Year Ahead Event

Indonesia Needs Aggressive Fiscal Policy, Former Minister Says

  • Poor tax revenue collection holding economy back: Basri
  • Ex-finance minister sees no room for more interest rate cuts
Chatib Basri, Former Indonesian Minister of Finance, discusses Indonesia’s economy and central bank policy.

Indonesia needs more aggressive fiscal policy to spur demand and investment in Southeast Asia’s largest economy, according to Chatib Basri, a former finance minister.

Efforts to kick-start economic growth through eight interest rate reductions since the beginning of 2016 have failed to yield desired results and President Joko Widodo may now need to pursue a more expansionist fiscal policy, Basri said. But poor revenue collections may limit the scope of such efforts, he said.

Widodo wants higher economic growth as he pursues his ambitious infrastructure agenda, including ramping up spending next year to record levels, but growth has been stuck around 5 percent since he took office three years ago. The government is also facing a persistent fiscal shortfall with revenue as a percentage of gross domestic product being significantly lower than peer economies and a tax-compliance rate among the region’s worst.

"The biggest problem for Indonesia is on the demand side,” Basri said in an interview on Tuesday ahead of the Bloomberg Year Ahead Asia Conference in Jakarta. "We need to have a more aggressive fiscal policy, but unfortunately because the tax revenue is still a problem, we don’t have the room to do so."

Indonesia lags its peers in terms of government revenue, which is estimated by the International Monetary Fund at 14 percent of GDP. Moody’s Investors Service has cited boosting revenue as a key factor in Indonesia winning another ratings upgrade.

Indonesia Needs Higher Revenue to Win Moody’s Upgrade

In a country of 260 million people, only about 17 million registered taxpayers were required to submit returns this year and just 11.3 million actually paid their dues, official data show. Revenue from taxation was 991.2 trillion rupiah ($73.3 billion) at the end of October, or about 67 percent of the 2017 target.

The government and central bank must be wary of the impact of rising interest rates in the U.S. and elsewhere on Indonesia’s economy, according to Basri, who was the country’s finance minister during the 2013 taper tantrum, when the U.S. Federal Reserve’s signal of stimulus withdrawal prompted an Indonesian sell-off.

The Southeast Asian nation is now seen less vulnerable to such external shocks with a current account deficit of less than 2 percent, subdued inflation and a budget deficit that’s within a legal limit of 3 percent, Basri said.

Consumer prices rose 3.3 percent in November, the slowest pace of growth in almost a year, data showed Monday. The low inflation environment in recent months paved the way for Bank Indonesia to deliver back-to-back interest rate cuts in August and September, on top of six reductions last year.

Still, Basri doesn’t see any room for further easing. "Starting next year, if the ECB starts to end quantitative easing, starts tapering, if the U.S. continues with normalization and the consolidation of its balance sheet, I think Bank Indonesia should raise the interest rate," he said.

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