RI must abandon fiscal stimulus, pursue fiscal sustainability: WB
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)