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