Architect of Indonesia Budget Cap Says Subsidy Must Go

An adviser to five Indonesian presidents whose budget rule helped the nation return to investment grade says the next leader needs to scrap a popular fuel-subsidy program.

“It’s created an addiction and we have to start to wind it down,” Dorodjatun Kuntjoro-Jakti, 74, professor of economics at the University of Indonesia and economy minister under former President Megawati Soekarnoputri, said in an interview yesterday. “I’m really afraid of subsidized fuel, as currently, we’re not only importing crude but also fuel.”

Kuntjoro-Jakti introduced the rule that limits Indonesia’s budget deficit to 3 percent of gross domestic product, a cap that helped the nation shrink debt levels and win investment grades at Moody’s Investors Service and Fitch Ratings. While the government’s debt-to-GDP ratio declined to 26 percent last year from 95 percent in 2000, according to International Monetary Fund data, its subsidy bill has sapped available funds each year and prevented the country from spending more on infrastructure.

Indonesian presidential frontrunner Joko Widodo, who’s said he would reduce fuel subsidies gradually, would avoid raising fuel prices this year, his economic team said this week. Other Southeast Asian nations from Malaysia to Thailand have also come under pressure to reduce payments that keep local gasoline and diesel prices low, with the head of Thailand’s state oil company this week calling on the junta to remove fuel subsidies while it has absolute power.

Berkeley Mafia

“I know it’s not easy,” Kuntjoro-Jakti said. “That’s why the next government has to build good team work.”

The holder of a doctorate in political economy from the University of California at Berkeley, Kuntjoro-Jakti is part of a group known as the “Berkeley mafia” of advisers to former dictator Suharto that crafted Indonesia’s economic-development strategy.

“In terms of economist clubs, my sense is that there is none that is as closely knit, sharing as much ideological background and imbued with such a strong purpose to reform Indonesia’s economy as the Berkeley mafia,” said Wellian Wiranto, a Singapore-based economist at Oversea-Chinese Banking Corp., who described Kuntjoro-Jakti as an “inspiring economist grandfather”. The U.S.-educated gang built the University of Indonesia’s economics faculty that produced the country’s current finance minister and central bank chief, Wiranto said.

Crisis Man

Kuntjoro-Jakti served as Indonesia’s Ambassador Extraordinary to the U.S. under PresidentsSuharto,B.J. Habibie and Abdurrahman Wahid during and after the Asian Financial Crisis, consulting with the IMF, World Bank and U.S. authorities to turn around Southeast Asia’s biggest economy. PresidentMegawatimade him coordinating economic minister in 2001 and Susilo Bambang Yudhoyono sought his help on United Nations reform and appointed him to a think tank.

Indonesia’s finance ministry data shows the country cut its debt-to-GDP ratio to 24 percent last year, from 57 percent in 2004, when Yudhoyono first took office.

Asked if he would accept any offer to join the next cabinet, Kuntjoro-Jakti said no.

“It’s enough for me, I’ve worked for five presidents,” he said. “I’m a specialist man to solve crises. If I have my own choice, I would rather stay this way, that’s enough for me as we see that Indonesia has a lot of clever and young people such as Agus Martowardojo, Chatib Basri, Muliaman Hadad,” he said, referring to the current central bank governor, finance minister and financial services authority chairman.

To contact the reporter on this story: Novrida Manurung in Jakarta at nmanurung@bloomberg.net

To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net Neil Chatterjee

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