T

he government is sticking to its fiscal reform agenda with a plan to boost capital spending through to 2019 as it shifts allocations away from subsidies and into productive spending, although disbursement remains sluggish.

The head of the Finance Ministry'€™s Fiscal Policy Agency (BKF), Suahasil Nazara, said on Thursday that the government would gradually increase capital expenditures (capex) every year until they reach 5.3 percent of the gross domestic product (GDP) in 2019.

'€œThis is part of the administration'€™s fiscal reform. We are reallocating funds from energy subsidies to capital expenditures to finance various needs, especially infrastructure,'€ he said in remarks to the International Forum on Economic Development and Public Policy held by the ministry in Nusa Dua, Bali. The forum focuses on '€œfiscal reform to support strong and equitable growth'€ and will run until Friday.

The fiscal reforms of President Joko '€œJokowi'€ Widodo'€™s administration began when the President scrapped the burdensome and poorly targeted fuel subsidies during his first few months in office, replacing them with a market-driven floating price mechanism so that the billion US dollar spending could be redirected toward capital or social spending.

However, capital spending this year has been slow, with only 39.2 percent of the budget, Rp 99.1 trillion, being spent as of October.

This year'€™s capex, equal to around Rp 252. 8 trillion (US$18.12 billion), accounts for 2.2 percent of the GDP. It is projected to increase to 3.1 percent in 2016, including special allocation funding (DAK), and to 4 percent in 2017, 4.6 percent in 2018 and eventually perch at 5.3 percent in 2019.

As capex increases toward 2019, the portion of energy subsidies as part of the GDP is projected to decline, according to Suahasil.

'€œAllocation of subsidies will go through a more stringent process in the coming years. For example, we allocated Rp 73 trillion for electricity subsidies in 2015, but we are going to reduce it to Rp 38 trillion next year,'€ he told the forum'€™s audience.

Energy subsidies now represent 1.2 percent of the GDP, which will be slashed to 0.8 percent in 2016, 0.5 percent in 2017, 0.4 percent in 2018 and 0.3 percent in 2019, data projection from the ministry reveals.

Asian Development Bank (ADB) deputy chief economist Juzhong Zhuang lauded Indonesia'€™s fiscal reform efforts of minimizing the subsidies, especially those on fossil fuels, which he claimed only benefitted affluent people.

He said that the shift provided the country with extra funds for infrastructure, but argued that its annual infrastructure spending would still have to rise to 6.2 percent of GDP between 2010 and 2020 to meet total infrastructure needs of Rp 450 trillion during the period.

According to the 2016 state budget, Rp 312 trillion has been earmarked for infrastructure-related spending, which is 2.4 percent of GDP, far below ADB'€™s suggestion.

Goldman Sachs executive director and senior ASEAN economist Reza Y. Siregar urged the government to maintain a sustainable and persistent public investment to attract private involvement to cover the financing gap.

'€œGovernment or public investment will never be enough to meet the Rp 450 trillion infrastructure needs, so it has to bring in private investment,'€ he said in the forum.

Goldman Sachs research shows that in a number of countries such public investment must demonstrate a sustainable increase for at least five years to spur private investment.

'€œIt'€™s the same for Indonesia. We cannot have public investment that goes up and down. You have to sustain an increase for at least a good five years. By then, you can see its impact on growth,'€ Reza explained.