Indonesia has a higher rate of economic growth than Greece and lower twin deficits of both the budget and the current account of the balance of payments. As a result, Indonesia has lower ratios of government debt-to-GDP as well as external debt-to-GDP.

The twin deficits in Greece reflect mismanagement of its economy. The budget deficit in Greece had been continuously in deficit by an average of 6 percent GDP during the past three decades or two times of the permissible Maastricht criteria of 3 percent.

At 2.6 percent in 2009, the ratio of the annual budget deficit to GDP in Indonesia was lower than the Masstricht criteria.

Finalized in December 1991, the strict pre-entry convergence Maastricht criteria should need to satisfy members of eurozone starting January 1999.

Like in Indonesia, in reality, Greece concealed the unsustainable large budget deficit by a combination of bookkeeping manipulation and financial engineering in its antiquated fiscal system.

In 2009, the Greek economy contracted by 2 percent while Indonesia grew by 3.5 percent.

Indonesia’s growth rate is below the minimum required rate of at least 5 percent per annum to absorb the new entrance to the labor force.

The ratio of the current account balance deficit to GDP in Greece was over 11 percent as compared to positive 0.3 percent in Indonesia.  

The ratio of government debt-to GDP of that country was 115 percent, nearly twice as much of the Maastrich limit at 60 percent and nearly four times that of Indonesia at 31.1 percent. As a ratio to GDP, external debt of Greece in 2009 was 170 percent in contrast to around 29 percent in Indonesia.

The first lesson from the present Greece debacle is that to avoid a fiscal crisis, Indonesia has to continue to adopt the present macroeconomic stabilization policy more forcefully.

In addition to the banking sector and trade policy reforms, the macroeconomic stabilization policy was first imposed by the IMF when Indonesia was under its program in 1997-2003. 

“The  crisis in Greece indicates that to enable the country to service its external debt the country
has to accumulate both budget and balance of payments surpluses.”

The macroeconomic policy consists of (i) monetary rule and (ii) fiscal rule. The monetary rule has two elements, namely: (a) to replace targeting the foreign exchange rate with inflation target of monetary policy and (b) to replace the heavily managed exchange rate system with a more flexible one.

There are three components of the fiscal rules. First, ban financing of the budget deficit through printing money. Second, to cap the budget deficit to no more than 2.5 percent of GDP. And third, to reduce the ratio of government debt-to-GDP to sustainable level around 30 percent range.

The second lesson is on the exchange rate management. As a member of eurozone, Greece has more national money and therefore there is nothing to devalue to improve competitiveness of its economy in international market.

Improvement in competitiveness is particularly needed in manufacturing sector outside the traditional shipping and tourist industries that are not sensitive to currency devaluation.

The only option available to Greece is to do internal devaluation by introducing an austere fiscal
program, deregulation of labor market, and improvement in business climate.

The objective of the fiscal consolidation is to reduce budget deficit from 13.6 percent of GDP in 2009 to below 3 percent in 2014.

The austerity program includes cutting military expenditure, freezing salaries of civil servants and, reduction in social benefits including education, healthcare and pension funds. In addition, institutions should be improved to protect property rights, enforce contracts and correct market failures and externalities.

In contrast, the policy option for Indonesia is wider than Greece because it is not a member of monetary union and its export sector is also wider.

Because of this Indonesia can adopt both internal and external devaluation to improve its international competitiveness.

The management of exchange rate in Indonesia should be directed to achieve two twin objectives. The first objective is to offer financial incentive for improving its international competitiveness.  

The second objective is to promote internal structural reforms by encouraging movement of economic resources from low productivity non-traded sector of the economy to traded sector with higher high productivity.  

The third lesson from Greece is on modernization of fiscal system to make it more transparent and accountable.

To end bookkeeping manipulation, the fiscal reform in Greece is now closely supervised both by the EU and the IMF.

The modernization of fiscal system includes programs to end proliferation of extra budget, the use of Treasury Single Account, reform and privatization of state-owned enterprises.

The reforms also include measures to increase tax revenues by strengthening tax administration, enlarging tax base and improving tax collection and battling tax evaders and transfer pricing.
As shown by Gayus Tambunan’s tax swindle case, our system is rotten to the core as the crime implicates tax officials, police officers, prosecutors, judges and lawyers.

The fourth lesson from Greece is that to be able to service the government debt, the borrowing country has to accumulate both budget and balance of payment surpluses.

The buyers of Greece’s government bonds are mainly financial institutions in other countries in the same eurozone using the same Euro currency, such as Germany, France and Spain.

Greece cannot absorb its sovereign bonds because it has a low saving rate for its domestic long-term financial institutions such as pension funds, and insurance companies are not rich enough.  

Unlike in Japan, Greece also does not have a Postal Saving Bank to absorb the securities. The present crisis in Greece indicates that to enable the country to service its external debt the country has to accumulate both budget and balance of payments surpluses.

The problem is more acute in the case of Indonesia because its external debt burden is prone to exchange rate movements.

The writer is a professor of economics at the University of Indonesia.

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