Indonesia shunned by investors

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

IO – President Jokowi has expressed his disappointment in his econom­ic team: Out of the 33 companies migrating from China between June-August 2019, only one chose to move to Indonesia; 23 others went to Vietnam. Indonesia is clear­ly being avoided by investors. It is no wonder that the Government targets – investments, economic growth, tourism, etc. are not reached (other than level of inflation).

At the same time, the World Bank issued a report pointing at the serious level of bureaucratic and regulatory obstacles in Indo­nesia that make us look less than “investment-friendly”. Therefore, we propose that the Government truly, properly, and honestly implement a policy of DEBUREAUCRITIZATION and DEREGULATION, instead of merely making claims of “reforms” and “modernization”. These vague terms mean nothing more than increasing the number of agen­cies and inflating expenditures of our State Budget, yielding results that we conclude are actually zero. Even worse, such useless “reform” and “modernization” programs are funded by debt.

3 years of Jokowi’s rule (2015- 2018) have seen 6300 new “non-in­vestor-friendly” regulations issued, generally impeding and complicat­ing permit processes. According to the World Bank report, this is the main reason why only a few compa­nies that have escaped from China (fleeing from the pressures of the trade wars with the United States) have chosen to move to Indonesia. They prefer to move to more com­petitive countries – like Vietnam. Also in the World Bank report, in Indonesia permits or recommenda­tions that should according to reg­ulations be completed and issued within five days are actually issued on average after a full six months.

Naturally, such practices are detrimental to entrepreneurs and investors, as they automatically en­tail more expenditures and uncer­tainty. The source of the problem is the bureaucracy, which makes use of these processes to secure their own “commercial advantages”. This is why the Government’s 16 Economic Policy Packages are only beautiful on the surface, but in fact cannot be implemented properly. This causes the Government to be openly derided as “Ki Jarkoni” (faux Javanese name), “iso ngajar ning ora iso nglakoni” – “They can only preach but cannot practice”.

When anyone exposes the Gov­ernment’s failure to implement its own regulations, the Economic Team generally acts like econom­ic sages and “observers” as they “criticize” the issue. They use it as a smokescreen to place the blame for low investment rates, instead of searching for ways to actually increase the Foreign Direct Invest­ment (FDI) that our economy sorely needs. Other than for maintaining economic growth and helping stim­ulate employment, FDI is also nec­essary to bulk up foreign reserves and defend the Rupiah exchange rate, while funding imports and other foreign currency needs – par­ticularly since Indonesia’s exports are on a downtrend, one that re­sults in trade deficits, and since our Current Account Deficit (CAD) in 2019 is projected to hit USD 33 billion or +3% of GDP.

For a long time now Indonesia’s economy has been relying on for­eign capital inflows from short-term portfolios – funds that may flee In­donesia at any time. Furthermore, the Government recently became aggressive in its pursuit of foreign currency debts to cover State Bud­get deficits. This is done in a con­text of an anticipated tax income deficit of IDR 150 T -IDR 200 T. Without any spending cuts, our State Budget deficit will balloon ex­actly as much as this tax income deficit. However, slashing the bud­get will further depress economic growth. Observers note that the tax ratio, which formerly hovered around 11%-13%, has continued to slip during Minister of Finance Sri Mulyani’s tenure. Economist Anthony Budiawan notes that the tax ratio has been declining from 13.3% to a mere 8.89% of the GDP in Semester I of 2019. This is the lowest rate in history, both in Indo­nesia and the Asia Pacific.

Meanwhile, debt-to-GDP ratio continues to rise in her term. The interest rate (or yield) of these debts is so steep – it’s the highest in the Asia Pacific. I do not think that any other Minister of Finance of RI has generated more State Budget debt than Sri Mulyani. It is no wonder that she has been called the “Con­trary Minister” or “Debt Minister”. In short, she is the worst Minister of Finance Indonesia has ever had.

Therefore, it is only natural that President Jokowi should reconsider his campaign promise of separating the Directorate General of Taxa­tion from the Ministry of Finance, transforming it into a separate, in­dependent agency. The effort was actually expressed already in the General Provisions and Procedures for Taxation (Ketentuan Umum dan Tata Cara Perpajakan – “KUP”) Draft Law submitted by President Jokowi to the House of Representa­tives (Dewan Perwakilan Rakyat – “DPR”) when Bambang Brojonegoro became Minister of Finance. It is a pity that Sri Mulyani never pursued the effort.

Whoever the Minister of Finance may be, s/he should not have any ambition of continuing to hold on to the Directorate General of Tax­ation – especially if proven to have never reached the target for years. The duty of obtaining and main­taining State income is too hard for a Directorate General to discharge. No matter what measurement you apply, the Directorate General of Taxation has exceeded the average for a ministry and must become its own agency.