economic Recovery (PEN) program, which is planned to cost Rp 695.2 trillion. This significantly exceeds the initial budget plan. Consequently, the deficit widened from 5.07 percent of GDP to 6.34 percent of GDP (Ministry of Finance, 2020).

The budget deficit was exacerbated by a decline in state revenue due to social restrictions, which resulted in reduced demand (demand shock) due to decreased income and reduced production (supply shock) due to disruptions to production activities.

These two-way shocks have resulted in a slowdown in state revenues (both tax and non-tax). Furthermore, there is the potential for investment losses and slowdowns due to the increasingly depressed economic growth outlook. In such a situation, government spending plays a crucial role in driving the economy, including by accelerating state spending and increasing state revenues. Therefore, the Indonesian government needs to optimize other alternatives, particularly domestic ones, for revenue generation. One such alternative is Islamic financial instruments.

Islamic Financial Innovation

Sukuk, or state sharia securities (SBSN), are sharia-compliant financial instruments used as an alternative to fiscal instruments in the form of securities based on sharia principles. Sukuk are financial instruments for financing investment projects, with shared ownership of assets or services. All investors participate in the project's outcomes, sharing profits and losses.

Sukuk issuance aims to issue sharia-compliant securities to finance the state budget. The role of sovereign sukuk as a fiscal instrument continues to experience rapid growth. Total sovereign sukuk issuance from 2008 to July 2020 reached IDR 1,467.26 trillion, with outstanding IDR 902.23 trillion.

The use of sukuk is a way to raise financial resources for large companies, including multinational corporations, multinational development institutions, and government agencies that require very large resources that are difficult for individual investors to meet alone.

Sukuk have a similar status to bonds. However, in terms of process, the two are distinct products. For example, sukuk investors receive a certificate of ownership/participation in a specific asset. Meanwhile, bond investors are considered to own only a debt certificate.

Sukuk and bonds also differ in their investment benefits. Bondholders receive regular interest payments based on the bond's term, and the principal is guaranteed to be returned at maturity. However, sukuk holders receive periodic payments representing a percentage of the actual profits, typically generated from sales or partnership contracts.

The underlying assets for sukuk include state-owned assets (land and buildings purchased or acquired with the state budget), government projects (infrastructure, procurement of goods and services), and Hajj services (land and air transportation, accommodation, and logistics). Utilizing state-owned assets as underlying assets aims to obtain full rights to use an asset without requiring registration for ownership.

Solutions for the Economy

Over time, sukuk have developed into innovative and solution-oriented programs for the economy. One of the most recent is the issuance of sukuk waqf, or cash waqf-linked sukuk (CWLS). The issuance of sukuk waqf demonstrates the government's commitment to supporting the development of social investment and productive waqf in Indonesia.

Through sukuk waqf, the government facilitates cash waqf donors, both temporary and permanent, to invest their cash waqf in safe and productive investment instruments. The advantages of the cash waqf-linked sukuk program include competitive returns. Investment proceeds are used to build new waqf assets or for social activities. Furthermore, cash waqf is invested in safe and risk-free financial instruments.

The profit-sharing proceeds from sukuk will also be used for social programs to maximize the welfare and dignity of Indonesia. This type of sukuk uses a wakalah contract, which means the delegation of authority from one person to another in matters that may be delegated. In this case, the Indonesian Waqf Board (BWI), acting as nazir or waqf manager, invests cash waqf funds in SBSN through a private placement mechanism.

Waqf sukuk also has broad potential. For example, the proceeds can be used to provide free healthcare for the poor, develop social infrastructure, empower MSMEs, and other social activities that support community welfare. Moreover, in the current economic downturn, communities need economic incentives to maintain their livelihoods and boost declining consumption.

In the author's view, Indonesia still has ample resources to address the multidimensional crisis caused by Covid-19. One such domestic resource is waqf sukuk, a new alternative to boost the economy by increasing funding for state spending.

Supported by the significant potential of waqf and the success of each sukuk issuance, it is hoped that we can quickly overcome the impact of the recession by optimizing this new shield as a strategic step in facing the crisis.

*) Nisful Laila, Deputy Dean 2 of FEB Unair; alumnus of The University of New South Wales, Australia