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Indonesia should push onward with structural reform: IMF
An International Monetary Fund (IMF) team has concluded that the country should continue to push for structural reform in tax collection to further carve fiscal space in its budget to finance priority spending
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span>An International Monetary Fund (IMF) team has concluded that the country should continue to push for structural reform in tax collection to further carve fiscal space in its budget to finance priority spending.
The IMF team, led by its division chief for Indonesia and the Philippines, Luis E. Breuer, visited Indonesia from May 2 to 14.
In a recently published statement, Luis lauded the government’s past policy that reflected its priority to maintain domestic stability amid uncertainty stemming from external uncertainties, while also urging policymakers to further advance tax reform, considering the government’s commitment to managing the fiscal deficit.
“Fiscal policy should focus on creating additional [fiscal] space through tax reform and improving the composition and efficiency of public spending,” said Breuer, adding that modernization of the tax system and its administrations would play a vital role in financing the government’s priority spending areas, such as vocational training, health, infrastructure and social safety nets, among other benefits.
In the 2019 state budget, the government had targeted a fiscal deficit of 1.84 percent of gross domestic product, equivalent to Rp 296 trillion (US$ 20.45 billion), slightly higher than the fiscal deficit of 1.76 percent booked in 2018.
Breuer said the current fiscal deficit would “strike a balance” between promoting economic growth while maintaining economic stability in the context of uncertain external financing.
The IMF team projected the economy to expand 5.2 percent in 2019, driven by strong domestic demand and supported by an uptick in lending in the banking sector. The team noted, however, that risks were tilted to the downside.
“Risks to the outlook are tilted to the downside and mainly stem from external sources, including rising trade tensions, sharp tightening of global financial conditions, weaker-than-expected growth in China, and large swings in commodity prices,” said Breuer.
He noted, however, that renewed efforts of reform after the elections would boost confidence, investment and GDP growth.
GDP expanded 5.07 percent year-on-year (yoy) in the first quarter of this year, slightly higher than 5.06 percent booked over the same period in 2018, thanks to strong household spending. The government targeted GDP to grow 5.3 percent this year.
Finance Minister Sri Mulyani Indrawati separately said the government would continue to monitor developments in the global environment, particularly ongoing trade tensions between the United States and China, to assess its effects on the economy amid indication of slowdown in state revenue collection.
Tax revenue, the highest contributor to state revenue, among others, was recorded at Rp 387 trillion as of April this year, having grown 1.02 percent from the amount of revenue collected over the same period last year. The growth in the first four months of 2019 was in contrast to 10.8 percent tax revenue growth booked in 2018.
“We have already see signs of downturn in the economy with the slowdown of tax revenue growth,” said Sri Mulyani, adding that the situation was similar to 2014 and 2015, during which imports and exports also declined due to external factors.
She, however, also pointed out that the decline in the tax revenue had been partly caused by a simpler tax refund process, the regulation for which was issued April last year.
The volatility in commodity prices has also affected the government’s nontax revenue, which is heavily reliant on the natural resources sector, as the government collected Rp 93.97 trillion as of April, lower than the Rp 110.4 trillion collected over the same period last year.
Center for Indonesia Taxation Analysis (CITA) executive director Yustinus Prastowo said the government was caught between a rock and a hard place in terms of collecting tax revenues, saying that a stricter approach to collection would risk disturbing the economy, while a softer collection approach also risked failing the taxation revenue target of Rp 1.78 quadrillion this year.
He also said it would be “reasonable” for the government to revise its state budget following the sluggish revenue performance, suggesting that such a move would be prepared after the General Elections Commission announced the election results on May 22.
