Indonesia’s Fiscal Institutions Are Improving

Posted by Ian Lienert

A recent IMF report examines the improvements in Indonesia’s fiscal institutions over the past few years. Progress includes the establishment of a fiscal policy office; revisions in tax legislation; some improvements in tax administration; and the adoption of legal and administrative measures to improve public sector governance. Moreover, more fiscal information is disclosed to the public, thereby improving fiscal transparency.

Despite these improvements, the report notes that further reforms are needed to improve fiscal institutions and transparency, particularly concerning disclosures related to oil and gas revenue flows.

• An assessment of the strengths and weaknesses of Indonesia’s fiscal institutions was undertaken during the fiscal transparency Review of Standard and Codes (ROSC) in 2006. The ROSC report reported that significant progress had been made in establishing a sound legal and administrative system for central government fiscal management and in improving transparency. However, the 2006 fiscal transparency report also noted that a substantial reform agenda remained.

The aim of the new paper, "Progress in Fiscal Institution Building," is to provide an overview of recent reforms that have improved fiscal institutions since the completion of the fiscal ROSC in 2006.

On the positive side, it observes progress in:

• Strengthening technical capacity at the central government level. Within the Ministry of Finance (MoF), the Fiscal Policy Office (FPO) is now fully operational. The FPO’s main mandate is the area of macro-fiscal projections and analysis.
• Improving budget documentation and disclosures to the public. A fiscal risk statement is now included in the annual budget documents—making Indonesia one of the pioneers in fiscal risk analysis among emerging market economies. Reporting of information by State Owned Enterprises (SOEs) has improved and should enable the FPO’s risk management unit to better assess the risks for selected SOEs, especially those with contingent liabilities.
• Revising tax legislation. The “General Provisions and Tax Procedures” law was adopted in 2007 and became effective in January 2008. It improves the balance between taxpayers’ rights and the Directorate General of Tax’s (DGT’s) ability to collect taxes.
• Adopting new government cash management regulations. The new 2007 regulations strengthen the Minister of Finance’s powers to consolidate government bank accounts. Using these powers, the MoF conducted a census of the government bank accounts operated by ministries and budget users outside control of DG Treasury. The ensuing ministry-by-ministry analysis of accounts revealed that over 20,000 government accounts existed.
• Pursuing corruption cases. The Anti-Corruption Commission (KPK) has become more vigorous in its investigations and prosecutions of corruption cases, including those involving senior government officials.

The report calls for further progress, including in:

• Improving transparency of the oil and gas sector. The government of Indonesia< has yet to participate in the Extractive Industries Transparency Initiative (EITI). The public disclosure of oil and gas revenue flows, and the assurance that all such flows are properly accounted for in the budget, would be enhanced if regular EITI reports were to be prepared and made public. Progress also needs to be made in publishing externally audited accounts for the national oil company (Pertamina).
• Enhancing parliament’s technical capacity for fiscal policy analysis. Parliament’s budget committee plays an important role in the budget approval processes. However, there is currently excessive emphasis on examination of the details of the budget and parliament has limited qualified technical staff for budget analysis.
• Adopting tax legislation and improving revenue administration. The laws on the value-added tax and income tax submitted to parliament in 2005 are yet to be approved, creating uncertainty in the business community. For tax administration, concerns relate to: (i) the need for the DGT to obtain a tax debtor’s permission to seize the debtor’s accounts receivable; (ii) restrictions in the methods used by the DGT to determine a tax liability; and (iii) the MoF’s Inspectorate General (IG) investigations unit staff lack unrestricted access to taxpayer information available to the DGT. The IG’s effectiveness is also limited by slow implementation of disciplinary actions against DGT staff proven to have acted illegally. More generally, existing practices limit incentives for the strong performance of tax officials.
• Completing the establishment of a Treasury Single Account (TSA) and making final decisions on the remuneration rates on government deposits held at Bank Indonesia (BI). Incomplete actions in this area impede the development of active cash management. Also, transparency will be improved when the operations of all extrabudgetary funds are included in the TSA.
• Strengthening further the internal and external audit bodies and in fighting corruption among public officials. The external audit office (BPK) mandate was strengthened by the adoption of a 2006 law and BPK’s staff headcount significantly increased. However, there is a need for a further strengthening of BPK.
• Further improving the transparency of fiscal information, especially concerning subnational governments. Reporting from local governments to the MoF on budget execution is still subject to very long delays. Reporting quality varies considerably between provinces and districts.

For further details on the above points, see Indonesia: Selected Issues, chapter IV, "Progress in Fiscal Institution Building." Selected issues papers are prepared by IMF staff as background documentation for the IMF’s periodic Article IV consultations with member countries. This paper is based on the information available at the time it was completed in July 2008.