The ‘Big Bang’ Program and its Economic Consequences
Edited by James Alm, Jorge Martinez-Vazquez and Sri Mulyani Indrawati
Chapter 13: Decentralization and the Challenge for Indonesian Fiscal Sustainability
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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