Claim of success before a crash

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DR. Fuad Bawazier, MA
Economist and Former Finance Minister in Cabinet Development VII

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IO – Practically all the rulers in the world always claim that the macro economy which is occuring is the success and economic policy of his government. That is the convenience of winning an argument in macroeconomics, that the ruler always claims success before a crash or economic crisis. Even before the devastating monetary crisis (Krismon) in 1997, the government stated that Indonesia’s economic fundamentals were strong and therefore they guaranteed would not be hit by the crisis. With the assurances of the Berkeley Mafia economists, President Soeharto was left feeling secure and content.

That is a typical behavior of economic rulers in almost the whole world who tend to not admit failure. Always claiming themselves to be great and successful until the real economic crisis hits and they can no longer dodge. When in power, the fact is that even when they know the macroeconomics, which is their responsibility, is in a state that is battered and heading towards an economic crisis, rulers always expect that the crisis occurs only after the regime change. Then later that ruler will boast on his make believe success during the period of his reign.

Apparently that is what’s happening right now during the reign of Jokowi–JK, where his Economic Team tend to evade taking responsibility simply for protecting their own image in the eyes of the President and the public. Macroeconomic data is being misinterpreted, not read in its entirety, comparing their data with irrelevant facts, etc,etc. What is important for them is that they, as the economic team, continue to look good and successful.

Not only in qualitative terms, but also quantitative terms, data can be interpreted and pictured as they please; most important is that the  Economic Team may claim success. For instance the Tax Amnesty in 2016, clearly did not reach its target revenue of Rp165 trillion and nor did it manage to collect Rp1,000 trillion repatriation funds, but is still claimed as a success and perhaps even as the most successful Tax Amnesty in the world. On the successive State budget since 2015, 2016 and 2017 which failed to reach the official targets according to Indonesian state budget law. The economic growth which is always below the target or state revenue which is far from target, are still claimed that the realization is still better compared to this and that, which is actually not the official data comparison.

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More with qualitative data, such as the promise of self-sufficiency in rice as it turns out that during Jokowi’s administration, is instead to be importing rice every year. Whereas in reality slowly but surely there is a shift from rice to wheat, so that wheat imports continue to rise. Similarly, in various political statements on macroeconomic, such as improving economic independence apparently we are becoming more and more dependent. Quantitative targets such as an increase in ratio, improvement in debt service ratio, and lowering debt ratio are not achieved if we are using official targets such as state budget and the National Medium-Term Depevolpment Plan (RPJM).  Instead of admitting to failure, they put aside the official targets, and use any other comparison in order to demonstrate the success of the economic team. Apparently this is what is happening right now during the Jokowi-JK administration in which its Economic Team are playing politics simply to enhance their image in front of the President and the the general public.

Macroeconomic data is easily twisted and misinterpreted, read in bits and pieces, compared with something irrelevant so that they can argue of having achieved economic success. Actually President Jokowi senses something is wrong with the course of economy or his economic team when he asked if everything is okay, why the economy is not running fast? Or when the President said that the actual repatriation budget for Indonesia Migrant Workers-TKI is only Rp500 million, but is budgeted at Rp3 billion, which reflects how much is wasted of the state budget.

Government Economic Team, if necessary, use domestic and foreign media to promote themselves. When the media is not enough, Indonesian economic officials  also use the services of international consultants to enhance their image of success. These consultants are given study projects under the guise of reform and modernization such as tax administration reform, government accounting reform, budget reform and so in which the results are very disappointing.

When all the manipulation efforts are exhausted and eventually a real crisis occurs, those economists will jump ship to save their  career as happened when Soeharto stepped down. The question is, what should we  be worried about with Indonesia’s macroeconomic developments which has the potential to produce a crisis?

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Like the monetary crisis of 1997/1998 as the crisis also hit many other countries, debt was the main cause of the problem. In the 1997/1998 crisis the main source was private debt which exceeded the ability to pay its obligations, by abusing banking facilities provided by Central Bank (BI). Fortunately at that time the state debt was still minimal, well-controlled and positive. So that the state was able to provide assistance to private parties and banks that were on the verge of collapse.

In the current state of 2018 it is in fact the country’s debt that has the potential to become the source of crisis as it rises sharply meanwhile state revenues are practically stagnant. In 2017, the tax revenue only reached 88.4% or Rp. 1,097 Trillion of a target of Rp 1,284Trillion whereas the target of 2017 was Rp 1,10Trillion below the 2016 target of Rp. 1,394Trillion. Growth realization of tax revenue from 2013 to 2016 average is only 7% and it seems that future growth is difficult to be improved.

Indonesia’s foreign exchange debt (public and private) at the end of November was 2017 USD.347 billion or grew by 9.1% (yoy), but the growth of the country’s foreign currency debt grew by 14.3%. This foreign currency debt ratio is 34% of GDP. These foreign currency debts are generally to finance projects that will eventually generate rupiah so it is necessary to be aware of a mismatch.

Based on data from the Ministry of Finance of Government debt per September 2017 amounting to Rp. 3,866 Trillion consisting of multilateral / bilateral loans Rp738Triliun, foreign exchange Goverernment Securities (SBN) Rp. 849 Triliun and Government Securities (SBN) of rupiah Rp. 2,279Triliun.

So the main problem is not on the amount of state debt, particularly the foreign debt of the country or the ratio of debt to GDP, but on the ability of state income, especially taxes to meet the payment obligations on the debt of the country. The gap between the growth of state revenues and debt growth is the main critical issue of state finances in the next 3 (three) years.