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.