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Reforming Intergovernmental Fiscal Relations and the Rebuilding of Indonesia

Reforming Intergovernmental Fiscal Relations and the Rebuilding of Indonesia

The ‘Big Bang’ Program and its Economic Consequences

Studies in Fiscal Federalism and State–local Finance series

Edited by James Alm, Jorge Martinez-Vazquez and Sri Mulyani Indrawati

Indonesia is currently facing some severe challenges, both in political affairs and in economic management. One of these challenges is the recently enacted decentralization program, now well underway, which promises to have some wide-ranging consequences. This edited volume presents original papers, written by a select group of widely recognized and distinguished scholars, that take a hard, objective look at the many effects of decentralization on economic and political issues in Indonesia.

Chapter 13: Decentralization and the Challenge for Indonesian Fiscal Sustainability

Anggito Abimanyu

Subjects: asian studies, asian development, asian economics, development studies, asian development, economics and finance, asian economics, public finance


13. Decentralization and the challenge for Indonesian fiscal sustainability Anggito Abimanyu1 INTRODUCTION The success of the Indonesian economy will depend heavily on whether the government of Indonesia can deliver a sustained economic recovery through 2004. Recovery requires a wide range of successful policy reforms. However, an issue that could derail the whole process is fiscal sustainability. For much of the past 30 years, there was little concern about the sustainability of the government’s finances. The economic crisis that began in 1997 changed everything. The government’s decision to honor the deposit guarantee that was issued in early 1998 and to cover the liquidity support given to the banking system by Bank Indonesia (BLBI) has created over IDR 650 trillion in domestic debt (well over 40 percent of GDP) that must be serviced each year. The depreciation of the rupiah has substantially increased the value of the government’s foreign debt in rupiah, further burdening the budget. The implementation of fiscal decentralization in response to demands for greater regional autonomy has also created significant new demands for expenditures. The government must decide how to balance these demands with the limited fiscal resources that it has at its disposal. Actual realized budget deficits have in fact been lower than originally estimated. For example, in 1998, 1999 and 2000 the realized deficits were 2.0 percent, 1.5 percent and 1.1 percent of GDP, respectively, compared with predicted budget deficits for the same years of 8.0 percent, 5 percent and 5 percent of...

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