Part 2 of 2 IMF inhibiting RI's improvement, inflating inequity<\/p>\n
Rizal Ramli, Former Coordinating Minister for the Economy,
\nJakarta<\/p>\n
Reform of the tax system is necessary to increase fiscal
\nautonomy and reduce dependence on foreign borrowing. It is time
\nfor groups that have benefited from 35 years of New Order
\ngovernment to share in the burden of the economic recovery. Tax
\nreform would increase revenues and make it possible to both use
\nfiscal policy to accelerate the recovery and reduce structural
\ninequality. Recommended measures include, among others:<\/p>\n
1. Increasing the number of Indonesians on the tax roll.<\/p>\n
In November 2000, two million people were listed on the tax
\nroll. Using a range of devices, including inspections at elite
\nhousing estates, the number of taxpayers was increased to 2.9
\nmillion in less than seven months. It is estimated that potential
\ntaxpayers under the current law could number as many as five
\nmillion people.<\/p>\n
2. Reducing nominal income taxes but increasing tax
\neffectiveness.<\/p>\n
The nominal rate of tax in Indonesia is 30 percent. In other
\nASEAN countries rates vary between 22 percent and 25 percent.
\nIndonesia would be more attractive to investors if nominal rates
\nwere reduced. Until now, although nominal rates are as high as 30
\npercent, in practice, negotiations take place between the tax
\nauthorities and taxpayers that reduce the effective tax rate to
\naround 10 percent. Therefore, any move to reduce the nominal rate
\nof tax must be accompanied by measures to improve tax collection.<\/p>\n
3. Introducing a tax amnesty<\/p>\n
The introduction of a tax amnesty would enable corporations
\nand individuals that have evaded taxes in the past to come into
\ncompliance with tax laws. Tax evaders would, of course, have to
\npay a penalty and back taxes. The two main advantages of
\nintroducing provisions for a tax amnesty are: first, increased
\nrevenues from back taxes and penalties; second, an increase in
\nthe tax base in future years.<\/p>\n
Tax amnesties are only effective if accompanied by strict
\nenforcement of the law as a means of reducing the scope for tax
\nevasion in future years. In the absence of rigorous enforcement
\nof existing laws, the possibility of a tax amnesty would not
\nattract evaders and the measures would therefore be a waste of
\ntime.<\/p>\n
These efforts, taken together, have the potential to raise an
\nadditional Rp 90 trillion in revenue over the next three years
\n(2003 to 2005).<\/p>\n
The government must make better use of public funds. For
\nexample, the government maintains a number of special accounts
\ncontaining funds that are rarely reported to the legislature and
\nthe public. These accumulated funds must be put to work for the
\npublic benefit. The amounts contained in these accounts are
\nsufficient to ease the government's cash flow problems in the
\nshort term. Account 69 (formerly Account 16) is an account set up
\nby the New Order for off-budget spending. The funds in this
\naccount were derived from the difference between actual oil
\nprices and the price set in the government budget for the year.<\/p>\n
At the moment Account No. 69 contains Rp. 18 trillion.
\nSimilarly, the government accumulates undisbursed funds from the
\nnational budget and funds in the Investment Fund Account derived
\nfrom the interest rate difference between the government's
\noverseas borrowing and second-tier lending at higher interest
\nrates to banks or state-owned companies. At the moment, the
\nInvestment Fund Account contains Rp. 2l trillion. These resources
\nshould be put to work in the form of public investment to
\naccelerate the recovery.<\/p>\n
The government must reach a fair and viable agreement with
\nBank Indonesia (BI) over BI's role in the Liquidity Credit (BLBI)
\nscandal. The BPK audit of BLBI concluded that BI bore
\nresponsibility for the misuse of Rp 84.8 trillion, from a total
\nof Rp 144.5 trillion in liquidity credits supplied from the
\nbeginning of the crisis until Jan. 29, 1999.<\/p>\n
The oil and gas sector has great potential to stimulate
\nIndonesia's economic recovery. Optimization of income from this
\nsector would generate substantial funds for national economic
\nrecovery. It is probable that Indonesia will experience a natural
\ngas boom over the coming decade.<\/p>\n
The management of public debt will play a key role in the
\neconomy in the post-IMF period. Dependence on the IMF and the
\nParis Club would be greatly reduced if the government could
\nreduce its stock of debt and the burden of debt servicing on the
\neconomy. Unfortunately, the current pro-IMF economic regime
\nadheres to a dogmatic approach to public finance.<\/p>\n
The current focus is on shifting around and adding to the
\ndebt burden, rather than reducing it. This approach results in a
\ncounterproductive fiscal policy that restrains rather than
\npromotes growth.<\/p>\n
Regarding domestic debt, the approach of the current
\ngovernment can be described as \"triple R\": Rollover, reprofiling
\nand refinancing. The aim of reprofiling is to change the
\nmaturities of existing bonds. Refinancing depends entirely on the
\nresilience, liquidity and confidence of the domestic bond market.<\/p>\n
This means that the government depends entirely on
\nrefinancing. If, for example, 75 percent of the principal of
\nrecap bonds falling due over a given year were refinanced, then
\nthe value of new bonds would vary from Rp 4.7 trillion to Rp 28.3
\ntrillion per year from 2003 to 2018. The question is whether the
\ndomestic bond market is resilient and liquid enough to absorb
\nthese new bond issues.<\/p>\n
In 2004, Indonesia will hold the first direct presidential
\nelections in the country's history. This will be a year of
\neconomic risk, political uncertainty, social tension and security
\nconcerns. Under this scenario, Indonesia must issue bonds valued
\nat Rp 19.1 trillion in the same year within the context of a
\ncontractionary fiscal stance. Would the market be willing to
\nabsorb the new bonds under these conditions? In other words, this
\ntriple-R strategy carries a high risk of default, and binds
\nIndonesia ever more tightly to the IMF.<\/p>\n
Indonesia's debt management strategy must therefore be
\noriented toward the reduction of debt stocks. The independent
\nteam on bank recap bonds identified five alternative solutions to
\nthe problem of domestic public debt: Asset-to-bond swaps (AB
\nswaps); adjustments to capital adequacy ratio (CAR), interest-
\nbearing perpetual bonds (IBPB) and bond pooling.<\/p>\n
If one of these proposals, or perhaps a combination or
\nadaptation of several were to be adopted, the reduction of public
\ndebt servicing would be substantial. For example, if the proposal
\nfor indirect acquisition among recap banks were adopted and
\naccompanied by interest-bearing perpetual bonds, then Rp 27.6
\ntrillion in recap bonds could be withdrawn and Rp 3.59 trillion
\nin interest payments would be saved (at an SBI (Bank Indonesia
\nCertificate) rate of 13 percent). With the issuance of IBPBs,
\nprincipal payments of Rp 11.6 billion would be eliminated. Total
\nsavings would be at least Rp 15.2 trillion.<\/p>\n
Another idea would be to trade shares in state-owned companies
\nfor recap bonds held by state-owned recap banks (bonds-to-share
\nswaps) and swaps of infrastructure-related foreign debt (for
\nexample, debts of state electricity company PLN) for recap bonds.<\/p>\n
Releasing our economy from the confines of an IMF agreement
\nwill help, but it is not in itself a solution to Indonesia's
\neconomic problems.<\/p>\n
We must work hard to attack the three main obstacles to
\neconomic recovery: political instability, the lack of secure
\nrights to property and personal safety, and the absence of the
\nrule of law. Even the most carefully constructed economic program
\ncannot overcome the negative effects of these essentially
\npolitical and social constraints to economic progress. This will
\nrequire leadership and vision, two elements distinctly lacking in
\nthe current administration.<\/p>",
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