Part 2 of 2 IMF inhibiting RI's improvement, inflating inequity

Rizal Ramli, Former Coordinating Minister for the Economy, Jakarta

Reform of the tax system is necessary to increase fiscal autonomy and reduce dependence on foreign borrowing. It is time for groups that have benefited from 35 years of New Order government to share in the burden of the economic recovery. Tax reform would increase revenues and make it possible to both use fiscal policy to accelerate the recovery and reduce structural inequality. Recommended measures include, among others:

1. Increasing the number of Indonesians on the tax roll.

In November 2000, two million people were listed on the tax roll. Using a range of devices, including inspections at elite housing estates, the number of taxpayers was increased to 2.9 million in less than seven months. It is estimated that potential taxpayers under the current law could number as many as five million people.

2. Reducing nominal income taxes but increasing tax effectiveness.

The nominal rate of tax in Indonesia is 30 percent. In other ASEAN countries rates vary between 22 percent and 25 percent. Indonesia would be more attractive to investors if nominal rates were reduced. Until now, although nominal rates are as high as 30 percent, in practice, negotiations take place between the tax authorities and taxpayers that reduce the effective tax rate to around 10 percent. Therefore, any move to reduce the nominal rate of tax must be accompanied by measures to improve tax collection.

3. Introducing a tax amnesty

The introduction of a tax amnesty would enable corporations and individuals that have evaded taxes in the past to come into compliance with tax laws. Tax evaders would, of course, have to pay a penalty and back taxes. The two main advantages of introducing provisions for a tax amnesty are: first, increased revenues from back taxes and penalties; second, an increase in the tax base in future years.

Tax amnesties are only effective if accompanied by strict enforcement of the law as a means of reducing the scope for tax evasion in future years. In the absence of rigorous enforcement of existing laws, the possibility of a tax amnesty would not attract evaders and the measures would therefore be a waste of time.

These efforts, taken together, have the potential to raise an additional Rp 90 trillion in revenue over the next three years (2003 to 2005).

The government must make better use of public funds. For example, the government maintains a number of special accounts containing funds that are rarely reported to the legislature and the public. These accumulated funds must be put to work for the public benefit. The amounts contained in these accounts are sufficient to ease the government's cash flow problems in the short term. Account 69 (formerly Account 16) is an account set up by the New Order for off-budget spending. The funds in this account were derived from the difference between actual oil prices and the price set in the government budget for the year.

At the moment Account No. 69 contains Rp. 18 trillion. Similarly, the government accumulates undisbursed funds from the national budget and funds in the Investment Fund Account derived from the interest rate difference between the government's overseas borrowing and second-tier lending at higher interest rates to banks or state-owned companies. At the moment, the Investment Fund Account contains Rp. 2l trillion. These resources should be put to work in the form of public investment to accelerate the recovery.

The government must reach a fair and viable agreement with Bank Indonesia (BI) over BI's role in the Liquidity Credit (BLBI) scandal. The BPK audit of BLBI concluded that BI bore responsibility for the misuse of Rp 84.8 trillion, from a total of Rp 144.5 trillion in liquidity credits supplied from the beginning of the crisis until Jan. 29, 1999.

The oil and gas sector has great potential to stimulate Indonesia's economic recovery. Optimization of income from this sector would generate substantial funds for national economic recovery. It is probable that Indonesia will experience a natural gas boom over the coming decade.

The management of public debt will play a key role in the economy in the post-IMF period. Dependence on the IMF and the Paris Club would be greatly reduced if the government could reduce its stock of debt and the burden of debt servicing on the economy. Unfortunately, the current pro-IMF economic regime adheres to a dogmatic approach to public finance.

The current focus is on shifting around and adding to the debt burden, rather than reducing it. This approach results in a counterproductive fiscal policy that restrains rather than promotes growth.

Regarding domestic debt, the approach of the current government can be described as "triple R": Rollover, reprofiling and refinancing. The aim of reprofiling is to change the maturities of existing bonds. Refinancing depends entirely on the resilience, liquidity and confidence of the domestic bond market.

This means that the government depends entirely on refinancing. If, for example, 75 percent of the principal of recap bonds falling due over a given year were refinanced, then the value of new bonds would vary from Rp 4.7 trillion to Rp 28.3 trillion per year from 2003 to 2018. The question is whether the domestic bond market is resilient and liquid enough to absorb these new bond issues.

In 2004, Indonesia will hold the first direct presidential elections in the country's history. This will be a year of economic risk, political uncertainty, social tension and security concerns. Under this scenario, Indonesia must issue bonds valued at Rp 19.1 trillion in the same year within the context of a contractionary fiscal stance. Would the market be willing to absorb the new bonds under these conditions? In other words, this triple-R strategy carries a high risk of default, and binds Indonesia ever more tightly to the IMF.

Indonesia's debt management strategy must therefore be oriented toward the reduction of debt stocks. The independent team on bank recap bonds identified five alternative solutions to the problem of domestic public debt: Asset-to-bond swaps (AB swaps); adjustments to capital adequacy ratio (CAR), interest- bearing perpetual bonds (IBPB) and bond pooling.

If one of these proposals, or perhaps a combination or adaptation of several were to be adopted, the reduction of public debt servicing would be substantial. For example, if the proposal for indirect acquisition among recap banks were adopted and accompanied by interest-bearing perpetual bonds, then Rp 27.6 trillion in recap bonds could be withdrawn and Rp 3.59 trillion in interest payments would be saved (at an SBI (Bank Indonesia Certificate) rate of 13 percent). With the issuance of IBPBs, principal payments of Rp 11.6 billion would be eliminated. Total savings would be at least Rp 15.2 trillion.

Another idea would be to trade shares in state-owned companies for recap bonds held by state-owned recap banks (bonds-to-share swaps) and swaps of infrastructure-related foreign debt (for example, debts of state electricity company PLN) for recap bonds.

Releasing our economy from the confines of an IMF agreement will help, but it is not in itself a solution to Indonesia's economic problems.

We must work hard to attack the three main obstacles to economic recovery: political instability, the lack of secure rights to property and personal safety, and the absence of the rule of law. Even the most carefully constructed economic program cannot overcome the negative effects of these essentially political and social constraints to economic progress. This will require leadership and vision, two elements distinctly lacking in the current administration.