Regions and Countries

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p. 13 of 33 BACK | NEXT I. Current Development Trends and Issues II. The Government's Development Strategy A. Development Goals and Strategy B. Resource Mobilization and Investment C. Role of External Assistance D. ADB’s Assessment of the Government’s Development Strategy III. ADB's Development Experience IV. ADB's Strategy V. ADB's Assistance Program VI. Risks and Performance Monitoring and Evaluation

Country Strategy and Program 2006-2009 (Draft for Consultation): Indonesia : II. The Government's Development Strategy

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B. Resource Mobilization and Investment

43. Before the crisis, development expenditures generally were around 7-8% of GDP (excluding defense). These dropped considerably at the time of the crisis, and have been fairly stagnant since. The fuel subsidy reduction in 2005 was a major attempt to enhance the resources available to the Government. To compensate for the reduced fuel subsidies, the Government has initiated a series of targeted interventions to establish and improve safety nets, as well as to increase investments into health, education, and rural infrastructure. Some of these are components of the Fuel Subsidy Reduction Compensation Program (PKPS-BBM). The following main interventions have been put in place. (a) unconditional cash transfers, estimated to be for15.5 million poor and near-poor households, with an allocation of $470 million equivalent in the 2005 budget; (b) operational aid to schools with an allocation of $630 million equivalent in the 2005 budget; (c) basic health care and health insurance for the poor with an allocation of ($390 million equivalent in the 2005 budget; (d) rural infrastructure allocations of $330 million equivalent in the 2005 budget and a further $250 million equivalent in the 2006 budget.

44. The law on regional autonomy (Law 32/2004) defines 30 functions which are the responsibility of local governments. Finances come from local government own-source revenues, shared revenues (natural resources), transfers from the national government and borrowings. Local governments’ own revenue-raising capacities are still limited, accounting for only about 6% of total revenues.²² Local governments remain dependent on fiscal transfers from the national government, which have increased from Rp33.5 trillion ($3.98 billion) in 2000 to Rp123.2 trillion ($13.1 billion) in 2004. Yet, 85% of local government budgets is earmarked for salaries and overheads, leaving very little for fulfilling service obligations. The lack of financial freedom and of an accountability mechanism makes it difficult for the Government to ensure increased spending on social services and local infrastructure.

45. In 2005, there was a marked slow down in development spending as a result of the introduction of a new budget system without sufficient preparation and training. Having overcome these hurdles, the 2006 budget was released early in 2006. However, spending has not picked up. It appears that the anti-corruption drive is playing a role in this, with line agencies as well as local governments investing Government funds in short term financial instruments rather than investing them in the economy.

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