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Regions and Countries Country Economic Reviews Document
Country Economic Review - Indonesia : II. Short and Medium-Term Economic Prospects and Policy Issues
B. Fiscal and Monetary Developments44. Continued fiscal prudence is will be needed to fight inflationary pressure. The projections for budget deficits of 2-3 percent% of GDP are attainable, although they will require considerable efforts to meet increased targets for domestic revenue generation. Strengthening tax administration is key to for raising resources to finance for financing higher levels of development. Although there are some recent indications that inflation may have peaked and that the stance of monetary policy has been is tightening, inflationary is expected expectations have been built up over the past two years of to be more than 10 percent% inflation. 45. In 2001, fiscal and monetary policy faced the difficult task of encouraging economic recovery without jeopardizing the hard-won yet fragile macroeconomic stability. This challenge is likely to remain in the coming years as fiscal flexibility remains limited and competing objectives hamper monetary policy. The The IMF has supported the Government's program of macroeconomic stability program., which, Wwhile overall the program has been implemented vigorously overall, still has several problemsissues remain. The most important ones are those central to effective monetary and fiscal policy, relating that relate to (i) Bank of Indonesia BI independence, (ii) financial sector strengthening, (iii) domestic resource mobilization, and (iv) debt management. 46. Bank of Indonesia independence is being addressed by new legislation to amend existing lawsBank of Indonesia is being addressed by new legislation to amend existing laws. Lack of a strong Ccentral Bbank might have contributed to a relatively accommodative monetary policy during the past two years. Over much of the recent past the Ccentral Bbank had been preoccupied with in defending its officials against allegations of corruption. The establishment of credibility will be crucial to ensure for ensuring that the Ccentral Bbank becomes an effective inflation fighter. 47. The financial sector has been strengthened through improvements in bank balance sheets and steps towards privatizeation of some institutions. Legislation has been passed to controlling anti-money laundering and is underway to to create a supervisory agency for the financial sector have also been important recent reform steps. In both areas, there is a vital need to follow-up with the creation of cCredible institutions must be created to implement the reforms, to underpin the anti-inflation policy, and to bolster public confidence in the banking system. The ADB is providing TA technical assistance to the Government for these purposes.10 48. Indonesia has a good track record of prudent fiscal management. However, this means that low revenue efforts reduce public spending, especially investment. The Government is committed to widening and deepening tax collection efforts, but needs to this will take concurrent efforts reform the at civil service and legal and judicial reformsystems. The proposed establishment of a proposed large- taxpayer office, if properly implementeddone, could signal welcome moves to ensure equity in the sharing of the tax burden. 49. The national debt is roughly the size of national income. Debt indicators will not shrink significantly until the end of the decade given the size of the debt and the trajectory of subdued GDP growth. Prudent debt management will require appropriate asset sales and privatization. The process of reducing overall debt levels by asset sales also redresses the imbalance between the relative shares of the public and private sector in the economy. Privatization is particularly crucial to reinvigorate the banking system and to make SOE management more efficient.11 Privatization is regarded as a strong signal of the Government's commitment and ability to advance reforms. Although the Government attained some clear success in 2001, some actions were stalled. Consensus is lacking between the legislative and executive branches and within the executive branch on how and when to carry out privatization and asset sales. A perceived history of corrupt practices during privatization limits public support for asset sales. Nongovernment organizations (NGOs) are skeptical of the benefits of privatization given the potential for corruption, the lack of effective regulatory institutions, and limited experience with competitive markets in many sectors. 50. However, While these issues are challenging, the Government following on previous actions, has demonstrated considerable resolve and capability in addressing solving difficult issues, . In particular particularly in reducing the success in reducing wasteful public subsidies for petroleum fuels and increasinges in utility service tariffs are a considerable testimony to the Government's political resolve and capability. These successes issue is also significant in that it demonstrates an evolving sophistication in economic debate in Indonesia. The public debate on fuel subsidies, for example, revealed that they had were of little impact on the poor and were thus could be seen as ineffective., which This allowed the Government to take what had earlier been considered politically unacceptable actions. A key lesson is that political consensus on economic issues is crucial if to allow for reforms are to proceed. ____________________ 10TA 3849-INO: Implementation of Anti-Money Laundering Regime, approved on 18 March 2002, for $1.5 million, and TA 3850-INO: Establishment of a Financial Sectors Authority, approved on 18 March 2002, for $1.5 million.
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