Govt says it's 'on right track' for fiscal sustainability
Govt says it's 'on right track' for fiscal sustainability
Dadan Wijaksana and Reiner S.
The Jakarta Post
Jakarta
The government has been applauded for making substantial progress
in managing its post-crisis fiscal challenges, but dangers
stemming largely from the crisis persist.
Minister of Finance Boediono said the government remained
committed to continuing the fiscal consolidation process, which
often requires taking difficult and unpopular measures.
"We're targeting that, in the next two to three years, we
can achieve a stable fiscal condition," he told The Jakarta Post.
"And I think we're on the right track."
He noted the declining government debt ratio and state
budget deficit.
The government debt to gross domestic product (GDP) ratio
is expected to fall to below 70 percent this year from 100
percent in 2001, while the budget deficit is set to drop to 1.7
percent of GDP from 3.7 percent three years ago.
Even today, Boediono said, Indonesia could be categorized
as having a relatively safe fiscal condition based on some
economic standards, including that of the European Union (EU).
According to an economic matrix treaty between EU
members, a country's fiscal condition is in danger when it has a
3 percent budget deficit and 60 percent debt-to-GDP ratio.
Achieving a stable fiscal condition is a prerequisite for
the sustained economic growth needed to create sufficient jobs
for the millions of people left unemployed by the economic crisis
that started in mid-1997.
The crisis drastically increased the size of government
debt -- from a reasonable level of overseas debt and no domestic
debt -- as authorities were forced to bail out troubled banks.
The government had to issue some Rp 650 trillion (about US$73
billion) worth of bonds to finance the bailout program.
During the peak of the crisis, the government allocated
around half of its revenue to service the debt, leaving little to
finance economic development programs.
The high rate of indebtedness also curtailed the
government's ability to respond to new shocks, thus affecting
investor confidence in the economy.
Upon taking office in 2000, the administration of
President Megawati Soekarnoputri put fiscal consolidation as a
top priority.
Renewed economic growth of between 3-4 percent in recent
years, and the stronger exchange rate of the rupiah to the U.S.
dollar have facilitated the debt reduction program, which has
been focused on seeking a debt restructuring facility from
foreign creditors and the "reprofiling" of government bonds by
replacing them with longer maturities, thus avoiding a potential
disaster for the state budget.
In another bid to ease pressure on the state budget, the
government is gradually removing expensive subsidies on fuel and
electricity.
Despite the efforts, the huge public debt still poses a
serious threat to the state budget, with the government having
limited options to manage the risk.
Analysts have said that to reduce the huge indebtedness,
the government must continue to pursue economic growth, fiscal
discipline and speed up the sale of assets under the Indonesian
Bank Restructuring Agency (IBRA) and also the privatization of
state-owned enterprises.
Restoring economic growth would not only increase the
size of GDP -- thus lowering the denominator in the debt-to-GDP
ratio -- but would also provide the government with resources to
repay the debt and facilitate the restructuring process both in
the banking and corporate sectors.
In the area of fiscal discipline, it is essential for the
government to boost tax revenue as the rising debt service cost
has cut into spending for infrastructure, including roads and
electricity development, which is crucial for boosting economic
growth.
It is in this area where progress has been limited.
"We aim to improve our tax administration," Boediono
said, pointing out that the government inaugurated the "large
taxpayers office" to help boost tax compliance, especially among
large businesses, last year.
Analysts agree that improving tax administration to
increase revenue should be of a higher priority than raising the
tax rate, because the country's tax ratio of around 12 percent
was still relatively low compared to the region's average of 14
percent.
Further cuts in expensive subsidies are also crucial to
help create a healthy budget.
The government must press ahead with the sale of IBRA
assets and the privatization program because they will not only
provide cash to pay debts, but also transfer productive assets to
the private sector to help accelerate economic growth.
Meanwhile, rising political pressure for the government
not to extend the existing International Monetary Fund (IMF)
five-year economic reform program when it expires at the end of
this year could provide another threat to the country's fiscal
condition.
Without the IMF, foreign creditors under the Paris Club and
London Club would not provide debt-rescheduling facilities.
The government has set up a special team to explore
options to deal with the situation.
Government debt structure
(Rp trillion)
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1998 2000 2002 2003 2004*
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Foreign debts 493.8 547.6 568.8 587.7 581.4
Domestic debts 100.0 653.8 650.4 623.1 619.5
Total debts 593.8 1,201.4 1,219.2 1,210.8 1,200.9
GDP 955.8 1,282.0 1,610.0 1,825.1 2,068.9
debt-to-GDP ratio 73% 103% 81.8% 71.1% 61.5%
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* Projected
Source: Ministry of Finance
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