RI must abandon fiscal stimulus, pursue fiscal sustainability: WB

JAKARTA (JP): Shackled by the exploding public debt level, the new government of President Abdurrahman Wahid is being advised by the World Bank to pursue fiscal sustainability to ensure a durable and sustained economic recovery.

The government should also improve the transparency of the processes for making budgetary allocations and budget the implementation of scarce resources, according to a World Bank report titled Indonesia, Public Spending in A Time of Change, released here over the weekend.

The report said the government's soaring debt, from a precrisis level of 24 percent of gross domestic product to more than 90 percent currently -- mainly the result of domestic debt to recapitalize local banks -- reduces its budgetary maneuverability.

As a result, the government will face fiscal difficulties throughout its term, which ends in 2004.

"Therefore, the government should abandon various fiscal stimuli which have failed to perform over the past two years, and move toward pursuing fiscal sustainability," said Sudharshan Gooptu, the World Bank's senior economist on Indonesia who led the team that prepared the report.

The report recommends that in order to achieve fiscal sustainability over the medium term, the government should seek a combination of appropriate efforts to generate domestic revenue, spending cuts, accelerated privatization and more aggressive asset recovery from uncooperative loan defaulters.

In addition, efforts to achieve fiscal sustainability should be supported through changes in budgetary management practices, including more comprehensive budget coverage, preparation of a medium-term budget outlook and improved debt and risk management.

The report also recommends the government take short-term measures to ensure fiscal sustainability. These include cutting wasteful spending such as energy subsidies, enhancing domestic resource mobilization by reducing various tax exemptions, limiting special economic zones to truly bonded areas and reducing corruption.

The report, however, warned medium-term fiscal sustainability was at risk from macroeconomic fluctuations, contingent liabilities and fiscal decentralization.

From macroeconomic considerations, interest rates and the rupiah's exchange rate are the most prominent factors affecting the government's budget.

The report suggested the government maintain interest rates at the current level, although this would mean the rupiah would remain under pressure. The WB reasoned that oil and gas revenue provided the government with a natural hedge against exchange rate fluctuation.

Contingent liabilities also pose fiscal risks whenever they become actual liabilities. Key contingent liabilities include the government's blanket guarantee covering domestic banks liabilities, its guarantee to power providers and toll road operators, obligations of minimum pension payments to civil servants and off-budget schemes such as subsidized farmer credits.

To minimize contingent liability risks, the report suggests the government make an inventory of all contingent liabilities to the budget, and include a contingency reserve in the budget to absorb shocks when they become actual liabilities.

The government should also track all off-budget operations, and include all government accounts in the government's treasury and accounting system.

According to the report, the last fiscal risk comes from decentralization. "This process would be risky in itself, but the risk is enhanced if the envisaged transfer of resources is not matched by a transfer of expenditure responsibilities," the report says.

Decentralization also poses a further fiscal risk through local government borrowing. "If not carefully managed, local government debt may end up on central government books, as in many countries around the world."

The report suggests the government carefully plan and phase in the decentralization process to develop spending obligations together with revenue.

The government should also set up a debt management unit in the Ministry of Finance to manage domestic and foreign debt, and coordinate local administrations that want to tap both domestic and offshore funds.

To ensure fiscal sustainability under a constrained budgetary environment, scarce public resources have to be allocated efficiently to those areas that will have the maximum intended impact in terms of public service delivery, the report says.

To this end, it recommends the government and the House of Representatives take institutional measures to ensure that adequate audit, evaluation and feedback mechanisms are in place so that the mix of spending allocations in the budget is deemed acceptable to a wider spectrum of the public.

To accomplish this, the government and the House must agree on rules for debates and making changes to the budget.

The report suggests the government restructure budget appropriations by ministries, and discuss each line of ministries' budgets separately with the House to enhance individual ministry's accountability.

Improvement in budget allocations must be followed by improvement in budget implementation, the report says. When it comes to implementation, decentralization can be a powerful tool to improve public service delivery and accountability.

"For fiscal decentralization to be successful, a strong central government is needed to lead and coordinate the process," the report says. (rid)