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)
---------------------------------------------------------------
1998 2000 2002 2003 2004* ----------------------------------------------------------------- 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% ------------------------------------------------------------------ * Projected
Source: Ministry of Finance 1