Budgetary Reforms

Indonesia

Economic News

22 Jul 2010
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Amid overwhelming interest in the sale of state bonds last week, the government is actively seeking additional ways to finance the expected state budget deficit, and to further improve its fiscal practices with assistance from overseas.



In an auction of government bonds last week, demand exceeded supply tenfold, with the government selling only Rp 1.1 trillion ($120m) ignoring the rest of incoming offers totalling Rp 10.1 trillion ($1.1bn).



During their first year of government, global oil prices rose to record highs, the Indonesian system of subsidising fuel became untenable, with a major budget deficit looming.



In the second half of 2005 the government took the politically brave step to decrease subsidies significantly. While this decreased the budget allocation for fuel subsidies, it has also resulted in super inflation, with the central bank raising interest rates to contain price increases.



These high interest rates, in combination with a widely commended strong anti-corruption and pro-governance campaign by the government, have resulted in relatively low public spending. Government officials preferred to put their regional development funds in central bank certificates (SBI) than to spend it on projects out of fear for corruption charges in implementing those projects.



In 2005 the budget deficit eventually reached only 0,5%, but with spending procedures eased and inflation and interest rates decreasing, 2006 is looking at a higher deficit.



Next to the bonds issuance, the government is also planning to divest significant stakes in a number of state-owned enterprises, to finance the deficit. This week, Coordinating Minister for the Economy Boediono told OBG that "the most immediate State Owned Enterprise to be privatised is our gas company, Perusahaan Gas Negara (PGN)".



Together with the sale of two other state firms, the 5.31% stake in PGN is expected to contribute approximately Rp 3 trillion ($329m) to the state coffers in 2006. Among the other two firms to be divested this year is Bank Tabungan Pensiunan Negara (BTPN), a national retirement and savings bank, in which a 18% stake will be offered via open tender.



Minister for State Owned Enterprises Sugiharto announced last week that the government is planning to privatise 14 state firms next year. While the proceeds of the sale of three of them (national steel company Krakatau Steel, construction company Wijaya Karya and Bank BTN) will be used to develop their own business, the proceeds from the rest (Bank BNI, Electronics firm Inti, PT Kertas Padalarang, PT Kertas Blabak, PT Cambrics Primissima, PT Atmindo, PT Intirub, PT Askrindo, PT Kertas Basuki Rahmat, PT Jakarta International Hotel Development and PT Reksadana) will be used to cover the expected budget deficit of 2007.



While these two measures bring in money, decreasing government debt aims to save money, thereby alleviating pressure on the budget. This week, the government announced that they are ahead of schedule in decreasing governmental debt as percentage of GDP, mainly due to a stronger rupiah, higher absolute value of GDP and higher debt repayment.



This month, Indonesia repaid all of its debt to the IMF, ahead of a schedule that would have ended in 2010 with a final payment of $3.2bn. In a statement, First Deputy Managing Director of the IMF John Lipsky said, "Indonesia's ability to repay the Fund early reflects the strength of Indonesia's economic recovery and its strong balance of payments position. We look forward to a continued close relationship and broad dialogue with the Indonesian authorities on economic developments and policy issues".



The IMF earlier commended the Indonesian government in a report published late September for legal and administrative reforms taken to improve transparency in fiscal management. In this report, the IMF also identified areas where the Indonesian government could still improve their financial management.



According to the IMF report, most room for strengthening could be found in internal auditing procedures, both in depth (central government level) and width (provincial and regional level), while implementing reporting on off-budget activity was identified as another challenge.



The attachment of a disclaimer by the Supreme Audit Agency (BPK) to the government's budget realisation of 2005, the sixth in a row, seems to confirm the analysis of the IMF. The agency reported irregularities in state-asset transfers, and a lack of access to audit tax revenues in particular as constraints.



While the finance minister acknowledged that procedures to access tax records were indeed complex, she promised to improve this in the future, partly by amendments to the tax law, currently being debated in parliament.



And it has become apparent that the government can expect even more support from abroad in improving fiscal practices.



Last week saw the signing of a Memorandum of Understanding (MoU) on the establishment of a EUR 14.3m ($17.9m) multi-donor trust fund intended to further reform public financial management in Indonesia.



Dutch minister for development cooperation Agnes van Ardenne signed the deal in Jakarta with Indonesian finance minister Sri Mulyani. The programme, that will be run by the World Bank, will receive financially sponsorship from The Netherlands with 5m euros ($6.3m), while the EU will contribute 9.3m euros ($11.7m).



Van Ardenne told reporters that the programme, which will focus on improving the management of the tax and customs office at the finance ministry, is expected to improve the investment climate, citing the success of a similar programme in Georgia.


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