RI heading for a 'banana republic'?

RI heading for a 'banana republic'?

By J. S. Uppal

YOGYAKARTA (JP): Since the crisis in Indonesia, some
macroeconomic variables have shown minor improvements. From 1999
to 2000, the real gross domestic product growth rate has
increased by 1.5 percent to 2.5 percent.

There is single digit inflation and some improvement in the
balance of trade. However, behind the veil of these aggregate
figures, deteriorating variables continue, casting doubts on the
self-sustaining growth of the fragile economy.

The first such aspect is the continued accelerating burden of
public debt: both internal and external. Total foreign and
domestic debt has reached the high figure of Rp 1,280.4 trillion,
which amounts to a staggering ratio of total debt to gross
domestic product of 111 percent.

The total interest payments on the debt amounts to Rp 54.6
trillion, which absorbs 36 percent of the total government
revenues and 28 percent of the total government expenditure.

This massive annual burden of the interest payment alone
leaves insufficient budgetary resources for other vital
governmental functions, including the outlays on the ensuing
fiscal autonomy. The interest burden has already retarded the
effectiveness of any fiscal policy for stabilization and growth.

The present public external debt stands at US$80.7 billion
(which does not include $4.6 billion approved recently at the
Tokyo meeting). Adding to the private external loans, Indonesia
has entered the "debt trap", owing more than $210 billion to
foreign lenders.

The seriousness of this phenomenon is evident in the high debt
service ratio (percent of annual payments to total exports) of
about 37 percent. We have to borrow more to pay the interest on
already existing debt and consequential negative flow of foreign
funds.

How tragic is it that the country has to borrow from abroad to
cover our budget deficit rather than investing the foreign
capital in capital goods and badly needed infrastructure.

Knowing that Indonesia has become "addicted to foreign loans"
and that we cannot survive without borrowing, the lender nations
and institutions are becoming increasingly bold and outspoken in
interfering in Indonesia's sensitive political issues. There is a
growing fear among the intelligentsia that Indonesia might
become a "banana republic" pushed around by lenders.

The growing pessimism and cynicism is evident from the feeling
of indifference among the public. There are no more pats on the
back of the government for having successfully arranged a new
$4.6 billion foreign loan recently in Tokyo.

Indonesia must resolve that there will be no more borrowing to
balance the budget. Domestic sources of revenue must be enhanced
to meet the mounting government expenditure.

Only through greater tax compliance can additional revenue be
obtained to cover the budget deficit, to a great extent. The
percentage of registered tax payers continues to be extremely low
(0.6 percent of the population) and the tax compliance rate
(percent of registered tax payers who actually file tax returns)
continues to be woefully low (0.3 percent).

The corresponding compliance rate in several Asian countries
is three to four times greater. The director general of taxation
recently said that contrary to popular belief the tax evaders are
not only petty traders and the hard-pressed middle-class, they
include many well-to-do people.

He surprised the nation by asserting that over half the
country's legislators, many ministers and many members of the
country's political elite received incomes outside their taxable
salaries, which they did not report to his office.

This is despite the fact that the tax rates in Indonesia are
lower than several Asian countries with even lower per capita
income. This massive tax evasion cuts into the very roots of
sound tax principles of revenue adequacy, efficiency and equity.

The tax system in Indonesia needs to be revamped through
careful study of the tax provisions and their compliance. Any ad
hoc action would create confusion and may be counterproductive.

The other serious concern on the Indonesia economy concerns
the impending local autonomy, promised to be implemented on New
Year's Day.

While the nation is getting ready to welcome the autonomy of
more than 325 townships and regencies, with thousands of
districts and villages, all over the country in about two months
time, there in no clear-cut well-designed public policies
outlined yet.

My visit to some local government officials tells me they are
as ill-informed and confused as the man on the street. The
autonomy laws have merely addressed some structural changes
regarding the new relationship between regencies or townships and
provinces, such as the matters of elections and who reports to
who, etc.

These laws also provide autonomy or fiscal powers to local
governments to change the rates and forms of the existing local
taxes, to raise the required tax revenue to meet expenditure on
the enhanced expectations from their electorates.

No attention has been paid to provide necessary guidelines to
determine tax capacity and tax efforts of the local governments,
to determine sharing of provincial and central tax revenue.

The two autonomy laws merely changed the method of
distribution of central subsidies; merging the present central
subsidies to the one central general allocation fund for
allocation of funds to local governments, without any serious
consideration of their revenue adequacy and fiscal needs to meet
their expected increased expenditures.

There is a growing feeling among local government officials
that all the central government has done is "pass the buck" to
the local governments, telling them not to bother the central
government for any additional resources.

Rather, they should just raise more tax revenues themselves or
"cut the coat according to the size of the cloth". No wonder
businesspeople are apprehensive and taxpayers uncertain about
their future tax liabilities.

There is thus an urgent need to address this serious concern.
Otherwise, New Year's Day may just be the beginning of chaos on
the question of the much-awaited regional autonomy.

Dr. J. S. Uppal is a professor of economics at New York State
University in Albany, New York. He is now a visiting professor at
Yogyakarta's Gadjah Mada University, which published his book
Taxation in Indonesia.