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Regions and Countries Country Economic Reviews Document
Country Economic Review - Indonesia : I. Recent Economic Developments
B. Fiscal Developments18. Relatively prudent fiscal policy, meeting deficit spending limits and revenue targets, has underpinned macrostabilization efforts. These efforts have been complicated by generally low revenue efforts. Central While a number of countries cut taxes in response to the economic slowdown in 2001, Indonesia increased the tax on interest incomes from bank deposits and the sales tax on luxury goods, and introduced a value- added tax on agricultural products, in order to generate more revenue. StillDespite these efforts, overall tax collection failed to show significant gains in 2001. The ratio of tax revenues to GDP stood at 12?13 percent% in 2001, which was close to that for Thailand and for the Philippines, but considerably below that the 18-19 percent for Malaysia (18-19%), and the 16-17 percent for Singapore (16-17%), and lower than that for Indonesia's performance before the financial Ccrisis (16.5 percent% in 1997). Significant change in tax mobilization will require strengthening governance through judicial and public administration changes, including civil service reforms. 19. The Central Government's fiscal policy is further impaired by decentralization., which The process has shifted considerable responsibility for the provision of public services and revenues to local governments. In 2002, they are expected to account for it is expected that 27.7 percent% of all public spending will be accounted for by local governments (Table 1),. which This change empowers meets the objective of empowering local communities, but does complicate fiscal policy by sharply limiting discretionary Ccentral Government spending. 20. The main sources of non-tax revenue are the volatile oil- and gas-related income, and asset and privatization sales. The sales latter reflects the continuing legacy of the financial Ccrisis when the Government assumed enormous debt, particularly as a result of bank recapitalization expenditures. Offsetting the debt, the Government received title to a wide range of assets; -the banking system as a whole was essentially nationalized as the Government assumed control and ownership of the the major portion of the sector. Sales of assets and of equity stakes in state-owned enterprises (SOEs) have provided funds equivalent to roughly 2 percent% of GDP in 2000 and 2001. However, political opposition and vested interests have limited these efforts have been limited by political opposition and by vested interests. The failure to conclude the long-planned sale of the state-owned Gresik Cement to a Mexican multi-national corporation is an example of how was a case in which, due to local vested interests, unraveled national policy became unraveled. Conversely tThe successful, public sale of Bank Central Asia to a foreign-led group, however, was a very positive signal that the Government was determined to implement its policy of privatize public assetsation. In recognition of the difficulties and the difficulties and declining market value of the remaining assets, the 2002 budget projects a fall in revenues from sales and privatization. 21. The biggest constraint on fiscal policy is the need to meet debt service obligations, -the largest single item of expenditure for the Government expenditure (Table 1). In 2001 and 2002, on average public revenues equivalent to 5.5½ percent% of GDP are obligated to meet interest payments on the public debt. Deficit financing is required partly to partly meet interest payments. Exceptional financing in this respect is largely asset sales and privatization revenues. Given existing budgetary projections, there will be little net debt repayment will be limited during 2000-2002. Indeed oOnly with improving economic prospects (including growth of at least at 4 percent%, uniformly falling inflation falling uniformly, and no adverse exchange rate shocks) will enable is a significant decline in public sector debt projected by the end of the decade.  22. In recognition of the difficult fiscal situation, the Paris Club group of official creditor nations agreed on 12 April 12 2002 to reschedule $5.4 billion of Indonesian debt falling due from between 1 April 1, 2002, to 31 December 31, 2003. The rescheduling provides fiscal 'breathing' space, postponing both interest and principal payments. The International Monetary Fund (IMF) program of macroeconomic stability was extended through 2003 to support the agreement. 23. Overall, the Government's fiscal policy stance in 2002 is little different from that in 2001, with the budget targeting an overall deficit equal to about 2.5 2½ percent% of GDP. However, the Government has significantly changed there are significant changes within the overall budgetary framework. The Government has reduced An important budgetary development has been the reduction in ppublic subsidies, particularly for petroleum products, . This has been done by substantially raising retail fuel prices substantially (Table ). The budgetary allocation for subsidies in 2002 is 2.5 percent% of GDP, well under the 5.2 percent% realized for the same purpose in 2001 and 6.4 percent% in 2000. Moreover tThe Government has also committed to tying most retail fuel prices to international market prices to avoid budgetary shocks due to world oil price volatility. Although fuel prices are not yet at world market levels, there has been considerable closing of the previous gap has been closed considerably, with fuel prices substantially rising rises over the past 18-months. This program complements others that have raised water, telephone, and electricity tariffs to improve operating revenues for SOEs and reduce their call upon public revenues. Risks to the 2002 budget include the volatileity of oil prices,, as lower oil prices will reduce net revenues; and continued high inflation, which raises inducing high interest rates and domestic debt servicing costs. 
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