View Point: Presidential
candidates promise, but
where will all the money
come from?

Vincent Lingga, The Jakarta Post, Jakarta | Opinion | Sun, June 08 2014, 1:07 PM

The two presidential-candidate pairs, Joko “Jokowi” Widodo-Jusuf Kalla and Prabowo Subianto-Hatta Rajasa, have revealed their economic platforms, showing the grand designs of their economic management for 2014-2019.

Both the platforms are similar, designed to develop a strong economy based on developing agriculture and manufacturing with a narrowing degree of inequality in income and asset ownership.

Naturally, food, energy, physical infrastructure and education (human capital) are central to their working programs.

But neither pair of candidates has stopped at simply showing their grand designs; they have also stipulated in the documents filed with the General Elections Commission (KPU) a series of concrete steps and measures to implement their programs.

As the designs are similar, so are the action programs, as illustrated by the following examples. Jokowi-Kalla: Improve irrigation networks for 3 million hectares (ha) of rice fields, opening 1 million ha of new rice fields outside Java; build 10 new airports, 10 seaports and 10 industrial estates, as well as 2,000 kilometers of road and 5,000 traditional markets, and offer 12 years of compulsory education. 

Prabowo-Hatta: Increase per capita income from the current Rp 35 million (US$2,951) to Rp 60 million in 2019 with annual economic growth of between 7 and 10 percent; create 2 million jobs annually; open 2 million ha of new farmland mainly for food crops; build 3,000 km of new road and 4,000 km of new railway, and replant 77 million ha of damaged forests.

While these action programs are badly needed to improve the economy and set it on a faster growth path, there is still a big question as to where all the money to finance these programs will come from.

The problem is that over the past four years and, most likely, through the next five years, the fixed components of central government spending — personnel expenditure, debt servicing and amortization, energy (fuel and electricity) and fertilizer subsidies and transfers to regional administrations — already use more than 85 percent of the annual state budget.

Hence, only about 10 to 15 percent of the state budget will be available for government investment in infrastructure if the huge amount spent on energy subsidies is not cut down and budget losses due to inefficiency and corruption are not decreased.

Neither candidate said anything meaningful regarding the budgetary system or fiscal management; nor did they refer to the format or structure of the budget they plan to implement if elected.

Jokowi and Kalla, like Prabowo and Hatta, set a target to increase the tax ratio — tax receipts as a percentage of gross domestic product (GDP) — from 12 percent to 16 percent in 2019, but they did not elaborate on how they would achieve it. They also committed themselves to phasing out the fuel subsidies.

 However, without any realistic course of action, these programs are little more than wishful thinking or dreams.

The Prabowo-Hatta pair did stipulate in its platform several measures related to the budgetary system, but again they were mostly statements in normative terms, such as a commitment to reform budget management and increase budget spending to Rp 3,400 trillion per year from the current Rp 1,600 trillion.

Doing nothing substantial about the hugely wasteful spending on fuel subsidies would threaten fiscal sustainability and, consequently, increase sovereign risk and government borrowing costs.

Within the coming few weeks before the July 9 election, in order to lend credibility to their promises, both presidential candidates should be more forthcoming about the fiscal management and budgetary system they plan to implement to inform voters of what they can expect.

This is because the state budget process is the only mechanism available for disciplined decision-making. The budget must encompass all the fiscal operations of government and must also force policy decisions with financial implications to be made against a background of hard budgetary constraints and in competition with other demands.

A budgetary system is a communication mechanism, conveying signals about behavior, prices, priorities, intentions and commitments. Budget reforms should take particular account of this characteristic, as effective communication would carry all stakeholders through the reform process. 

Fiscal policy must take account of the need to ensure the timely flow of funds to programs and projects. This requires a medium-term approach to the adjustment of budgetary imbalances, program development and evaluation.

In other words, the total amount of money a government spends should be closely aligned with what is affordable over the medium term and, in turn, with the annual budget; such spending should be appropriately allocated to match policy priorities, and spending should produce its intended results at the least expense.

A budgetary system, however good, is not self-contained. In particular, the system is adversely affected by multiple elements, converging uncertainties, entrenched patterns of expenditure, inflation and structural imbalances between expectations and resources.

The system must be built to cope with these realities, while being aware of self-inflicted uncertainties or rigidities.

But, whatever reforms the candidates commit to, they must realize that reform needs a broad-based sentiment that things have to be changed, and it needs leadership that is able to translate that massive dissatisfaction into concrete programs. 

That is why bold reforms often require, as a necessary condition, a perception of crisis, or at least a sense of chronic deterioration. The challenge for the candidates, however, is to find a way to convey such a message to voters without sowing the seeds for exaggerated pessimism.

The writer is a senior editor at The Jakarta Post.

View Point: PDI-P has to
bite the bullet or face
fuel-subsidy time bomb

Vincent Lingga, The Jakarta Post, Jakarta | Opinion | Sun, March 23 2014, 12:33 PM

 

The Indonesian Democratic Party of Struggle (PDI-P), so far a staunch supporter of the hugely wasteful government spending on the fuel subsidy, will have to bite the bullet if its candidate wins the July presidential election to lead the next government.

Stubbornly resisting the urgent need to reform the energy policy could set off a fuel-subsidy time bomb, causing fiscal distress and market turbulence and eventually social and political upheaval as well.

The PDI-P would be well advised to realize that its leader, Megawati Soekarnoputri, refused to raise fuel prices a few months before the presidential election in 2004 despite the steep rises in oil market prices, apparently with high hopes of being reelected.

But she lost miserably to Susilo Bambang Yudhoyono, who was immediately forced to increase fuel prices twice in 2005 in the face of an unmanageable fiscal deficit. This simply shows that the wasteful fuel subsidy has nothing to do with gaining voter support because the subsidy benefits mostly private-car owners.

It would be better for the PDI-P, so far seen as the most likely party to win the presidential election, if it drastically changed its stance on the fuel subsidy early in the upcoming deliberation of the draft 2015 state budget that President Yudhoyono will propose to the House of Representatives in mid-August.

The latest World Bank report cites the ballooning fuel subsidy and the big risks of widening trade and current-account deficits, with their multiple ramifications on the rupiah exchange rate and inflationary pressure, as the biggest downside risks to Indonesia’s economy this year and in 2015.

The World Bank estimates that the steady increase in fuel consumption and a weakening rupiah will increase the fuel subsidy to Rp 267 trillion (US$22.6 billion) this year (2.6 percent of gross domestic product), far higher than the Rp 211 trillion budgeted for this year.

The report says that including the Rp 40 trillion in fuel subsidy carried over from last year, total subsidy for this year could skyrocket to over Rp 300 trillion, or more than 3 percent of GDP and almost 20 percent of central government spending.

The amount of the fuel subsidy could even be much higher than the World Bank estimate because average daily oil output this year will most likely be 60,000 barrels short of assumed production in this year’s state budget.

This means that oil imports will have to increase to cover the shortfall, thereby causing a bigger oil trade deficit. This deficit, combined with the $5 billion to $6.5 billion export losses caused by the ban on unprocessed mineral exports, will sharply increase the current-account deficit, setting off stronger downward pressure on the rupiah and stronger inflationary pressure.

The World Bank has suggested two reform scenarios to reduce and control the fuel subsidy along the same idea that Finance Minister Chatib Basri started promoting soon after his appointment last May.

Under the current fuel-subsidy regime, it is the price of subsidized fuel that is fixed (currently at Rp 6,500 per liter against the market price of Rp 11,200)). But the ultimate amount of the subsidy depends on the average oil market price and the rupiah’s exchange rate. Since oil prices and the rupiah’s exchange rate tend to fluctuate wildly, the final amount of the fuel subsidy also tends to increase steeply.

The plan that Chatib has been promoting will fix the amount of the fuel subsidy per liter irrespective of eventual oil market price developments and the rupiah’s movements. Under this regime, the amount of fuel subsidy per liter would not fluctuate along with oil market prices or rupiah rate quotations because it would be the price of subsidized fuel that would rise or fall monthly following oil market quotations.

This plan actually amounts to floating the price of subsidized fuel at market prices as the Megawati government did in 2002 but stopped a few months before the 2004 legislative and presidential elections..

Hopefully, the PDI-P faction at the House will take the initiative to support the stipulation of the fixed fuel-subsidy plan in the draft 2015 state budget, which will be tabled for deliberation in August.

The fixed-subsidy plan should be attractive because the automatic monthly price adjustment would provide policy predictability for the market and the general public, protect the economy from sharp price adjustments and their shocking inflationary pressure.

Yet more politically encouraging is that such a plan would spare the government the wasteful political bickering at the House every time international oil prices fluctuate widely. Past experience shows that any time the government moves to raise fuel prices, irrespective of the amount, there is always political turbulence at the House, not to mention street demonstrations and the temporary shocking impact on general price levels.

Still most important is that floating the price of subsidized fuel at market prices would free the government from being held hostage by the wildly volatile international oil market and remove the fuel-subsidy time bomb from government fiscal management.

However, the uncontrolled fuel subsidy is not only the issues of fiscal and current-account deficit.

The wide price disparity between market and subsidized fuel prices is a big incentive for export smuggling but hinders energy efficiency and conservation.

Yet more damaging in the long term is that the huge subsidy that made fuel prices artificially low has hindered the development of renewable energy, such as biofuel and biodiesel, which has huge potential to grow in the country, already the world’s largest palm oil producer with an annual output of more than 25 million tons.

 The writer is a senior editor at The Jakarta Post.

Multilayered control fails
to prevent misuse of rice
imports

Vincent Lingga, Jakarta | Opinion | Tue, February 18 2014, 11:00 AM

Since rice is classified as one of the nation’s strategic commodities, its import is severely restricted and subject to multiple layers of control under the regulations of several ministries.

The import of medium-quality rice for domestic price stabilization can be made only by the state-owned State Logistics Agency (Bulog) and the imports are based on the volume set annually by an inter-ministerial rice task force chaired by the chief economics minister.

Only rice of premium quality and for special purposes can be imported by private companies (non-Bulog).

But imports of both medium-quality and premium-quality rice can be made only by companies that have both general import licenses and special rice-importer licenses. Imports should be endorsed by a letter of recommendation from the Agriculture Ministry which clearly stipulates details on the quantity and the quality of rice, the countries of origin and the seaports of unloading in Indonesia.

The Trade Ministry (directorate general of foreign trade) can issue import licenses only on the basis of the letter of recommendation from the Agriculture Ministry and the import specifications must also conform to those stipulated by the latter.

Copies of rice-import licenses are sent to 11 parties, including senior officials at the customs offices at the designated seaports of unloading in Indonesia (mainly Tanjung Priok, Tanjung Perak, Tanjung Emas and Belawan), to the Agriculture Ministry, the Office of the Coordinating Economic Minister and the trade office of the Jakarta municipal administration.

Before imports can be realized, importers must notify state-owned surveyor companies, either PT Sucofindo or PT Surveyor Indonesia, in Jakarta about their import plans, complete with technical specifications. This surveyor company will inspect the technical specifications of the rice at the seaports of loading overseas or the warehouses of the rice suppliers overseas.

Rice imports can be cleared by the customs service in Indonesia only if they are supported by a surveyor’s verification report certifying that the imported rice fully conforms to the specifications as stipulated in the import license.

Importers also must have a Rice Import Control Card which must be filled out by the local customs service each time imports are realized stipulating such details as the volume and classification of imported rice. And importers must report to the Trade Ministry the import realization, supplemented with the Rice Import Control Card bearing the signature and stamp of the local customs service.

The question is then why after all this elaborate bureaucratic procedure and multilayer supervision, misuse of rice import license still takes place? Furor broke out over the past two weeks after it was discovered that more than 17,000 tons of medium-quality rice had been brought in by private (non-Bulog) importers by manipulating their quality and their harmonized-system (HS) tariff codes.

Deputy Trade Minister Bayu Krisnamurthi cried foul, pointing out that if the rice was medium-quality it would have entered the country illegally, because his ministry issued import licenses to private importers only for premium-quality rice and only on the basis of letters of recommendation from the Agriculture Ministry.

This started a heated blame game. The Agriculture Ministry vehemently defended its position, stressing it never recommended imports of medium-quality rice to private importers. Likewise, the customs service, seemingly “burned” by Krisnamurthi’s tirade, said it only cleared rice imports supported with approved documents from the ministries of trade and agriculture.

The Supreme Audit Agency (BPK), the customs service and the ministries of trade and agriculture are still digging into the alleged rice-import scandal.

The manipulation of the quality of the imported rice did not cause any state losses because all grades of rice are subject to a fixed, specific import duty of Rp 450 (4 US cents) per kilogram and the impact was negligible as the volume involved was a mere 0.0005 percent of the national rice production.

But the controversy conveyed a strong warning.
_______________

These rather blurred tariff classifications seem to open loopholes for manipulation by importers.
_____________________

The government is acutely short of adequate technical competence and integrity in managing such trade-protectionist measures through the distribution of import quotas of basic commodities. Just look at the recent wave of sugar- and beef-import scandals.

Such import irregularities never happened between 1985-1997 when Indonesian imports were subjected by then president Soeharto to pre-shipment inspection at the countries of origin by the global surveyor company, Geneva-based Société Générale de Surveillance (SGS).

Part of the problem should be blamed on the vague HS classification of tariff codes for rice in place since 2012. First of all, the import-tariff book does not mention such terms as medium or premium quality for rice but classifies this commodity only using 10-digit codes for its specific characteristics.

When the government changed the import-tariff book in 2012, medium-quality rice, which under the old tariff regime had been under a separate HS tariff code (1006.30.90.00), was classified in the same tariff code (1006.30.99.00) together with such premium-quality rice as Basmati and Japonica. Thai Hom Mali rice was moved from the 1006.30.15.00 to the 1006.30.40.00 code.

Futher complicating the matter, such rice trademarks as Japonica (formerly Japan), Basmati (India) and Thai Hom Mali (Thailand) can currently be imported from anywhere, as these rice varieties are now grown outside their native countries. Just like Thailand’s Munthong durian, which is now planted in Bogor.

These rather blurred tariff classifications seem to open loopholes for manipulation by importers who exploit the inadequate technical competence of officials or in collusion with corrupt officials.

The clearest and loudest warning from this controversy is that the government should improve its institutional capacity and the internal control of officials directly involved in managing import-restrictive measures, especially as regard to such basic commodities as rice, sugar, beef and horticultural products.

The future challenges are even tougher because the new Trade Law which was enacted last week vests ever broader authority in the government to control the import or export of certain commodities considered vitally important to the basic needs of the people.

This means the government will be involved directly in the trading of many more commodities through the distribution of quotas, special import licenses and other restrictive measures.

A corrupt bureaucratic and political system crowded by greedy businesspeople could “creatively” exploit and turn such import-restrictive measures into cash cows.

_________________
The writer is senior editor at The Jakarta Pos

View Point: Unnecessary
confusion in enforcing
the 2009 Mining Law

Vincent Lingga, The Jakarta Post, Jakarta | Opinion | Sun, January 19 2014, 1:17 PM

The government resolved the confusion over the enforcement of the 2009 Mining Law, preventing massive worker layoffs and a potential loss of at least US$5 billion in export earnings, through an 11th hour regulation that lowered the purity levels of most exportable minerals as from Jan. 12.

Though the regulation seemed disgraceful and inconsistent with the true spirit of the mining law, which aims to develop as high a value-added as possible for mineral ores, it appeared to be the best compromise, a face-saving solution to the debacle caused by the incompetency of the Energy and Mineral Resources Ministry.

The government’s claim that it fully enforced the law by the Jan. 12 deadline is debatable. It did totally ban the export of nickel ore and bauxite but still allowed the exports of copper concentrate with a purity level of at least 15 percent and other minerals with purity levels of 62 percent for iron, 49 percent for manganese, 57 percent for lead, 52 percent for zinc and 56 percent for ilmenite, which is refined into titanium.

Such purity levels certainly are not the final goal, let alone the spirit, of the 2009 Mining Law.

The six concentrates are subject to 20 percent export tax, which will gradually be increased up to 60 percent by July 2016 in a strong bid to push mining firms to fully process their minerals in the country by 2017.

Indonesia has long been a major exporter of nickel, bauxite, copper, tin, coal and several other minerals.

Therefore, the 2009 Mining Law which, among other things, requires the processing of minerals within the country and prohibits exports of mineral ores starting Jan. 12, had been welcomed as a strong legal foundation to bring Indonesian natural resources up on the value-added chain.

Even though the law was enacted a few months before the legislative and presidential elections in 2009, when the sentiment of economic nationalism usually escalates, the legislation is rational as it provides a five-year transition period for miners to meet the mandatory processing requirement and 10 years (after commercial production) for the divestment of controlling ownership by foreign investors to national interests.

Five years should have been adequate for investors wanting to abide by the law in good faith even though smelters require big investments, especially because smelting is high, energy-intensive manufacturing, while areas outside Java, where most of major mineral resources are located, still suffer a large power deficit.

But alas, confusion had surrounded the enforcement of the law, especially since early last year when the government confirmed it would push ahead with a total export ban on unprocessed minerals starting from mid-January 2014.

The government and mining companies should only blame themselves for the policy uncertainty within the mining industry.

The problem was that the law was virtually shelved for more than three years because ministerial regulations on the technical details on the provisions on the domestic processing of mineral ores were issued only in May 2012.

This caused misperceptions among mining companies that the government would not be steadfastly serious about enforcing the law’s provisions on a complete ban of the export of mineral ores.

Certainly, two years are not adequate to build smelters that require big investments. Moreover, while smelters require a large volume of electricity and support infrastructure as ports, almost all the mining firms are located in areas outside Java, which still suffer from a huge power deficit. In fact, investment for a captive power unit is sometimes larger than the investment for the smelter itself.

The policy reaffirmation last year set off a sort of chaotic reaction, even among giant mining firms such as Freeport and Newmont, which cried out that they would not be able to meet the deadline for processed mineral exports and demanded a reschedule of two to three years.

Mining firms blamed the weak commodity market, an acute lack of infrastructure and what they considered an accelerated period of divestment by foreign investors while at the same time investors were required to put up additional investment for processing.

The government, greatly concerned about the temporary loss of $5 billion in export earnings annually at a time when the country has been suffering big current account deficit, seemed willing to reschedule the deadline for the mandatory processing.

But the plan plunged into chaos in November after the House of Representatives rejected the government’s proposal to amend the mining law so as to allow a longer transition period.

But full enforcement of the export ban would increase the current account deficit and strengthen the downward pressures on the rupiah, which has so far depreciated by more than 21 percent against the dollar.

Yet more politically sensitive, the export ban could anger regional administrations because they would certainly lose tax and royalty revenues.

It is encouraging to note that the government has learned a great lesson from the confusion. The latest regulation will be more powerful in terms of forcing miners to build smelters because of the 10 percentage-point increase to be made in the export tax on the semi-processed minerals every half of the year, starting in January 2015 until the export tax reaches as high as 60 percent in the second half of 2016.

Certainly, an export tax of as high as 60 percent will make the export of semi-finished minerals commercially unfeasible because not a single commodity is able to provide a profit margin of over 60 percent.

Of more importance is the government should resolutely enforce the latest rule. Big risks are already inherent within the mining sector without legal uncertainty and policy inconsistency.

The writer is senior editor at The Jakarta Post.

The week in review: Geared up for more shocks

The Jakarta Post | Editorial | Sun, December 01 2013, 11:15 AM

President Susilo Bambang Yudhoyono strengthened the message of caution conveyed last week by Bank Indonesia’s (BI) Governor Agus Martowardojo that Indonesia should brace for possible shocks in the financial market, as the US Federal Reserve could start tapering its stimulus early next year.

This will mean that the supply of cheap dollar-based loans could dry out soon, pushing up lending rates. The Fed’s US$85 billion bond buying per month, or quantitative easing, has made dollar-based loans so cheap that many companies in Asia, including Indonesia, have been ramping up their borrowing in dollars.

The President’s warning at the conference of business leaders here on Wednesday that the government should prepare a contingency plan was not exaggerated.

 Just look at the great shocks on the financial and equity markets in Indonesia and other emerging markets between July and September after the Fed merely hinted in May that tapering was forthcoming. 

Tens of billions of dollars in portfolio investment flew out of Indonesia, pushing down sharply the rupiah exchange rate and share prices on the back of expectations that the tapering policy would make dollar interest rates rise significantly.

It is difficult to imagine the magnitude of the shock on the Indonesian financial market when the fiscal stimulus ended sometime in the first half of the year, but the rupiah could be in for another great shock.                                                            

The Jakarta Composite Index (JCI) dropped almost 6 percent this month and the rupiah hit another low in four years, depreciating further to around Rp 11,815 per US dollar.

According to the Jakarta Interbank Spot Dollar Rate (JISDOR), the rupiah has so far depreciated by 18 percent year-to-date and is now among Asia’s worst-performing currencies.

Finance Minister Chatib Basri stated he had already prepared several policy measures to stabilize the economy and reduce the current account deficit, which he estimated to reach $31-$32 billion throughout this year, higher compared to the $21.5 billion in 2012. 

The measures include increases in import tax on consumer and luxury goods, combined by a fiscal incentives package for companies that do not repatriate their earnings overseas and for firms that don’t lay off their workers. 

Agus said the central bank was now intensifying a campaign to bring home overseas funds to boost dollar liquidity onshore, so that the rupiah could be cushioned better against external shocks. BI also again raised its benchmark interest rate to 7.5 percent two weeks ago.

The news from global trade negotiations within the General Council of the World Trade Organization (WTO) in Geneva is not good either, as negotiators from 159 member countries failed early this week to clinch global free trade deals for approval by the WTO’s 9th ministerial meeting in Bali early next week.

Achieving a deal in Bali is seen as a final effort to revive a broader 12-year effort to ease global trade rules. The mini-deal discussed in Geneva had been intended, in part, to reduce delays and inefficiencies at national borders. 

Making it easier to move goods across borders could boost the global economy by nearly $1 trillion a year and support 21 million jobs, according to a report co-written by Jeffrey Schott, a senior fellow in international trade at the Peterson Institute for International Economics.

Some developing countries are demanding economic and technical assistance before they sign on. India is holding up a deal by insisting on protections for its farmers.

Negotiations toward a broader global trade deal began in Qatar in 2001 but the agonizing pace of talks has frustrated negotiators.

Success in the Bali meeting has been expected to return confidence to members in the multilateral trading system in general amid proliferation of regional and plurilateral trade accords, and in the negotiating function of the WTO in particular. But the expected deals on three packages — trade facilitation, agriculture and least developed countries — seemed more elusive. 

The divergence in the proposal in agriculture issues would serve as a solid foundation for progress in the talks on trade facilitation, which deals with simplified custom procedures, another hot topic of debate among developed and developing nations, Trade Ministry director general for international trade cooperation Iman Pambagyo said.

This is like a mutual hostage relationship between the G33 proposal and the trade facilitation draft deal. The progress in one area will generate a snowball effect in another area, he added.

The move by thousands of doctors across the country to stage a nationwide protest on Wednesday to show solidarity with three doctors — Dewa Ayu Sasiary Prawani, Hendry Simanjuntak and Hendy Siagian — who were put behind bars as a result of a Supreme Court ruling, raised more criticism than sympathy.

 The three were deemed responsible for the death of Julia Fransiska Makatey in 2010 due to a heart embolism during a caesarean section at Kandou Hospital in Manado.

Many blasted the doctors for violating their code of ethics as the strike and protests left many hospital patients without proper medical attention. A patient in South Sulawesi even claimed to have suffered a miscarriage without any medical assistance.