Why Jokowi-Kalla cannot meet debt promise

One of the most popular promises made by President Joko “Jokowi” Widodo and Vice President Jusuf Kalla during their 2014 presidential campaign was to lessen Indonesia’s reliance on foreign debt.

However, according to the latest data, the government’s foreign debt reached US$146.16 billion in March. In October 2014, when Jokowi-Kalla were installed as President and Vice President, respectively, the government foreign debt was about $126.55 billion. In the period between October 2014 and March 2016, then, the government foreign debt rose by $19.6 billion, or 15.49 percent.

The perception of foreign debt in emerging economies in the 1980s was generally positive since such borrowing helped to improve the economies of many countries, such as South Korea, Taiwan, Singapore and Hong Kong.

However, some countries in Africa, Latin America and South Asia unfortunately failed to maximize the foreign debts and instead fell into a debt trap as a result of problems such as corruption and poor governance.

Indonesia’s debt per capita in 2015 reached $1,119, rising from $660 in 2010. Some government debt indicators have deteriorated because both exports and foreign reserves (a source of debt funding) have continued to decline.

The ratio of government foreign debt to foreign reserves rose from 115 percent in the fourth quarter of 2014 to 140 percent in the first quarter of 2016. In the same period, the ratio of the government’s foreign debts to exports also rose, from 61 percent to 84 percent.

The ratio of the government debt to gross domestic product (GDP) meanwhile rose from 14 percent to 17 percent.

What are the reasons behind this increase in government foreign debt?

The first factor is the government’s promise to ensure economic growth at an average of 7 percent for 2015 to 2019. With the GDP growth target, poverty is expected to decline to 4-5 percent from 11.22 percent in September 2015, and the unemployment rate is expected to fall to 5 percent by the end of 2019 from 5.5 percent in February this year.

The government also plans to increase its role in the economy to at least 10 percent of GDP from 7 percent currently.

In its attempts to achieve the target, the government has significantly increased state revenues, especially from taxes. In 2015, tax revenue was expected to reach Rp 1.48 quadrillion, increasing almost 30 percent from the previous year.

In the period between 2010 and 2014, tax revenue increased by an average of 12 percent annually. Even if the government wants to achieve economic growth of 7 percent, the tax revenue target is too ambitious. It is clear that government wants to increase tax revenue in order to reduce debts in financing the budget.

Unfortunately neither internal nor external economies are as good as expected. With economic growth at below 5 percent, tax buoyancy remains low.

Tax buoyancy (elasticity of tax revenue to economic growth) in emerging economies is generally between 1.5 percent 2 percent. But in Indonesia, tax buoyancy is lower at 1.2 percent.

Moreover, with the 2015 economic growth target of 5.7 percent, the tax revenue growth could be in the range of 10-15 percent, but the government has put it at 30 percent.

Second, as a result of the global economic slowdown, the government revenues are behind target. Decline in foreign reserves was caused by a fall in the prices of and demand for Indonesia’s exports.

The government wants to increase tax revenue in order to reduce debts in financing the budget.

Between January and April this year, the value of total exports dropped by 13 percent from the same period last year. Oil and gas exports declined by 39 percent and non-oil and gas exports plunged 9 percent.

Based on destinations, exports to Malaysia declined 13 percent, Thailand 10 percent, the Netherlands 24 percent, Italy 21 percent, India 29 percent and Taiwan 37 percent.

Prices of Indonesia’s commodities also declined sharply. Prices of oil and gas have dropped by 33.27 percent. Fortunately, prices of non-oil and gas commodities increased moderately at 3.78 percent.

Third, the realization of state revenues was slower than expenditure. In the period between January and April, realized revenues totaled only Rp 386.3 trillion (21.2 percent of the target), while realized expenditure totaled Rp 544.8 trillion (26 percent of the target).

The budget suffered a deficit of about Rp 158.2 trillion. The government raised debt of $7.8 billion during January to March to plug this deficit.

The accumulation of government debt is caused by deficit financing. However, besides creating debt, to cover the deficit, the government still has at two tools at its disposal, namely asset sales (privatization) and money printing. But those options are rarely taken. Raising foreign debt is a common tool in every single country.

But it is crucial to note that increasing foreign debt can cause structural problems, for example primary balance deficit.

Primary balance deficit means that the revenue budget is not able to fulfill interest debt payments, meaning the government needs to raise new debts to pay it. Primary balance deficit in Indonesia rose form Rp 52 trillion in 2012 to Rp 98 trillion in 2013. In 2015, primary balance deficit hit Rp 136 trillion while in the revised 2016 state budget, the amount reached Rp 313 trillion.

In 2015, interest debt payments reached Rp 156 trillion, contributing almost 9 percent of the government budget, while in the revised 2016 state budget, the amount was Rp 191.7 trillion (about 11 percent).

With the increase in debt payments, the allocation to the productive sector becomes more limited.

by Abdul Manap Pulungan

source The Jakarta Post, Monday, June 20, 2016

What is wrong with economy’s performance?

The economy is still unable to show a satisfactory performance, although the government has issued as many as 12 policy packages since September last year.

The latest data showed that the economy grew only at a rate of 4.92 percent in the first quarter of 2016, down from 5.04 percent in the fourth quarter of 2015. It is also down from Bank Indonesia’s growth target of between 5.1 percent and 5.2 percent.

What is wrong? Initially the packages raised high expectations as it was believed that the government under President Joko “Jokowi” Widodo would miraculously drive up economic growth. Why did the initially bullish climate turn sour? This is of course a delicate question taking into account the global economic malaise, but the Indonesian economy does not only depend on exports.

The 12 economic packages introduced by the Jokowi government can be divided into two groups: one meant to enhance the puchasing power of consumers and the other to boost investment and raise industrial competitiveness. They are very important because the two sides of the economy, namely demand and supply, should be balanced and work hand in hand.

The 12 packages consist of new regulations or replacements for old ones. The question is, since the regulations have been in place, are there any other economic activities that could be run efficiently and effectively? In other words, has the economy been managed according to economic laws?

Let’s start with the agricultural sector. By observing this sector from one province to another, it is clear that most of them produce similar products. For example, almost all provinces produce rice, without considering the soil characteristics of the respective regions. It is well known that specialization will increase productivity.

From the statistical data published by the Central Statistics Agency (BPS), it was found that rice productivity was different from one region to another. Java and Bali had the highest rice productivity, almost 6 tons per hectare, while in West Kalimantan it is only around 3 tons per ha. Why is the principle of comparative advantage not applied as it is in international trade? If agricultural specialization is implemented, the sector could contribute a higher proportion of gross domestic product (GDP).

This is a picture that could mirror the larger context of the Indonesian economy. From GDP data for 2015, it was found that the tradable sectors contributed 41.2 percent to GDP, while the nontradable sector contributed 58.8 percent in current prices, but a publication of Bank Indonesia for 2015 shows that the tradable sector obtained only 28 percent of the total credit, while the nontradable sector obtained the lion’s share of 72 percent.

The figures hide the economic incentive of the whole economy. The nontradable sector consists of, among others, housing, commercial buildings, apartments and real estate in general. The potential profit in this sector is usually higher compared to other sectors. The public works and housing ministry’s data show that the demand for housing is very high, making the housing sector a “producers’ market”.

Such a situation enables the developers to enjoy the rent by raising the prices of their products, which become a barrier for the general public to buy the offered housing or flats.

This is a vicious circle leading to economic inefficiency. The continuous rise of housing prices, flats and real estate in general become a source of economic attractiveness for investors. Unfortunately it has a negative impact for the economy as a whole, distorting the investment.

In the case of Indonesia, many people buy apartments or houses not to use them immediately, but just for investment, expecting high capital gains.

The lion’s share of bank credits going to the nontradable sectors, such as the construction sector and housing, has partly contributed to the poor economic situation.

The high interest rates in the country would only be suitable for activities with a potentially high return on investment. Such an expectation would be fulfilled by the real estate sectors in general.

How can such negative prospects be improved? A deep and detailed economic analysis should be conducted before an appropriate economic policy is implemented to ensure that the new policies would be able to make a positive impact on the real sector.

A policy or a policy package that is not based on analysis of the real sector, but just derived from another economic setting, will be doomed to failure.

The role of an efficient price formation for all products, accompanied by an appropriate tax system, should be emphasised so that there will be no economic rent component in the prices of any products leading to misallocation of resources. The land component in housing and construction activities in general are usually susceptible to malpractice.

A low capital gains tax in real estate as proposed by the Financial Services Authority (OJK) will boost the potential profits in that subsector, raising its attractiveness to investors. The OJK head several times proposed a one-percent capital gains tax on real estate. This is distortive, because there will be a reallocation of funds from other sectors to this sector, lowering the potential growth in the economy. Why so? Because the majority of the cost component of real estate is just land.

Hence the lack of attention by the policy packages to the internal structure of activities that would be influenced by the intended regulations could be a source of their ineffectiveness. Without knowing exactly what is inside the activities to be regulated and the interaction between the activities, the regulations could be doomed to fail.

Fulfilling the World Bank’s criteria about the ease of doing business is not a panacea for success.

by Djamester Simarmata 

source The Jakart Post, Monday, June 20, 2016

New approach to bureaucratic reform

President Joko “Jokowi” Widodo clearly states in his Nawacita priority agenda that he will build clean, effective, democratic and reliable governance.

In fact, bureaucratic reform has been a priority since the two terms of the Susilo Bambang Yudhoyono presidency that ended in 2014.

In the 2010-2014 Medium Term Development Plan (RPJMN), bureaucratic reform was listed as a national priority with several indicators such as the Corruption Perception Index (CPI), an audit opinion on the financial reports of state institutions by the Supreme Audit Agency (BPK) and the Government Performance Accoutability Report (LAKIP).

Indonesia’s CPI rose from 32 in 2012 to 36 in 2015. Meanwhile, the BPK notes that the number of state institutions that received an unqualified opinion accounted for 71 percent in 2014, rising from 63 percent in 2010.

The Corruption Eradication Commission in its latest survey gives 7.22 points for state institutions’ public service integrity — rising from 6.16 points in 2010. The Administrative and Bureaucratic Reform Ministry stated in a 2015 report that 79 percent of government institutions received a “good” grade on performance accountability, increasing significantly from just 12 percent in 2010.

Thus, bureaucratic reform has improved bureaucratic accountability and enhanced public services. Now, interacting with the bureaucracy is no longer a costly waste of time. In some regions, a significant change has taken place, providing the optimism that bureaucracies can be reformed.

The Global Competitiveness Report notes that one key pillar that determines competitiveness in many countries is the legal and administrative framework within which all development takes place.

The latest report shows that Indonesia still faces major challenges in the basic areas of competitiveness, including in infrastructure and institutions. But we must also focus on how bureaucratic reform can answer development problems. This will push bureaucracies to be more sensitive to the objectives of development.

One national priority, for instance, is to build 10 tourist destinations within five years. Is the bureaucracy ready to meet this goal? There are at least four aspects related to the readiness of the bureaucracy — organization, human resources, business process, and regulation.

Procedural matters in business should be clear.
First, we have to determine which organization will manage these tourist destinations, whether it will be the Tourism Ministry or a special agency. If the latter is chosen, we have to ensure that there will not be any overlapping authority between these two institutions.

Second, we must provide sufficient human resources. How many experts in tourism do we have in government? Will we recruit more civil servants with a background in tourism?

Third, to manage tourist destinations, several ministries, regional governments and state-owned enterprises with separate authorities must coordinate with one another.

How will this be done? Procedural matters in business should be clear.

Fourth, what is the legal basis for establishing these 10 tourist destinations? A bureaucracy always needs a legal basis to guide it in executing policies despite the spirit of deregulation that is buzzing at the moment.

These questions are basic institutional issues that we must consider if we want to ensure the readiness of the bureaucracy as a implementer of policy. We are now conducting an organizational audit in a bid to streamline the bureaucracy. We are in a moratorium period for recruiting civil servants to assess the number, need effectiveness of existing civil servants. In this period, government institutions should formulate human capital development plans to determine such needs.

However, bureaucratic reform is not merely about how we change bureaucracy. Rather, it is a process directed toward the attainment of national development goals.

by Husni Rohman

source The Jakarta Post, Tuesday, June 21, 2016