The Development of Indonesia’s State Budget
As globalization render countries nearly borderless, the flow of people, investment and information freely moves from one country to another. That is also why the economic condition of a certain country is inevitably influenced by world economy, both directly and directly.
In the era of borderless world, new developments on state finance management is easily accessible over the internet and mass media. Therefore, best practices from developed countries can be studied, evaluated and applied by the developing countries, if such practices are considered beneficial.
As a result of Indonesia’s open economic system, the effort to amass budget revenue is influenced by both domestic and foreign economic condition. As the world economy was improving in the beginning of the implementation of the first long term developmnet, so was Indonesia’s ability to generate fund. In early 80’s, world economy started to show signs of the declining of primary comodity price, investment to developing countries, economic growth of several developed countries, and the free-fall of crude oil price. Domestic influence includes the economic crises, development of private sector, and the spirit of decentralization, regional autonomy, and the urgency to create clean government and good governance. Meanwhile, other
foreign influence includes the adjustments made to state budget format to comply with GFS and internationally approved practises.
This chapter will discuss the development of state budget from 1969/70 to 2005 which is grouped into changes in state budget format, composition, structure, and other policy changes. The change of format will cover the transformation from T-account to I-account. Composition change will discuss the significant role of tax revenue, and government bond (SUN) as an alternative source of revenue. Structural change will cover issues related to addition of budget share, change in balance fund, and expenditure reclassification by function.
CHANGES IN STATE BUDGET FORMAT
The fundamental changes in state budget include change in format, from T-account to I-account, the purpose of which is to increase transparency, efficiency, and effectiveness, especially in the area of budget deficit control. Fiscal Year (FY) 2005 saw further improvement in state expenditure to accomodate the transformation
from dual budget to unified budget.
The Change from T-account to I-account
State budget adopted T-account from FY 1969/1970 to FY 1999/2000. The shortcoming of this format, some may consider, is that the format does not provide clear information on deficit control and lacks transparency.
Hence the need for improvement.
Starting from FY 2000, state budget format is changed into I-account, in compliance with Government Finance Statistic . The change is meant to:
a. increase transparency in budget formulation
b. facilitate easier analysis, monitoring, and control in budget implementation and management
c. facilitate cross-country comparative analysis
d.facilitate a more transparent calculation of balance fund to be distributed by central government to local government as warranted by Law 25/1999 on Central and Local Fiscal Balance
The differences between the two formats are:
a. In T-acount the revenue and expenditure sides are separated in different column, meanwhile in I-account they are not, instead, both are put in the same column.
b. T-account reflects a balanced and dynamic budget, while I-account applies deficit/surplus budget. In T-account balanced means that both revenue and expenditure side should have the same total amount. If the expenditure is larger, the deficit is covered by financing from domestci and/or foreign sources. I-account applies deficit/surplus budget, i.e. the gap between combined amount of revenue and grants and that of expenditure. Negative gap or deficit occurs when total expenditure is larger than total revenue and grants. Positive gap or surplus is when the amount of revenues and grants exceed that of expenditure. Financing sources used to cover deficit may come from both domestic or foreign.
c. Budget expenditure is divided into that of central and local government. T-account does not show clear distinction between the composition of budget managed by central government and local government, as a result from centralized budget. On the contrary, I-account clearly shows the composition of the amount of budget managed by local governments.
The detailed transformation from T-account to I-account is as follows :
a. Reclassification of state revenue items, that includes:
i. Tax component in oil and gas revenue is reclassified into income tax revenue from oil and gas sector in domestic revenue.
ii. Other components of oil and gas revenue are reclassified into non-tax revenue item..
iii. Non-tax revenue is divided into:
• Natural resources, including; oil, natural gas, general mining, forestry and fishery.
• Revenue from governmnet’s share of State-Owned Enterprise (SOE) proceed.
• Other non-tax revenues.
b. Reclassification of expenditure items, including several transfer payments in recurrent expenditure that are prone to confusion, such as:
i. subsidy for interest on credit program
ii. interests of the bonds for national bank restructuring program
c. Separation of budget financing components that are previously included in revenue and expenditure side
i. Revenue
-Revenues from SOE provatization
-Selling of assets under national bank restructuring program
-Selling of governmnet bonds in domestic market
According to GFS, revenues from thses proceeds should be put in financing account in state budget and not be traeted as revenue
ii. Expenditure
Repayment of foreign loan principals are moved to budget financing and thus reducing revenue from new forign loans
In T-account forign loans are considered to be development revenues. Similarly, repayments of their principal are regarded as recurrent expenditure. Meanwhile, in I-account foreign loans and their repayment is considered as budget financing. This differing concepts consequently causes a change in the way foreign loans are handled. The new format considered foreigd loans as debts, thus their amount should be as small as possible since the repayment of these loans’ principal and interest will undoubtedly burden the state budget in the future.
Account Format Change in Expenditure
Starting from FY 2005, the I-account format underwent several adjustments in the expenditure side as warranted by Law 17/2003 regarding State Finance. The adjustments were made to facilitate the application of unified budget system, i.e. integrating the previously separated reccurrent expenditure and development expenditure.
One purpose of the adjustments is to increase state expenditurte management transparency and accountability through reducing duplication of strategic plan and budgeting in state expenditure and to create linkage between output and outcome to be achieved by organization budgeting. Other purpose includes complying with internationally approved classification system. See Chart II-2 for details.
The new format still separate central government expenditure from local governmnet expenditure. However, as a result of state budget format adjustment, several changes have been made in central governmnet expenditure. They are:
-with the application of unified budget, the classification of expenditure according to type no longer separate reccurrent expenditure from development expenditure.
-Classification of expenditure by organization will be done in accordance to the existing organization and will be included in Budget Law. In the previous format, classification according to organization exist only in Satuan 3 book.
-Classification of recurrent expenditure by type consists of personnel, material, interest payment, subsidy and other recurrent expenditure. The new format adds capital, grant and social aid expenditure.
-In the new format, the old development expenditure is converted and distributed into personnel, material, capital, social aid, and other expenditure.
CHANGE IN BUDGET COMPOSITION
The changes in budget composition, among others, are the increasing role of tax revenue in supporting the budget and the inclusion of government bonds (Surat Utang Negara, SUN) as one of the budget’s financing sources. From FY 1969/1970 to 1985/1986, the dominant source of budget revenue is oil and natural gas, however since FY 1985/1986 their contribution have been declining and relaced by tax revenue. During and after economic crises, governmnet debt, especially domestic debt in the form of governmnet bond that was used to finance bank restructuring program, skyrocketed. Since 2002, SUN has become an important instrument in covering budget deficit. The proportion of domestic debt used to finance loan interest and principal repayment is also increases compared to the period prior to the crisis.
The Increasing Role of Tax Revenue
From FY 1969/70 up to 1985/86 oil and natural gas revenue gave large contribution to the budget. IN FY, Indonesia reaped major profit from oli price-hike. In April 1973 Indonesian Crude Oil Price (ICP) was US$ 3.73 per barrel (see Graph II-2) and increased rapidly to US$ 11.7 per barrel by April 1974. The event is known as Indonesia’s ‘oil boom’. On the contrary, the period was dubbed ‘oil crises’ by oil-importing countries. In FY 1969/70, the beginning of Pelita I (Five Year Development I), oil and natural gas revenue amounted to IDR 65.8 billion (27% of total domestic revenue – see Graph II.2), meanwhile in FY 1974/75 the number rose to
IDR 957.2 billion (54.6% of domestic revenue). In the Pelita III (FY 1979/80 – 1983/84) oil price kept on rising and reached its peak in January 1981, which was around US$ 35.0 per barrel, so that in FY 1981/82 the share of oil and gas revenue in domestic revenue amounted to 70.6%. In Pelita IV (FY 1984/85 – 1988/1989) oil price dropped significantly due to world economic crisis and excessive supply of oil and gas in international market. Oil price nosedived from US$ 35.0 per barrel in January 1981 to US$ 10.0 per barrel in August 1986. Its impact on the budget was the rapid declining of oil and natural gas revenue. While oil and gas revenue in FY 1985/86 reached IDR 11,144.4 billion or 57.9% of total domestic revenue, in the following fiscal year the number dropped to IDR 6,337.6 billion or 39.3% of total domestic
revenue.
The positive impact of the enactment of these laws are the sharp increase of tax revenues. Tax revenue that was only IDR 4,788.3 billion or 30.1% from total domestic revenue rose to IDR 11,687.9 billion or 53.6% of total domestic revenue in FY 1988/89. Since then, tax have made larger ontribution to state budget compared
to oil and gas revenue.
In 1994, the government perfected the prevailing tax laws to increase the ignificance of tax revenue and thus strengthen Indonesia’s economy in the eve of globalization. The new laws are:
a. Law 10/1994 on Income Tax (PPh)
b. Law 11/1994 on Value Added Tax (PPN) and Luxury Good Retailing Tax (PPn-BM)
c. Law 12/1994 on Land and Building Tax (PBB)
The new tax laws did enhance tax revenue significantly. In FY 1997/98 tax revenue amounted to IDR 70,934.2 billion, a steep 59.6% increase from total tax revenue in FY 1994/95, which was IDR 44,442.1 billion.
In order to trim down deficit, the government continued to increase tax revenue. The increase is considered feasible because Indonesia still have low tax ratio. Therefore, in the year 2000, the government refined the existing tax laws into:
a. Law 17/2000 on Income Tax (PPh)
b. Law 18/2000 on Value Added Tax (PPN) and Luxury Good Retailing Tax (PPn-BM)
c. Law 19/2000 on Duties on Land and Building Transfer (BPHTB)
The Increasing Domestic Debt
During the period of FY 1969/70 to FY 1997/98, the amount of domestic debt was much smaller compared to foreign debt. Domestic debt was usually in the form of unpaid electricity, gas, water,and telephone bills of government offices from the previous year and other third party bills. Compared to repayment of foreign loans, the amount of these debts was really unsignificant.
However, since the economic crises, Indonesia’s domestic debt has grown significantly. In order to carry out restructuring programs for banks that were nearly collapsed the government implements recapitalizing and financial guarantee programs. To finance the financial guarantee program, government issued Government
Bond (Surat Utang Pemerintah, SUP) worth IDR 218,315.6 billion. Another IDR 432,075.9 billion worth of bond was also issued to finance recapitalizing program.
In 2002, the government and the Parliament enacted Law 24/2004 on Governmnet Bond to regulate the issuing of government bond be it in the form of State Treasury Bond or bonds. The purpose of government bonds is to finance budget deficit, covering short term cash shortage as a result of mismatch between revenue and expenditure cash flow in state account within one fiscal year, and to manage state debt portfolio. IN FY 2005, the government plans to issue IDR 43.0 trillion worth of Government Bonds. Meanwhile the total amount of domestic debt as if June 30th, 2005 is IDR 625.4 trillion.
So that at present the government has alternative financing to cover budget deficit from domestic sources as well as foreign.
The Increasing Amount of Repayments of Domestic Loan Interest and Principal
Prior to the economic crises Indonesia’s repayment of domestic loan interest was considerably low. However, since the issuing of Government Bond and bonds to finance bank recapitalizing and financial guarantee program, the number have been rising steeply.
The most direct impact of government bonds is the increase the load that the budget have to carry, i.e. repayment of domesctic loan interest and principal. In FY 1997/98, before the crises, domestic debt repayment was IDR 1,639.7 billion, while in FY 2001 domestic debt repayments was a stunning IDR 61,174.3 billion,
which was even larger than foreign loan repayments totaling IDR 28,395.4 billion in the same year.
In addition to reduce the burden of government bond payments that were due in 2004 to 2009, the government has conducted reprofiling to bonds owned by four SOE banks, namely Bank Mandiri, BNI (National Bank of Indonesia), BRI (People’s Bank of Indonesia), and BTN (State Saving Bank). The reprofiling is done by shifting
the fixed rate bonds’ due date from 2004-2009 to 2010-2013, and shifting variable rate bond from 2004-2009
to 2014 to 2020.
In 2002, the government and the Parliament enacted Law 24/2004 on Government Bonds that will make the role of domestic debt interest and principal repayment more significant in the future, especially if the bond issued by the government is larger than those whose date is due.
In FY 2005 total repayments of domestic debt reaches IDR 58.8 trillion which consists of IDR 39.0 trillion of interest repayment and IDR 19.8 trillion of principal repayment. Meanwhile, total foreign debt repayment is IDR 72.0 trillion which consists of IDR 25 trillion of interest repayment and IDR 47 trillion.
Debt Reschedulling and Suspension in order to Decrease Budget Load
The sharp increase in foreign loan interest and principal forces the government to seek ways to lighten the budget load by suspending or rescheduling the loan through Paris Club.
Loan suspension priority is given to projects with low-intake capability and those yet to be implemented. As an example, the goverment has cancelled several projects which were funded by IBRD and ADB loan. In 1998 and 1999, 66 IBRD funded projects was suspended, the total value of which were US$ 1,030.1 million in 1998 and US$ 556.48 million in 1999. The number of suspended projects from ADB loan was 59, the total value of which were US$ 923.29 million in 1998 and US$ 317.9 million in 1999.
In order to reschedule foreign debts, the government organizes Paris Club forum. The forum has convened three times since its establishment:
1. Paris Club I, which was held in September 1998 and attended by 16 member countries, 6 non member countries, and 9 commercial banks. The meeting resulted in the signing of US$ 4.2 billion worth of debt rescheduling agreement.
2. Paris Club II, which was held in April 2000 and attended by 17 member countries, 3 non member countries, and 3 commercial banks. The meeting resulted in the signing of US$ 5.8 billion worth of debt rescheduling agreement.
3. Paris Club I, which was held in April 2002 and resulted in the signing of US$ 5.4 billion worth of debt rescheduling agreement.
The reschedulling lessens the burden of state budget not only in the on-going fiscal year but also for the future fiscal years.
In addition, Paris Club II and Paris Club III agreements signify that the creditors are giving Indonesia the chance to decrease its foreign debt stock through debt swap program that contains elements of debt relief. Up to this moment Indonesia has received offers of debt swap programs from four creditor countries; Germany,
England, France and Italy.
In the end of 2003, the Indonesian Government decided not to extend IMF program in the form of Extended Fund Facility and chose Post Program Monitoring in its stead. The impact of the decision was the absence of Paris Club meeting to reschedule repayment of debt interest and principal to creditor countries. However,
in the aftermath of Tsunami that hit Aceh and other Asian countries, Paris Club issued policy to grant debt suspension to to countries hit by the catastrophy. The amount of suspension offered by Paris Club to the Indonesian Government is US$ 2.6 billion or IDR 24.31 trillion for one year foriagn debt repayment. The
suspension decreases Indonesian budget deficit by 0.9% from GDP. In addition, several member of Paris Club also apply 0% interest for debts included in the suspension program.
CHANGE IN STRUCTURE
Structural changes in state budget includes the transformation of Regional Development and Recurrent Fund into Balance Fund, the addition of Indonesian Bank Capital Addition, addition of Public Service Obligation (PSO) as part of subsidy, and government capital. Other change comprises expenditure reclassification by
functions.
Transformation From Regional Development Fund (DPD)
and Regional Recurrent Fund (DRD) Into Balance Fund and
Sepecial Autonomy and Equalization Fund
As reform movement swept through all area in Indonesia, changes in policies on authority delegation from central to regional government have been made. The change is instituted in Decree of People’s Consultative Assembly No. XV/1998 regarding Regional Autonomy that regulates sharing and usage of national resources
and fiscal balance between central and local government. The decree is followed by the enactment of Law No. 22/1999 on Regional Government and Law No. 25/1999 on Fiscal Balance between Central and Local
Government.
Law No. 22/1999 regulated region establishment, authority distribution, personnel and regional financial sources. Further exposition on distribution of regional financial sources was regulated in Law No. 25/1999.
Law No. 25/1999 stipulated the formula for calculating the amount of fund allocation and other regulations related to regional financial sources. The allocation for the regions was definite so that estimation of the amount of fund allocation could be calculated anually.
In 2004, both laws were considered no longer appropriate so Law No. 22/1999 was ammended by Law No. 32/2004, as so did Law No. 25/1999 by Law No. 33/2004.
The enactment of those laws changed the budget format as Autonomous Region Subsidy/Regional Recurrent Fund and Presidential Instruction Project (proyek inpres)/Regional Development Fund of the old format were transformed into Balance Fund and Special Autonomy and Adjustement Fund.
Autonomous Region Subsidy or, some might say, regional recurrent fund was used to finance the region’s recurrent expenditure, be it personnel or non-personnel. Non-personnel expenditure included operational expenditures of sub-district (kecamatan) and village (desa). Meanwhile, Proyek Inpres, which was later on
refferred as regional development fund, was intended to accelerate the achievement of evenly spread people’s wealth, thus it included aid for village development, second-tier region (district) development, first-tier region (province) development, elementary schools, health, marketplace improvement, tree-planting, and road/
bridges maintenance/building. Later on the scope of regional development fund only involved village, district/municipality, province, and Social Safety Net-Poverty Control (JPS-PK).
Balance Fund is central government fund transfer to the regions to support the implementation of their tasks.
Balance Fund consists of revenue sharing (DBH), General Allocation Fund (DAU), and Specific Allocation Fund (DAK). DBH is the region’s share of tax revenue and revenue from certain natural resources. The distribution of DBH to the ragions is based on producing region principle, i.e. part of the revenue is trasferred back to the
producing region. DBH is divided into tax and natural resources revenue sharing. Furthermore, tax revenue sharing includes income tax, land and building tax, and duties of land and building transfer while natural resources revenue sharing comprises petroleum, natural gas, general mining, forestry and fishery. DBH is
intended to reduce vertical imbalance, i.e. fiscal gap between central and regional government.
DAU is a block grant, by which it means that regional government has considerable flexibility in spending it according to the needs and aspiration of each region. Although the regions has full discretionary expenditure over DAU, DBH and regional original revenue (PAD), there are matters that non-discretionary and thus should
be prioritized, such as personnel expenditure, including central personnels that have been transferred to the regions, and other recurrent expenditure that are considered as budget priority. DAU is meant to correct horizontal imbalance, due to the fact that the regions’ ability to generate revenue varies largely. According to Law No. 33/2004 at least a quarter of domestic net income is allocated for DAU. Net income is domestic income after revenue sharing deduction. DAU allocated to every distric/municipality and province is based on a certain formula so that the DAU received is relevant to their fiscal gap condition.
The provision of DAU is intended to direct the implementation of regional authority so as to fulfill special needs that are considered as national priorities. In the beginning DAU originated from 40% of reforestation fund. Starting from 2003, aside from financing reforestation in producing regions, DAK was also given in
the form non-reforestation DAK to finance activities in the area of education, health, infrastructure, and expanded regions’ infrastructure. Since 2004 marine and fishery have been added to the areas financed by non reforestation DAK.
In 2005, regional expenditure reaches IDR 130.6 trillion that consists of IDR 31.2 of DBH, IDR 88.1 of DAU, IDR 4.1 of DAK and IDR 7.2 of special autonomy and equalization fund.
The government has also been allocating special autonomy and equalization fund since 2002. Special autonomy fund, which amounts to 2% of DAU, is allocated only for Papua as manifestation of Law No.21/2001. For FY 2005 Papua receives IDR 1.777 trillion in the form of this fund.
However, in 2004 balancing fund was replaced by equalization fund, which consists of pure and ad-hoc equalization fund. Pure equalization fund is given to the region so that the amount of DAU and pure equalization fund received by the regions will never be smaller than the previous year’s. Ad-hoc equalization is given if there are government policies that may influence certain budget item in regional expenditure, for example, the policy of awarding bonus of one-month salary to all civil servants including those in the regions.
The equalization fund is considered as aid and in FY 2005 its amount is IDR 4.7 trillion.
Subsidy
Bearing in mind the fluctuative nature of economy, government’s involvement is sometimes needed to ensure economic stability, especially the stability of basic good prices so that they are affordable by domestic market.
One way of doing so is by giving subsidy for the price of particular items that are important for people’s well being. However, the subsidy should be given within close consideration to the state’s financial capacity because subsidy is nothing more than reduction of fund reserved for development.
Initially, subsidy was only given for staple food, i.e. rice subsidy and wheat flour subsidy. The subsidy was used to fill the gap between the price of imported rice and the price set in domestic market. The purpose of this subsidy is to ensure adequate supply of rice, and that its price is affordable. Rice subsidy program was
started in FY 1973/74 and terminated in 1982/83 because since then Indonesian rice production have been able to supply its domestic need.
Meanwhile, to encourage consumption diversity so that people would not be dependent solely on rice, the government launched wheatflour import subsidy program to ensure that the flour was affordable. The program started in FY 1973/74 and was terminated in FY 1982/83 due to the increase of people’s purchasing capacity.
Petroleum fuel subsidy program was started in FY 1977/78 because as a source of energy petroleum fuel plays a significant role in supporting national economic activity and maintaining economic stability. The amount of petroleum fuel subsidy is dependent on the net amount of fuel sold in domestic market and the cost of fuel
provision which includes osts of crude oil purchasing, refining, and national distribution.
The scope of subsidy is getting larger. This is evident because in FY 2005 subsidy can be cathegorized into petroleum fuel, non-petroleum fuel and Public Service Operation (PSO). Of the three, petroleum fuel is the most costly. The expenditure for petroleum fuel subsidy is generally affected by international crude oil price,
the exchange rate of IDR to US$, domestic petroleum fuel consumption, and the policy of domestic price equalization that have been implemented gradually since 2001. Non-petroleum fuel subsidy take the form of food, electricity, program credit interest, fertilizer, seed, vehicle, and tax subsidy. FY 2004 saw the addition
of subsidy for SOE in implementing public service obligation into the budget. Prior to FY 2004, PSO aid was included in other recurrent expenditure in the budget. SOEs receiving PSO aid are PT Kereta Api Indonesia (Indonesian Railway Service), PT Pos Indonesia (Indonesian Postal Service), PT TVRI (Television of Republic of Indonesia) and Perum Bulog (Logistic Affairs Agency). The total amount of distributed subsidy for FY 2004 is IDR 26.3 trillion which consisted of IDR 14.5 trillion of petroleum fuel subsidy, IDR 11.0 of non-petroleum fuel subsidy, and IDR 0.8 of PSO aid. See Table II-6 for details.
Bank Of Indonesia Capital Addition
Starting from FY 2005, Bank of Indonesia Capital Addition is inluded as a new item under Government Bond in domestic financing. The new item is intended to contain the settlement of Liquidity Aid of Bank of Indonesia (BLBI). The settlement of BLBI is carefully engaged with close consideration to short term and long term budget
capacity and long term fiscal sustainability of Bank of Indonesia. Furthermore, repayment of government bond for BLBI settlement refers to the ratio of the capital of Bank of Indonesia to monetary obligation which is 310%. In the event that the ratio is less than 3%, the government will supply the required fund the get the ratio
back to 3%.
In Budget Draft 2005, the planned addition of the capital of Bank of Indonesia is IDR 8.7 trillion, however after the deliberation with the Parliament and Bank of Indonesia, the number is decreased to zero.
Government Capital Participation for Second Mortgage Facility (SMF)
In FY 2005 the government is planning to operate long term financing system for housing (second mortgage facility, SMF). The SMF program is intended to support government’s effort to build 225.000 plain and sanitary houses for low income communities. Initial capital for SMF is IDR 2.5 trillion, IDR 1 trillion of which comes from state budget and the rest is from a SOE, PT Jamsostek.
Within the state budget government’s capital contribution for SMF is included under domestic non-bank financing. Initially, SMF was not included in the budget proposal for FY 2005, however government’s capital participation of IDR 1 trillion was agreed upon in the deliberation with the Parliament.
Expenditure Reclassification by Organization, Function and Type, Where Formerly by Sector and Type The breaking down of expenditure by function is a reclassification of programs formerly included in the old format as sectors/subsectors. However, programs in both new and old format is incomparable due to the fact that they are different in nature.
Function/subfunction is not the basis for budget allocation as in the new format state budget allocation is based on programs proposed by ministries/agencies. Then the programs are grouped according to their function/subfunction Expenditure classification by function is merely an analysis tool used to identify functions that have been, is being and will be implemented by government in compliance to best international practises, which is Classification of the Functions of Government (COFOG). COFOG is formulated by UNDP and was adopted by GFS Manual 2001-IMF. Indonesian government, however, made an adjustment by separating religious function
from recreation, culture, and religious functions so that in state budget the classification encompasses 11 functions namely: (1) general public services, (2) defense, (3) public order and safety, (4) economic affairs, (5) environmental protection, (6) housing and community amenities, (7) health, (8) recreation and culture, (9) religion, (10) education, (11) social protection.
Budget Section Addition For Financing and New Ministry/Agency Item
The dynamics of economy, demands for good government and increasing number of ministries/agencies are the reason underlying the adjustment of the number of budget section. Recently the code number of budget section (Bagian Anggaran, BA) has reached 99, among the new additions are Foreign Loan Principal Repayment, Domestic Loan Principal Repayment, On-lending, and State Capital Participation. New budget
section codes for newly established ministries/agencies have also been added, i.e. for Nanggroe Aceh Darussalam Reconstruction and Rehabilitation (BRR-NAD) and Board of Regional Representatives (DPD).
Budget section codes are enacted to ensure a more organized, transparent, and accountable state budget.
Additionally, having their own budget section code means that ministry/agency has full authority over state financial management. See Table II-7 for new additions of budget section codes.
Currently not all of 99 budget section codes are used. Some, like for instance code number 14, 16, 17, 21, 28, 30, 31, 37, 38, 39, 45, 46, 49, 53, dan 58 are codes for ministries that no longet exist, e.g. Ministry of Information, Ministry of Industry. These codes are not written off for hystorical reasons.
OTHER CHANGES
Other changes in state budget, both in preparation and policy, are the inclusion of grants in budget document, project readiness criteria, and international obligation criteria.
Inclusion of Grants in Budget Document
Prior to 2001, forign grant management encounterd various contrains that were caused by:
-the absence of fixed mechanism and administration procedures of foreign grants;
-the fact that foreign granst were conducted through various institution, for instance National Development
Planning Agency, Ministry of External Affairs, State Secretariate, and Ministry of Finance. Some grants were even transferred directly to their beneficiaries
-the various form of grants, e.g. cash, material. services, consultation services, training, and project
preparation;
- the absence of fixed grant reporting system;
-the fact that most grants went unreported and unrecorded through budget mechanism, thus a major
accountabilty problem.
In order to control these problems Directorate General of Budget issued Circullar Letter No. SE-54/A/2001 dated April 21st, 2001 which stated that grant executive agencies/beneficiaries must report the grants they received to Ministry of Finance. The reporting would ensure more organized, transparent, and accountable foreign grant administration so that the realisation of foreign grant could be compared and held accountable to Parleament and public in general.
In the case of grants from Government of Japan (GOJ) for rehabilitation and reconstruction of Nias and Aceh, GOJ even insisted that the grants must be put into budget document. In its tender implementation, GOJ appointed Japan International Cooperation System (JICS) as procurement agent. The grant itself amounted
to US$ 139.40 million or the equivalent of IDR 1,240.66 billion. This case is indeed a sign of improvement in foreign grant administration as warranted by Circullar Letter No. SE-54/A/2001
Project Readiness Criteria
The implementation of projects funded by foreign loan usually encounters problem such as incomprehensive project preparation that includes aspects like land acquisition, project staffs appointment, evaluation and supervision system preparation, lack of coordination with related institutions, and many others. These problems causes project stagnancy even when the loan agreement has been signed and the fund disbursed.
The obvious consequence of such incidence is the inefficiency of commitment fee paid by the government.
To prevent such inefficiency, the government has enacted ‘Project Readiness Criteria’ to ensure that the project is in a state of ready for implementation before loan agreement is signed so that once the loan is effective, the project may be commenced immediately.
As an example, readiness criteria filter for Neighborhood Upgrading and Shelter Secter Project includes:
a. the availability of performance indicator for monitoring and evaluation, including baseline data.
b. the availability of commitment from regional government to participate and provide the obligatory financing and contiguous fund
c. contiguous fund of both central and regional government for the firts year has been allocated in the fiscal year in which the project supposed to commence
d. draft of Grant Agreement has been approved by central and regional government
e. the availability of land acquisition and resettlement plan.
f. the appointment of Project Management Unit and Project Implementing Unit, including the staffs.
g. the availability of the final draft of project management/manual administration (including organizational
scope and Term of Reference), procurement, financing, reporting, and audit mechanism
h. the availability of procurement proposal and request for proposal
i. financing plan has been deliberated and approved by Bappenas and Ministry of Finance
j. Fund Absorbtion plan
k. budget agreement document for loan and contiguous fund proposal for the first year has been issued
l. recommendation concerning the winner of project tender for main consultant of the first year.
Issue International Bond
In order to cover budget deficit and increase devisa reserve, the government also issues international bonds.
Until recently, the government has issued international bonds three times which were in 1996, 2004, and 2005. The value of international bonds issued in 1996 was US$ 400 million. Whereas in 2004 and 2005 the value was US$ 1 billion in each year.
The high level of interest shown by investors to Indonesian bonds issued in 2004 and 2005 indicates the increasing level of trust of the investors to Indonesian economic recovery.
The issue also implies the variety of current alternative budget financing, aside from domestic Government
Bonds and foreign loan.
In the era of borderless world, new developments on state finance management is easily accessible over the internet and mass media. Therefore, best practices from developed countries can be studied, evaluated and applied by the developing countries, if such practices are considered beneficial.
As a result of Indonesia’s open economic system, the effort to amass budget revenue is influenced by both domestic and foreign economic condition. As the world economy was improving in the beginning of the implementation of the first long term developmnet, so was Indonesia’s ability to generate fund. In early 80’s, world economy started to show signs of the declining of primary comodity price, investment to developing countries, economic growth of several developed countries, and the free-fall of crude oil price. Domestic influence includes the economic crises, development of private sector, and the spirit of decentralization, regional autonomy, and the urgency to create clean government and good governance. Meanwhile, other
foreign influence includes the adjustments made to state budget format to comply with GFS and internationally approved practises.
This chapter will discuss the development of state budget from 1969/70 to 2005 which is grouped into changes in state budget format, composition, structure, and other policy changes. The change of format will cover the transformation from T-account to I-account. Composition change will discuss the significant role of tax revenue, and government bond (SUN) as an alternative source of revenue. Structural change will cover issues related to addition of budget share, change in balance fund, and expenditure reclassification by function.
CHANGES IN STATE BUDGET FORMAT
The fundamental changes in state budget include change in format, from T-account to I-account, the purpose of which is to increase transparency, efficiency, and effectiveness, especially in the area of budget deficit control. Fiscal Year (FY) 2005 saw further improvement in state expenditure to accomodate the transformation
from dual budget to unified budget.
The Change from T-account to I-account
State budget adopted T-account from FY 1969/1970 to FY 1999/2000. The shortcoming of this format, some may consider, is that the format does not provide clear information on deficit control and lacks transparency.
Hence the need for improvement.
Starting from FY 2000, state budget format is changed into I-account, in compliance with Government Finance Statistic . The change is meant to:
a. increase transparency in budget formulation
b. facilitate easier analysis, monitoring, and control in budget implementation and management
c. facilitate cross-country comparative analysis
d.facilitate a more transparent calculation of balance fund to be distributed by central government to local government as warranted by Law 25/1999 on Central and Local Fiscal Balance
The differences between the two formats are:
a. In T-acount the revenue and expenditure sides are separated in different column, meanwhile in I-account they are not, instead, both are put in the same column.
b. T-account reflects a balanced and dynamic budget, while I-account applies deficit/surplus budget. In T-account balanced means that both revenue and expenditure side should have the same total amount. If the expenditure is larger, the deficit is covered by financing from domestci and/or foreign sources. I-account applies deficit/surplus budget, i.e. the gap between combined amount of revenue and grants and that of expenditure. Negative gap or deficit occurs when total expenditure is larger than total revenue and grants. Positive gap or surplus is when the amount of revenues and grants exceed that of expenditure. Financing sources used to cover deficit may come from both domestic or foreign.
c. Budget expenditure is divided into that of central and local government. T-account does not show clear distinction between the composition of budget managed by central government and local government, as a result from centralized budget. On the contrary, I-account clearly shows the composition of the amount of budget managed by local governments.
The detailed transformation from T-account to I-account is as follows :
a. Reclassification of state revenue items, that includes:
i. Tax component in oil and gas revenue is reclassified into income tax revenue from oil and gas sector in domestic revenue.
ii. Other components of oil and gas revenue are reclassified into non-tax revenue item..
iii. Non-tax revenue is divided into:
• Natural resources, including; oil, natural gas, general mining, forestry and fishery.
• Revenue from governmnet’s share of State-Owned Enterprise (SOE) proceed.
• Other non-tax revenues.
b. Reclassification of expenditure items, including several transfer payments in recurrent expenditure that are prone to confusion, such as:
i. subsidy for interest on credit program
ii. interests of the bonds for national bank restructuring program
c. Separation of budget financing components that are previously included in revenue and expenditure side
i. Revenue
-Revenues from SOE provatization
-Selling of assets under national bank restructuring program
-Selling of governmnet bonds in domestic market
According to GFS, revenues from thses proceeds should be put in financing account in state budget and not be traeted as revenue
ii. Expenditure
Repayment of foreign loan principals are moved to budget financing and thus reducing revenue from new forign loans
In T-account forign loans are considered to be development revenues. Similarly, repayments of their principal are regarded as recurrent expenditure. Meanwhile, in I-account foreign loans and their repayment is considered as budget financing. This differing concepts consequently causes a change in the way foreign loans are handled. The new format considered foreigd loans as debts, thus their amount should be as small as possible since the repayment of these loans’ principal and interest will undoubtedly burden the state budget in the future.
Account Format Change in Expenditure
Starting from FY 2005, the I-account format underwent several adjustments in the expenditure side as warranted by Law 17/2003 regarding State Finance. The adjustments were made to facilitate the application of unified budget system, i.e. integrating the previously separated reccurrent expenditure and development expenditure.
One purpose of the adjustments is to increase state expenditurte management transparency and accountability through reducing duplication of strategic plan and budgeting in state expenditure and to create linkage between output and outcome to be achieved by organization budgeting. Other purpose includes complying with internationally approved classification system. See Chart II-2 for details.
The new format still separate central government expenditure from local governmnet expenditure. However, as a result of state budget format adjustment, several changes have been made in central governmnet expenditure. They are:
-with the application of unified budget, the classification of expenditure according to type no longer separate reccurrent expenditure from development expenditure.
-Classification of expenditure by organization will be done in accordance to the existing organization and will be included in Budget Law. In the previous format, classification according to organization exist only in Satuan 3 book.
-Classification of recurrent expenditure by type consists of personnel, material, interest payment, subsidy and other recurrent expenditure. The new format adds capital, grant and social aid expenditure.
-In the new format, the old development expenditure is converted and distributed into personnel, material, capital, social aid, and other expenditure.
CHANGE IN BUDGET COMPOSITION
The changes in budget composition, among others, are the increasing role of tax revenue in supporting the budget and the inclusion of government bonds (Surat Utang Negara, SUN) as one of the budget’s financing sources. From FY 1969/1970 to 1985/1986, the dominant source of budget revenue is oil and natural gas, however since FY 1985/1986 their contribution have been declining and relaced by tax revenue. During and after economic crises, governmnet debt, especially domestic debt in the form of governmnet bond that was used to finance bank restructuring program, skyrocketed. Since 2002, SUN has become an important instrument in covering budget deficit. The proportion of domestic debt used to finance loan interest and principal repayment is also increases compared to the period prior to the crisis.
The Increasing Role of Tax Revenue
From FY 1969/70 up to 1985/86 oil and natural gas revenue gave large contribution to the budget. IN FY, Indonesia reaped major profit from oli price-hike. In April 1973 Indonesian Crude Oil Price (ICP) was US$ 3.73 per barrel (see Graph II-2) and increased rapidly to US$ 11.7 per barrel by April 1974. The event is known as Indonesia’s ‘oil boom’. On the contrary, the period was dubbed ‘oil crises’ by oil-importing countries. In FY 1969/70, the beginning of Pelita I (Five Year Development I), oil and natural gas revenue amounted to IDR 65.8 billion (27% of total domestic revenue – see Graph II.2), meanwhile in FY 1974/75 the number rose to
IDR 957.2 billion (54.6% of domestic revenue). In the Pelita III (FY 1979/80 – 1983/84) oil price kept on rising and reached its peak in January 1981, which was around US$ 35.0 per barrel, so that in FY 1981/82 the share of oil and gas revenue in domestic revenue amounted to 70.6%. In Pelita IV (FY 1984/85 – 1988/1989) oil price dropped significantly due to world economic crisis and excessive supply of oil and gas in international market. Oil price nosedived from US$ 35.0 per barrel in January 1981 to US$ 10.0 per barrel in August 1986. Its impact on the budget was the rapid declining of oil and natural gas revenue. While oil and gas revenue in FY 1985/86 reached IDR 11,144.4 billion or 57.9% of total domestic revenue, in the following fiscal year the number dropped to IDR 6,337.6 billion or 39.3% of total domestic
revenue.
The positive impact of the enactment of these laws are the sharp increase of tax revenues. Tax revenue that was only IDR 4,788.3 billion or 30.1% from total domestic revenue rose to IDR 11,687.9 billion or 53.6% of total domestic revenue in FY 1988/89. Since then, tax have made larger ontribution to state budget compared
to oil and gas revenue.
In 1994, the government perfected the prevailing tax laws to increase the ignificance of tax revenue and thus strengthen Indonesia’s economy in the eve of globalization. The new laws are:
a. Law 10/1994 on Income Tax (PPh)
b. Law 11/1994 on Value Added Tax (PPN) and Luxury Good Retailing Tax (PPn-BM)
c. Law 12/1994 on Land and Building Tax (PBB)
The new tax laws did enhance tax revenue significantly. In FY 1997/98 tax revenue amounted to IDR 70,934.2 billion, a steep 59.6% increase from total tax revenue in FY 1994/95, which was IDR 44,442.1 billion.
In order to trim down deficit, the government continued to increase tax revenue. The increase is considered feasible because Indonesia still have low tax ratio. Therefore, in the year 2000, the government refined the existing tax laws into:
a. Law 17/2000 on Income Tax (PPh)
b. Law 18/2000 on Value Added Tax (PPN) and Luxury Good Retailing Tax (PPn-BM)
c. Law 19/2000 on Duties on Land and Building Transfer (BPHTB)
The Increasing Domestic Debt
During the period of FY 1969/70 to FY 1997/98, the amount of domestic debt was much smaller compared to foreign debt. Domestic debt was usually in the form of unpaid electricity, gas, water,and telephone bills of government offices from the previous year and other third party bills. Compared to repayment of foreign loans, the amount of these debts was really unsignificant.
However, since the economic crises, Indonesia’s domestic debt has grown significantly. In order to carry out restructuring programs for banks that were nearly collapsed the government implements recapitalizing and financial guarantee programs. To finance the financial guarantee program, government issued Government
Bond (Surat Utang Pemerintah, SUP) worth IDR 218,315.6 billion. Another IDR 432,075.9 billion worth of bond was also issued to finance recapitalizing program.
In 2002, the government and the Parliament enacted Law 24/2004 on Governmnet Bond to regulate the issuing of government bond be it in the form of State Treasury Bond or bonds. The purpose of government bonds is to finance budget deficit, covering short term cash shortage as a result of mismatch between revenue and expenditure cash flow in state account within one fiscal year, and to manage state debt portfolio. IN FY 2005, the government plans to issue IDR 43.0 trillion worth of Government Bonds. Meanwhile the total amount of domestic debt as if June 30th, 2005 is IDR 625.4 trillion.
So that at present the government has alternative financing to cover budget deficit from domestic sources as well as foreign.
The Increasing Amount of Repayments of Domestic Loan Interest and Principal
Prior to the economic crises Indonesia’s repayment of domestic loan interest was considerably low. However, since the issuing of Government Bond and bonds to finance bank recapitalizing and financial guarantee program, the number have been rising steeply.
The most direct impact of government bonds is the increase the load that the budget have to carry, i.e. repayment of domesctic loan interest and principal. In FY 1997/98, before the crises, domestic debt repayment was IDR 1,639.7 billion, while in FY 2001 domestic debt repayments was a stunning IDR 61,174.3 billion,
which was even larger than foreign loan repayments totaling IDR 28,395.4 billion in the same year.
In addition to reduce the burden of government bond payments that were due in 2004 to 2009, the government has conducted reprofiling to bonds owned by four SOE banks, namely Bank Mandiri, BNI (National Bank of Indonesia), BRI (People’s Bank of Indonesia), and BTN (State Saving Bank). The reprofiling is done by shifting
the fixed rate bonds’ due date from 2004-2009 to 2010-2013, and shifting variable rate bond from 2004-2009
to 2014 to 2020.
In 2002, the government and the Parliament enacted Law 24/2004 on Government Bonds that will make the role of domestic debt interest and principal repayment more significant in the future, especially if the bond issued by the government is larger than those whose date is due.
In FY 2005 total repayments of domestic debt reaches IDR 58.8 trillion which consists of IDR 39.0 trillion of interest repayment and IDR 19.8 trillion of principal repayment. Meanwhile, total foreign debt repayment is IDR 72.0 trillion which consists of IDR 25 trillion of interest repayment and IDR 47 trillion.
Debt Reschedulling and Suspension in order to Decrease Budget Load
The sharp increase in foreign loan interest and principal forces the government to seek ways to lighten the budget load by suspending or rescheduling the loan through Paris Club.
Loan suspension priority is given to projects with low-intake capability and those yet to be implemented. As an example, the goverment has cancelled several projects which were funded by IBRD and ADB loan. In 1998 and 1999, 66 IBRD funded projects was suspended, the total value of which were US$ 1,030.1 million in 1998 and US$ 556.48 million in 1999. The number of suspended projects from ADB loan was 59, the total value of which were US$ 923.29 million in 1998 and US$ 317.9 million in 1999.
In order to reschedule foreign debts, the government organizes Paris Club forum. The forum has convened three times since its establishment:
1. Paris Club I, which was held in September 1998 and attended by 16 member countries, 6 non member countries, and 9 commercial banks. The meeting resulted in the signing of US$ 4.2 billion worth of debt rescheduling agreement.
2. Paris Club II, which was held in April 2000 and attended by 17 member countries, 3 non member countries, and 3 commercial banks. The meeting resulted in the signing of US$ 5.8 billion worth of debt rescheduling agreement.
3. Paris Club I, which was held in April 2002 and resulted in the signing of US$ 5.4 billion worth of debt rescheduling agreement.
The reschedulling lessens the burden of state budget not only in the on-going fiscal year but also for the future fiscal years.
In addition, Paris Club II and Paris Club III agreements signify that the creditors are giving Indonesia the chance to decrease its foreign debt stock through debt swap program that contains elements of debt relief. Up to this moment Indonesia has received offers of debt swap programs from four creditor countries; Germany,
England, France and Italy.
In the end of 2003, the Indonesian Government decided not to extend IMF program in the form of Extended Fund Facility and chose Post Program Monitoring in its stead. The impact of the decision was the absence of Paris Club meeting to reschedule repayment of debt interest and principal to creditor countries. However,
in the aftermath of Tsunami that hit Aceh and other Asian countries, Paris Club issued policy to grant debt suspension to to countries hit by the catastrophy. The amount of suspension offered by Paris Club to the Indonesian Government is US$ 2.6 billion or IDR 24.31 trillion for one year foriagn debt repayment. The
suspension decreases Indonesian budget deficit by 0.9% from GDP. In addition, several member of Paris Club also apply 0% interest for debts included in the suspension program.
CHANGE IN STRUCTURE
Structural changes in state budget includes the transformation of Regional Development and Recurrent Fund into Balance Fund, the addition of Indonesian Bank Capital Addition, addition of Public Service Obligation (PSO) as part of subsidy, and government capital. Other change comprises expenditure reclassification by
functions.
Transformation From Regional Development Fund (DPD)
and Regional Recurrent Fund (DRD) Into Balance Fund and
Sepecial Autonomy and Equalization Fund
As reform movement swept through all area in Indonesia, changes in policies on authority delegation from central to regional government have been made. The change is instituted in Decree of People’s Consultative Assembly No. XV/1998 regarding Regional Autonomy that regulates sharing and usage of national resources
and fiscal balance between central and local government. The decree is followed by the enactment of Law No. 22/1999 on Regional Government and Law No. 25/1999 on Fiscal Balance between Central and Local
Government.
Law No. 22/1999 regulated region establishment, authority distribution, personnel and regional financial sources. Further exposition on distribution of regional financial sources was regulated in Law No. 25/1999.
Law No. 25/1999 stipulated the formula for calculating the amount of fund allocation and other regulations related to regional financial sources. The allocation for the regions was definite so that estimation of the amount of fund allocation could be calculated anually.
In 2004, both laws were considered no longer appropriate so Law No. 22/1999 was ammended by Law No. 32/2004, as so did Law No. 25/1999 by Law No. 33/2004.
The enactment of those laws changed the budget format as Autonomous Region Subsidy/Regional Recurrent Fund and Presidential Instruction Project (proyek inpres)/Regional Development Fund of the old format were transformed into Balance Fund and Special Autonomy and Adjustement Fund.
Autonomous Region Subsidy or, some might say, regional recurrent fund was used to finance the region’s recurrent expenditure, be it personnel or non-personnel. Non-personnel expenditure included operational expenditures of sub-district (kecamatan) and village (desa). Meanwhile, Proyek Inpres, which was later on
refferred as regional development fund, was intended to accelerate the achievement of evenly spread people’s wealth, thus it included aid for village development, second-tier region (district) development, first-tier region (province) development, elementary schools, health, marketplace improvement, tree-planting, and road/
bridges maintenance/building. Later on the scope of regional development fund only involved village, district/municipality, province, and Social Safety Net-Poverty Control (JPS-PK).
Balance Fund is central government fund transfer to the regions to support the implementation of their tasks.
Balance Fund consists of revenue sharing (DBH), General Allocation Fund (DAU), and Specific Allocation Fund (DAK). DBH is the region’s share of tax revenue and revenue from certain natural resources. The distribution of DBH to the ragions is based on producing region principle, i.e. part of the revenue is trasferred back to the
producing region. DBH is divided into tax and natural resources revenue sharing. Furthermore, tax revenue sharing includes income tax, land and building tax, and duties of land and building transfer while natural resources revenue sharing comprises petroleum, natural gas, general mining, forestry and fishery. DBH is
intended to reduce vertical imbalance, i.e. fiscal gap between central and regional government.
DAU is a block grant, by which it means that regional government has considerable flexibility in spending it according to the needs and aspiration of each region. Although the regions has full discretionary expenditure over DAU, DBH and regional original revenue (PAD), there are matters that non-discretionary and thus should
be prioritized, such as personnel expenditure, including central personnels that have been transferred to the regions, and other recurrent expenditure that are considered as budget priority. DAU is meant to correct horizontal imbalance, due to the fact that the regions’ ability to generate revenue varies largely. According to Law No. 33/2004 at least a quarter of domestic net income is allocated for DAU. Net income is domestic income after revenue sharing deduction. DAU allocated to every distric/municipality and province is based on a certain formula so that the DAU received is relevant to their fiscal gap condition.
The provision of DAU is intended to direct the implementation of regional authority so as to fulfill special needs that are considered as national priorities. In the beginning DAU originated from 40% of reforestation fund. Starting from 2003, aside from financing reforestation in producing regions, DAK was also given in
the form non-reforestation DAK to finance activities in the area of education, health, infrastructure, and expanded regions’ infrastructure. Since 2004 marine and fishery have been added to the areas financed by non reforestation DAK.
In 2005, regional expenditure reaches IDR 130.6 trillion that consists of IDR 31.2 of DBH, IDR 88.1 of DAU, IDR 4.1 of DAK and IDR 7.2 of special autonomy and equalization fund.
The government has also been allocating special autonomy and equalization fund since 2002. Special autonomy fund, which amounts to 2% of DAU, is allocated only for Papua as manifestation of Law No.21/2001. For FY 2005 Papua receives IDR 1.777 trillion in the form of this fund.
However, in 2004 balancing fund was replaced by equalization fund, which consists of pure and ad-hoc equalization fund. Pure equalization fund is given to the region so that the amount of DAU and pure equalization fund received by the regions will never be smaller than the previous year’s. Ad-hoc equalization is given if there are government policies that may influence certain budget item in regional expenditure, for example, the policy of awarding bonus of one-month salary to all civil servants including those in the regions.
The equalization fund is considered as aid and in FY 2005 its amount is IDR 4.7 trillion.
Subsidy
Bearing in mind the fluctuative nature of economy, government’s involvement is sometimes needed to ensure economic stability, especially the stability of basic good prices so that they are affordable by domestic market.
One way of doing so is by giving subsidy for the price of particular items that are important for people’s well being. However, the subsidy should be given within close consideration to the state’s financial capacity because subsidy is nothing more than reduction of fund reserved for development.
Initially, subsidy was only given for staple food, i.e. rice subsidy and wheat flour subsidy. The subsidy was used to fill the gap between the price of imported rice and the price set in domestic market. The purpose of this subsidy is to ensure adequate supply of rice, and that its price is affordable. Rice subsidy program was
started in FY 1973/74 and terminated in 1982/83 because since then Indonesian rice production have been able to supply its domestic need.
Meanwhile, to encourage consumption diversity so that people would not be dependent solely on rice, the government launched wheatflour import subsidy program to ensure that the flour was affordable. The program started in FY 1973/74 and was terminated in FY 1982/83 due to the increase of people’s purchasing capacity.
Petroleum fuel subsidy program was started in FY 1977/78 because as a source of energy petroleum fuel plays a significant role in supporting national economic activity and maintaining economic stability. The amount of petroleum fuel subsidy is dependent on the net amount of fuel sold in domestic market and the cost of fuel
provision which includes osts of crude oil purchasing, refining, and national distribution.
The scope of subsidy is getting larger. This is evident because in FY 2005 subsidy can be cathegorized into petroleum fuel, non-petroleum fuel and Public Service Operation (PSO). Of the three, petroleum fuel is the most costly. The expenditure for petroleum fuel subsidy is generally affected by international crude oil price,
the exchange rate of IDR to US$, domestic petroleum fuel consumption, and the policy of domestic price equalization that have been implemented gradually since 2001. Non-petroleum fuel subsidy take the form of food, electricity, program credit interest, fertilizer, seed, vehicle, and tax subsidy. FY 2004 saw the addition
of subsidy for SOE in implementing public service obligation into the budget. Prior to FY 2004, PSO aid was included in other recurrent expenditure in the budget. SOEs receiving PSO aid are PT Kereta Api Indonesia (Indonesian Railway Service), PT Pos Indonesia (Indonesian Postal Service), PT TVRI (Television of Republic of Indonesia) and Perum Bulog (Logistic Affairs Agency). The total amount of distributed subsidy for FY 2004 is IDR 26.3 trillion which consisted of IDR 14.5 trillion of petroleum fuel subsidy, IDR 11.0 of non-petroleum fuel subsidy, and IDR 0.8 of PSO aid. See Table II-6 for details.
Bank Of Indonesia Capital Addition
Starting from FY 2005, Bank of Indonesia Capital Addition is inluded as a new item under Government Bond in domestic financing. The new item is intended to contain the settlement of Liquidity Aid of Bank of Indonesia (BLBI). The settlement of BLBI is carefully engaged with close consideration to short term and long term budget
capacity and long term fiscal sustainability of Bank of Indonesia. Furthermore, repayment of government bond for BLBI settlement refers to the ratio of the capital of Bank of Indonesia to monetary obligation which is 310%. In the event that the ratio is less than 3%, the government will supply the required fund the get the ratio
back to 3%.
In Budget Draft 2005, the planned addition of the capital of Bank of Indonesia is IDR 8.7 trillion, however after the deliberation with the Parliament and Bank of Indonesia, the number is decreased to zero.
Government Capital Participation for Second Mortgage Facility (SMF)
In FY 2005 the government is planning to operate long term financing system for housing (second mortgage facility, SMF). The SMF program is intended to support government’s effort to build 225.000 plain and sanitary houses for low income communities. Initial capital for SMF is IDR 2.5 trillion, IDR 1 trillion of which comes from state budget and the rest is from a SOE, PT Jamsostek.
Within the state budget government’s capital contribution for SMF is included under domestic non-bank financing. Initially, SMF was not included in the budget proposal for FY 2005, however government’s capital participation of IDR 1 trillion was agreed upon in the deliberation with the Parliament.
Expenditure Reclassification by Organization, Function and Type, Where Formerly by Sector and Type The breaking down of expenditure by function is a reclassification of programs formerly included in the old format as sectors/subsectors. However, programs in both new and old format is incomparable due to the fact that they are different in nature.
Function/subfunction is not the basis for budget allocation as in the new format state budget allocation is based on programs proposed by ministries/agencies. Then the programs are grouped according to their function/subfunction Expenditure classification by function is merely an analysis tool used to identify functions that have been, is being and will be implemented by government in compliance to best international practises, which is Classification of the Functions of Government (COFOG). COFOG is formulated by UNDP and was adopted by GFS Manual 2001-IMF. Indonesian government, however, made an adjustment by separating religious function
from recreation, culture, and religious functions so that in state budget the classification encompasses 11 functions namely: (1) general public services, (2) defense, (3) public order and safety, (4) economic affairs, (5) environmental protection, (6) housing and community amenities, (7) health, (8) recreation and culture, (9) religion, (10) education, (11) social protection.
Budget Section Addition For Financing and New Ministry/Agency Item
The dynamics of economy, demands for good government and increasing number of ministries/agencies are the reason underlying the adjustment of the number of budget section. Recently the code number of budget section (Bagian Anggaran, BA) has reached 99, among the new additions are Foreign Loan Principal Repayment, Domestic Loan Principal Repayment, On-lending, and State Capital Participation. New budget
section codes for newly established ministries/agencies have also been added, i.e. for Nanggroe Aceh Darussalam Reconstruction and Rehabilitation (BRR-NAD) and Board of Regional Representatives (DPD).
Budget section codes are enacted to ensure a more organized, transparent, and accountable state budget.
Additionally, having their own budget section code means that ministry/agency has full authority over state financial management. See Table II-7 for new additions of budget section codes.
Currently not all of 99 budget section codes are used. Some, like for instance code number 14, 16, 17, 21, 28, 30, 31, 37, 38, 39, 45, 46, 49, 53, dan 58 are codes for ministries that no longet exist, e.g. Ministry of Information, Ministry of Industry. These codes are not written off for hystorical reasons.
OTHER CHANGES
Other changes in state budget, both in preparation and policy, are the inclusion of grants in budget document, project readiness criteria, and international obligation criteria.
Inclusion of Grants in Budget Document
Prior to 2001, forign grant management encounterd various contrains that were caused by:
-the absence of fixed mechanism and administration procedures of foreign grants;
-the fact that foreign granst were conducted through various institution, for instance National Development
Planning Agency, Ministry of External Affairs, State Secretariate, and Ministry of Finance. Some grants were even transferred directly to their beneficiaries
-the various form of grants, e.g. cash, material. services, consultation services, training, and project
preparation;
- the absence of fixed grant reporting system;
-the fact that most grants went unreported and unrecorded through budget mechanism, thus a major
accountabilty problem.
In order to control these problems Directorate General of Budget issued Circullar Letter No. SE-54/A/2001 dated April 21st, 2001 which stated that grant executive agencies/beneficiaries must report the grants they received to Ministry of Finance. The reporting would ensure more organized, transparent, and accountable foreign grant administration so that the realisation of foreign grant could be compared and held accountable to Parleament and public in general.
In the case of grants from Government of Japan (GOJ) for rehabilitation and reconstruction of Nias and Aceh, GOJ even insisted that the grants must be put into budget document. In its tender implementation, GOJ appointed Japan International Cooperation System (JICS) as procurement agent. The grant itself amounted
to US$ 139.40 million or the equivalent of IDR 1,240.66 billion. This case is indeed a sign of improvement in foreign grant administration as warranted by Circullar Letter No. SE-54/A/2001
Project Readiness Criteria
The implementation of projects funded by foreign loan usually encounters problem such as incomprehensive project preparation that includes aspects like land acquisition, project staffs appointment, evaluation and supervision system preparation, lack of coordination with related institutions, and many others. These problems causes project stagnancy even when the loan agreement has been signed and the fund disbursed.
The obvious consequence of such incidence is the inefficiency of commitment fee paid by the government.
To prevent such inefficiency, the government has enacted ‘Project Readiness Criteria’ to ensure that the project is in a state of ready for implementation before loan agreement is signed so that once the loan is effective, the project may be commenced immediately.
As an example, readiness criteria filter for Neighborhood Upgrading and Shelter Secter Project includes:
a. the availability of performance indicator for monitoring and evaluation, including baseline data.
b. the availability of commitment from regional government to participate and provide the obligatory financing and contiguous fund
c. contiguous fund of both central and regional government for the firts year has been allocated in the fiscal year in which the project supposed to commence
d. draft of Grant Agreement has been approved by central and regional government
e. the availability of land acquisition and resettlement plan.
f. the appointment of Project Management Unit and Project Implementing Unit, including the staffs.
g. the availability of the final draft of project management/manual administration (including organizational
scope and Term of Reference), procurement, financing, reporting, and audit mechanism
h. the availability of procurement proposal and request for proposal
i. financing plan has been deliberated and approved by Bappenas and Ministry of Finance
j. Fund Absorbtion plan
k. budget agreement document for loan and contiguous fund proposal for the first year has been issued
l. recommendation concerning the winner of project tender for main consultant of the first year.
Issue International Bond
In order to cover budget deficit and increase devisa reserve, the government also issues international bonds.
Until recently, the government has issued international bonds three times which were in 1996, 2004, and 2005. The value of international bonds issued in 1996 was US$ 400 million. Whereas in 2004 and 2005 the value was US$ 1 billion in each year.
The high level of interest shown by investors to Indonesian bonds issued in 2004 and 2005 indicates the increasing level of trust of the investors to Indonesian economic recovery.
The issue also implies the variety of current alternative budget financing, aside from domestic Government
Bonds and foreign loan.
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