PRESIDENT-elect Joko Widodo has ambitious plans to expand and improve the nation’s infrastructure.
But to come up with the financing, he faces daunting challenges, namely slowing revenue from commodities and rising costs for fuel subsidies that would further widen the country’s current-account deficit.
Joko, popularly known as Jokowi, said in his campaign that he would jump-start Indonesia’s economy with maritime-based initiatives such as “sea tolls” — a network of deep-sea ports across the archipelago that are designed to handle local and international shipments and would lower logistics costs in the country of 17,000 islands.
“He will need to find ways in dealing with the state budget because the current budget gives no room for him to manoeuvre around. His task will be to find out how can he free up some fiscal space for all of his promises on infrastructure development,” said David Sumual, economist at Bank Central Asia on Wednesday.
Due to several laws passed in recent years, the state budget is earmarked for fixed spending on such programmes as education, regional transfers, social security and civil service pay, leaving the government with only a tenth of the budget to spend on infrastructure development.
Joko isn’t likely to borrow more without risking exceeding the state budget deficit legal cap of three per cent of gross domestic product (GDP). So any additional fund should come from budget cuts or higher revenue.
Lower prices of the country’s main exports such as coal and palm oil, though, have dented tax revenues. Prices of those commodities fell nine per cent since early this year, according to a report from the World Bank this week. Tax officers managed to collect 442.6 trillion rupiah (RM122 billion) this year through June, still less than half the full-year target of 1,072.3 trillion rupiah.
Fuad Rahmany, the director general of tax at the Finance Ministry, had said that adding around 30,000 tax officers would allow the office to pursue domestic tax resources, which would in turn help boost the state’s coffers.
The tax office cannot collect more than 320 trillion rupiah in potential tax revenue from thousands of small and medium-size businesses, Fuad said, simply because the tax office does not have the resources to ensure their compliance.
Fuad said Joko should start recruiting new tax officers in his first years, because training to infuse new tax officers with the necessary skills and integrity could be lengthy.
Joko also could, as he has promised during his campaign, cut the fuel subsidy, which currently accounts for about a fifth of the central government’s 1,280 trillion rupiah budget.
“Subsidies are a huge burden to the government because around 60 per cent of the total oil demand is subsidised,” said Sushant Gupta, head of Asia Pacific downstream research at Wood Mackenzie, a consultancy that tracks extractive industry, last Wednesday.
Gupta said that the total subsidy bill for 2014-2020 would hit US$120 billion (RM381 billion), based on current domestic prices.
“This accounts for around three per cent of gross domestic product and is, therefore, unsustainable,” he said.
“The main risk for Indonesia’s economy is widening current account deficits,” Bank Indonesia governor Agus Martowardojo said on Wednesday.
Agus forecasts a gap of about three per cent of GDP this year.
“Positive sentiment would be stronger should the new elected administration perform a comprehensive structural reform to create a stronger and sustainable growth,” Agus said.
Many economists said Joko can gradually raise the subsidised fuel price, without creating spikes in inflation that would hurt the country’s poor, most of whom have been his avid supporters in the election campaign.
“An annually rolled-out gradual cut should have a relatively limited impact on headline inflation. Indeed, headline inflation could head down to four per cent by 2018 without the volatility that the hitherto last-minute, back-to-the-wall fuel price increases have done,” said Wellian Wiranto, a Singapore-based economist at OCBC Bank, in a research note on Wednesday.
DION BISARA AND VANESHA MANUTURI
JAKARTA