Indonesian fiscal consolidation impressive

Indonesian fiscal consolidation impressive

The Jakarta Post,, Malang, East Java

Analysts have accorded top marks to Indonesia for its fiscal
consolidation over the last three years, calling it quite an
impressive achievement despite the pump-priming policies pursued
by the government and the string of external shocks that have
affected the economy.

Anggito Abimanyu, chief fiscal analyst at the ministry of
finance, told the 15th national congress of the Indonesian
Economists Association here on Monday that the budget deficit
declined from as high as 2.4 percent of the gross domestic
product in 2001 to 1.7 percent last year.

The budget deficit is estimated to stay at around 1.7 percent
this year due to the Rp 10 trillion in additional stimulus
appropriated after the October 12, 2002 terrorist bomb attack in
Bali and is envisaged to further decline to a mere 1 percent of
GDP by next year.

The state budget is expected to be balanced by 2005.

The government debt to GDP ratio also decreased significantly
from over 100 percent in 2001 to as low as 70 percent now.

"This consolidation is impressive indeed by any standard,"
noted World Bank country director for Indonesia Andrew Steer, one
of the panelists, at the meeting.

He suggested that the B-minus given by international economic
rating agencies to Indonesia now seemed too low, given the
significant progress in its key financial ratios.

Steer pointed out the many other achievements the government
had made thus far in its fiscal management and accountability,
citing several new laws and draft legislation (bills) which
should further improve public spending management.

He cautioned, however, that Indonesia would be facing new
challenges in fiscal management within the next two years,
especially in connection with the government's plan to exit the
International Monetary Fund program.

"Indonesia's budget deficit now is much lower than Thailand's
or South Korea's when those countries graduated from the IMF
program. However, the Indonesian government's debt to GDP ratio
is much higher than those countries," Steer added.

He also said that fiscal challenges after disengagement from
the IMF arrangement would likely increase because there would no
longer be special financing arrangements from the Paris Club of
donors while quite a portion of the government bonds issued in
1999 to recapitalize banks would also be maturing soon.

Moreover, proceeds from asset disposal by the Indonesian
Restructuring Agency (IBRA) will decline as most of the prime
assets have been sold, while privatization of state companies
will slow down, especially in view of the 2004 election year,
Steer added.

"These fiscal challenges and risks do require strong
leadership," he asserted.

He also suggested the need for a good balancing act in the
process of fiscal decentralization as it was now tipped more
towards spending decentralization.

"Compared to most developed countries, spending
decentralization in Indonesia is far more advanced. But in the
case of revenue decentralization, too much responsibility still
falls on the central government," Steer said.

He also suggested that it was now time for the government to
reassess its public spending policy with the objective of
accelerating poverty alleviation and fueling higher growth.

Some other analysts shared Steer's view, saying that not
everything about fiscal consolidation was good for the economy.

In fact, they argued, the decline in the budget deficit would
be, to a certain extent, bad for the economy because that was
caused partly by the shortfall in development (investment)
spending due to the limited availability of counterpart local
funds from foreign-funded projects.

Hadi Soesastro, chief economist at the Jakarta-based Centre
for Strategic and International Studies (CSIS) also warned the
government against being complacent about the improvement in the
country's foreign reserves.

"We should not forget that the steep rise in international
reserves was generated partly by loans from the IMF and the debt
rescheduling granted to us by the Paris Club," Hadi noted.

According to official estimates, more than US$8 billion of the
$34 billion in foreign reserves that Bank Indonesia now holds is
a result of IMF loans.

But Indonesia will have to repay at least $5 billion of these
loans this year if the government decides to totally disengage
from any kind of special arrangement with the IMF. Moreover,
total disengagement from the IMF also will make the government
ineligible for further debt rescheduling from the Paris Club.

"Therefore, I think, it would be well advised for the
Indonesian government not to abruptly make a total disengagement
from the IMF arrangement," suggested Jack Boorman, a senior IMF
executive from Washington, who also attended the economic
conference.

The experiences from other countries such as Thailand and
South Korea which have successfully graduated from the IMF
program show that gradual engagement made the transition smooth
without any new shocks.

According to Boorman, Indonesia could opt first for a
precautionary arrangement, which would be followed by the IMF's
Post-Program Monitoring process.

Boorman cautioned, however, that even if Indonesia did not opt
for any kind of special arrangement after the current IMF
facility ended later this year, the country would automatically
fall into the IMF Post-Program Monitoring scheme if it did not
immediately reduce its debt to the IMF to less than 100 percent
of its quota.

"All countries which owe the IMF more than 100 percent of
their respective quotas are subject to more intensive, though not
binding, policy dialogs under the Post-Program Monitoring
plan," Boorman added.