FINANCEASIA.COM - Indonesia continues to delight its equity and bond investors. The
country is achieving healthy economic growth while so many other
economies are stagnating, and it is doing so without profligate
government spending. But investor-friendly ratios can disguise
institutional failings. (source)
President Susilo Bambang Yudhoyono outlined his 2012 budget proposals
to parliament on August 16, on the eve of the country’s 66th
anniversary. The fiscal deficit is expected to drop to 1.5% of gross
domestic product in 2012 from 2.1% of GDP in 2011, maintaining the trend
of successive annual falls since 2004.
Wellian Wiranto, HSBC’s Asia economist calls this an “enviable
trajectory”. Certainly, in the context of the budget deficits and
accumulating debt levels characteristic of several industrialised
countries, especially since 2008, it would seem that Indonesia has every
reason to be satisfied. The prospect of a further global economic
downturn, and the knock-on effects to even Indonesia’s
consumption-oriented economy, would suggest that the management of its
finances has been prudent and far sighted.
Yet, the assumption is that a declining budget deficit is best for
Indonesia. The country is expected to post growth of 6.5% this year, the
highest since the Asian financial crisis, but most economists agree
that this is too little for a nation that is trying to pull large parts
of its population out of poverty. Annual growth rates have been meagre
compared with China and India, for instance.
“There is a constant dichotomy between managing a higher deficit in
order to promote stronger economic growth and prudence in order to
ensure less volatility from contagion to external events,” Bambang
Brodjonegoro, head of Indonesia’s ministry of finance fiscal policy
office, told FinanceAsia.
That’s fair enough. More contentious is whether that “prudence” is
intentional; instead it might be due to fiscal failures rather than
success.
International approval for Indonesia, especially by the ratings
agencies, has largely been predicated on improving credit metrics and a
confidence that institutional inadequacies will be redressed. The ratios
look good, but the way they have been achieved is less impressive. On
the other hand, the finance ministry is aware of deficiencies and is
making efforts to bring about changes.
Take the expenditure side of the equation. Brodjonegoro conceded that
as usual, “the deficit will probably be lower by the end of the year
because the government will not have met its spending targets”. Poor
planning and unrealistic ministerial “wish lists”, together with
parliamentary lobbying for special interest projects means that there is
a regular “absorption rate shortfall”. So far, only 21% of budgeted
capital expenditure has been distributed; in theory, the bulk of it will
be spent in the final five months of the year.
And that is unrealistic.
However, from November, all ministries will have to report their
bidding processes for projects, which should allow for greater scrutiny
at least. And, “in the future, the finance ministry is likely to get its
way by imposing a system of rewards and penalties for meeting or
failing to achieve spending targets,” said Brodjonegoro.
Failing to spend money allocated to projects is a serious impediment to
the country’s development. It means that the projects themselves are
either inappropriate or else the system is simply inefficient. After
all, as all investors and businessmen are aware, the inadequacy of
Indonesia’s physical infrastructure is the main obstacle that the
country has to overcome before it can achieve a much higher structural
growth rate. “Given the lack of capital spending after the Asian
Financial Crisis, its stock of infrastructure has become overburdened,”
pointed out HSBC’s Wiranto.
Nevertheless, Wiranto is sanguine. “It is heartening to see that the
administration is planning to ramp up development spending sizably in
the 2012 budget proposal,” he said. At almost $20 billion, it is more
than 19% higher than this year’s allocation, and is expected to go into
building 4,000 kilometres of roads, 150 kilometres of rail track and14
new airports, as well as more affordable public housing. In addition,
Brodjonegoro is hopeful that the private sector will increase its
investment through public-private partnerships, especially in the water
and power sectors.
It will be interesting to see the progress achieved this time next year
— and, of course, whether the much awaited land acquisition law has
been enacted.
Meanwhile, widespread subsidies cause distortions to the economy and,
because of their general coverage, are wasteful. They make up 15% of
total government spending, which is higher than the sums allocated to
infrastructure expenditure. Certainly, subsidies for fuel, food and
basic goods for the country’s poor are justified; but, so far, everyone —
rich and poor — gets the benefit. The government intends to raise the
electricity tariff next year and is discussing lowering the fuel
subsidy, except for poor households, but is maintaining food price
controls as part of its food security programme.
Tax avoidance and evasion
Yet, the problems the government encounters spending its cash are minor compared to its ability to raise revenue.
Tax receipts make up around 75% of total revenues, but the collection system is rife with avoidance and evasion.
Realisation is always much lower than targeted, said Brodjonegoro, and
is only about 12% of GDP. The main factor is a very small tax base.
“Although the country’s workforce is about 119 million, only about 17
million people are registered, and only about one million people in the
private sector actually pay tax,” he said.
So much of that labour force is employed by small and medium-sized
firms, often informally and usually paid in cash, making it hard to
identify prospective taxpayers and evaluate incomes. A proposed national
tax census might help, and was flagged by President Yudhoyono in
August.
Other proposals by the finance ministry include incentives and tax
holidays to “support revenue optimisation”, more effective law
enforcement against non-compliance and third-party data utilisation.
These policies would also be directed at the customs and excise
division, which suffers from similar failings.
But, measures instituted by the finance ministry led by Sri Mulyani
Indrawati until May 2010, and by her equally reformist successor have
had an effect. In 2007, less than 40% of registered taxpayers met their
obligations. In 2008, the number climbed to 52.8%, and in 2009 it
improved again to 58.16%.
Indrawati’s successor, Agus Martowardojo, “continues to work for
bureaucratic reform, to improve the tax administration and strengthen
the customs and excise division”, said Brodjonegoro. The ministry
expects tax receipts to rise by 16% in 2012.
There is clearly no sense of complacency. And, as Wiranto put it, “the
apparent earnestness with which the government is pursuing higher
revenues is driven in part by the realisation that development
expenditure needs to be ramped up, particularly for infrastructure”.
But, broadening the tax base is a longer-term goal; stamping out
rampant corporate tax evasion, which is often linked to corruption, is a
priority.
One of the biggest graft cases in Indonesia’s history unfolded last
year with the arrest of Gayus Tambunan, a low-level tax officer found to
have $3.3 million stashed in bank accounts.
Tambunan was convicted of bribery in January 2011, and he is expected
to stand trial again for taking bribes from corporate taxpayers who
allegedly used his services to ease their tax burdens.
Some Indonesian experts estimate that the so-called “tax mafia” steal as much as Rp400 trillion each year.
On the bright side, despite the tax collection problems, Indonesia can
rely on access to both domestic and international capital markets to
fill in any shortfalls. Brodjonegoro is confident that net issuance of
Rp126 trillion will be comfortably achieved this year — and will include
a global sukuk — and that Rp134 trillion of net issuance in 2012 is
manageable.
Of course, gaining investment grade status will help lower borrowing
costs and might mitigate the effects of risk aversion among bond
investors should the global economic environment worsen. Brodjonegoro’s
“optimistic forecast is that at least one agency will assign Indonesia
investment grade status by the end of 2011; more realistically, it will
happen next year.” But, attracting international approval for prudence
is insufficient. Institutional reform of other revenue sources and
implementation of necessary spending plans are essential for the
country’s sustainable development. That would indeed be an “enviable
trajectory”.
Source : http://www.financeasia.com/News/275792,indonesia-targets-fiscal-reform.aspx - Oct 6, 2011
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