Indonesia’s newly appointed finance minister explains why she returned to her home country to take up the role, and outlines her economic policy objectives.

Sri Mulyani

Following six fulfilling years working at the World Bank group to deliver its financial and knowledge services to countries grappling with the aftermath of the global financial crisis, it was time to heed the call to serve my own country, Indonesia. I am privileged to serve as the finance minister of a government led by a president fully dedicated to improving the lives of our people, a purpose to which I am also fully committed myself.

President Joko Widodo is determined to achieve an equitable and prosperous Indonesia, with a strong commitment to maintain diversity, peace, stability, and inclusiveness. His willingness to implement ambitious and difficult structural reforms and his strong commitment to fight corruption deserve strong support.

His decision to cut energy subsidies in January 2015 created opportunities to better use the country's budget for equitable growth. However, over-ambitious revenue targets of the past created risks within our policy framework.

In this context, I was asked to serve again as finance minister. The duty deep in my heart to serve my country, the president’s vision and commitment, and the urgency of circumstance were compelling reasons to take on this challenge.

Global economic risk

These are troubling times for the world economy, especially for commodity-exporting emerging markets such as Indonesia. Weak global economic and trade activity as well as uncertainty about the pace of recovery persist, while political and protectionist risks and financial market volatility are emerging.

Against this backdrop, Indonesia’s economy remains resilient following a remarkable recovery from the global financial crisis. The economy has weathered well the Taper Tantrum, the potential Grexit, Brexit, the renminbi devaluation and China stock market volatility, and the markets’ shock reactions following the result of the US presidential elections.

Credible economic management buttresses our strong fundamentals, which include low levels of public debt and strong discipline to maintain low fiscal deficits as a share of gross domestic product (GDP); a narrow current account deficit combined with a strong foreign reserves position; and benign inflation supporting stable consumption by a young and dynamic population. These fundamentals represent a strong defence against global economic uncertainty.

But as an open economy, Indonesia, like others, must remain vigilant to fragilities in the global economy and must position itself to take advantage of global market opportunities while pursuing its rightful place among the prosperous countries in the world. To achieve such prosperity we must increase and accelerate investment.

Necessary fiscal reform

The state budget, as a minister of finance’s fundamental tool, must be the backbone of policy and reform efforts – the budget must reduce, not create, risks for the economy.

That is why immediately upon my return to the post I took careful and considered decisions to reduce fiscal risks. With the support of parliament, we introduced spending efficiencies and more realistic tax revenue targets in the 2016 and 2017 budgets. The spending efficiencies are achieved by cutting less productive outlays, and maintaining outlays for productive and priority programmes, including infrastructure and social protection.

But a lot more needs to be done. Our aim is to use the budget as a key instrument to support growth without jeopardising fiscal prudence. The strategy is to optimise revenue and improve the quality of spending, while adhering to our fiscal rules to preserve sustainability.

Indonesia’s fiscal space is constrained by limited revenue collection, caused only partly by declining natural resource revenues. In 2015, the government collected total revenues of roughly 13% of GDP. Given the deficit-to-GDP ceiling of 3%, this meant we had a fiscal space of just 16% of GDP for spending on essential public goods and services. This is well below peers such as Malaysia and Thailand. Revenue reform, especially tax reform, is a priority.

Tax reform

Tax reform is a marathon, not a sprint, and we need to start now to expand our tax base and incentivise better tax compliance. Tax reform is one part of a new social contract between government and people, which highlights the maturing of our young democracy.

In June 2016, as an initial step to boosting fiscal revenues, the government launched a tax amnesty to provide delinquent taxpayers with a one-off opportunity to declare assets abroad and in Indonesia.

Rather than pay the statutory tax obligation, participants in the amnesty were required to pay only a small redemption fee on declared assets – a fee that rises through the three phases of the programme. If declared, overseas assets are repatriated, then a lower redemption fee is levied.

The first phase of the amnesty finished strongly in September, registering thousands of new taxpayers and collecting 54% of the redemption fees targeted under the whole programme. Proactively raising awareness helped expand the number of taxpayers, including many owners of large conglomerates, and other wealthy individuals who have acknowledged their obligations and tax responsibility to the country.

But it takes two hands to clap, and government must play its part to build taxpayers’ trust. The tax amnesty is in effect also a reprieve for government, which was not diligent enough in collecting taxes in the past. We therefore are committed to enhancing the performance of tax collectors by, among other things, equipping them with the best IT tools available, deploying appropriate human resource reforms, and improving governance and fighting corruption in the system.

Our tax reform programme goes beyond the tax amnesty. We are strengthening tax policy by revising our income tax, VAT and general tax administration laws to broaden the tax base and lower compliance costs, while also modernising revenue administration. Measures already introduced, such as the roll-out of electronic VAT invoicing, the expansion of electronic tax filing, the establishment of a unique taxpayer ID system, and the improvement in access to land asset data for audit purposes are already strengthening our relationship with taxpayers and are paying off.

Improving spending

The other part of the social contract is delivering on the government’s commitment to the people to efficiently provide essential public services that allow ordinary Indonesians – regardless of their income or where they live – to realise their potential, while protecting them from negative events.

Currently, the budget is not contributing sufficiently to our goals of reducing poverty and inequality, including across regions, even if we see recent signs that progress is being made. The government intends to: spend more on infrastructure, health and social assistance; reallocate education spending towards tertiary and technical and vocational training – having given all children the opportunity to go to school, we need to ensure they are able to compete with global peers; and cut inefficient and regressive subsidies to spend more on effective, better targeted social assistance programmes.

Indonesia’s service delivery is highly decentralised. We need an equitable system of fiscal transfers that provides incentives for performance as well as the accountability for probity and efficiency from provincial level, to district and village level.

Complementary structural reform

The budget is not an end in itself, but an instrument for more sustainable and inclusive growth. Lifting Indonesia’s economy and achieving our development goals is not possible without the innovation, dynamism and drive of a thriving private sector investing in the Indonesian economy. The critical challenge is how to unlock this investment, not by expanding the fiscal deficit but by implementing deep and difficult structural reforms.

We have to continue making it increasingly easier to do business in Indonesia. In 2016, Indonesia rose from 109th place to 91st place out of 190 countries in the World Bank’s Doing Business ranking, making it a top 10 reformer. However, much remains to be done. Indonesia’s business environment still suffers from complex regulations and could benefit from further improving property rights protections and institutions. In 91st place, Indonesia still ranks behind many of its Association of South-east Asian Nations peers, such as Malaysia (23rd), Thailand (46th) and Vietnam (82nd).

We have to build skills. Our manufacturing and service firms complain about not being able to find sufficient numbers of technically qualified and managerial staff. We must improve connectivity to lower the cost of moving goods and people across this vast archipelago, thereby lowering production costs and boosting purchasing power.

We also have to accelerate public-private partnerships (PPP) approvals. Eight projects were awarded or closed in 2016, which was more than all PPPs closed in the previous eight years.

The government is credibly committed to reform. The president himself has an open and personally engaged management approach. He regularly visits the field and people to hear about the progress of his reforms. We understand that the full results of reform may not be seen immediately, but we believe that what we are doing today will lay a strong foundation for our country’s sustainable development.

The reforms that we are implementing today will define our country’s position in the future and I am confident that this position belongs among the most prosperous, stable and inclusive countries in the world. 

Sri Mulyani Indrawati is the finance minister of Indonesia.

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