Notes for Minister of Finance Sri Mulyani: Report on her performance and the realization of the 2018 State Budget

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

IO – To start, let us make clear that on 2 January 2019 the Ministry of Finance issued a brief, dense, yet incomprehensible Performance Report and Realization of the 2018 State Budget. Therefore, we need to be thorough in reading this report in order not to be fooled or misled.

Why? Because since Sri Mulyani became the Minister of Finance (during the President Jokowi era), all reports have been presented in a “framework of success” by using wordplay and careless and irrelevant comparison methods, which ostensibly causes performance to seem amazing and totally successful. Alternative analyses that should have been included are notably absent. This is not in the tradition of the Ministry of Finance, which actually used to tend to be straightforward and conservative. To quote what “insiders” say, the current model of reporting is the style of Sri Mulyani, who has modified the presentation style from that of professional technocrat into that of a politician, to match the all-image importance in the current political era.

Everything that is already confirmed to be fair and positive in the Minister of Finance’s report need not be discussed further. The politicians in the People’s House of Representatives (Dewan Perwakilan Rakyat – “DPR”) need only review performance of issues that are not appropriate or that require attention. These include:

  1. Exchange Rate of Rupiah > USD
    In the 2018 State Budget, the Rupiah exchange rate is targeted at Rp 13,400.00, with a realized average rate of Rp 14,247.00. The Rupiah exchange rate is determined by numerous factors, but in the end it all comes down to the ratio between foreign currency supply and foreign currency demand. The main source of foreign currency is our exports and foreign currency income from other sources to Indonesia, whether from foreign currency debt, currency swaps, foreign tourist income, foreign direct investment (FDI), portfolio investments, or miscellaneous foreign currency income such as remittances from Indonesian workers abroad.

These details are important, but they are not specified. This might need to be reported jointly with the Governor of Bank Indonesia (BI). A cause of concern is the fact that exports (the main source of foreign currency) only grew 7.7%, while imports (the main user of foreign currency) exploded by 22.2%. This resulted in a deficit in Indonesia’s 2018 trade balance (both petroleum and natural gas (minyak bumi dan gas alam – “migas” and “non-migas”) at USD 7.5 billion. Migas trading alone suffered a deficit of USD 12.1 billion, the result of a sharp increase in migas imports.

We need to separate how much of these migas imports was caused by an increase in oil prices on the global market, how much is caused by the increase of oil import volume, and most importantly, we must honestly ask what is the impact of the B20 program? It has been said that domestic petroleum refineries are actually unsuitable for adopting the B20 program. Is the B20 program only image-building, or are there vested interests which really want higher oil imports in order to gain import interest income?

Furthermore, service imports have also increased sharply. Our Current Transaction Balance deficit has worsened, and this is a continuous threat to the Rupiah exchange rate. However, Rupiah exchange rate oddly remained relatively under control. There must be other factors, anomalies that the Government and BI must explain properly. For example, is it true that this control was caused by Currency Swaps with China? The Government should explain such issues comprehensively and transparently. The DPR must be proactive in cases such as this.

The method for calculating the Rupiah depreciation rate throughout 2018 must also be explained. How did the Government arrive to the conclusion that the depreciation rate would only be 6.89%? If the Government relies on the average 2018 exchange rate of Rp 14,247.00, then it is assumed that the Rupiah exchange rate in early 2018 was Rp 13,328.00/USD; thus, the exchange rate depreciation rate is calculated at 6.89%. However, if we use point-to-point (instead of an average) exchange rate, i.e. the exchange rate on 31/12/2017 compared to 31/12/2018 exchange rate at Rp 14,481.00, we might arrive at a different depreciation rate. There is no erroneous method in determining this; however, it needs to be explained, especially to the politicians at the DPR, in order to avoid misunderstandings.

  1. 2018 State Income
    Minister of Finance Sri Mulyani Indrawati proudly stated that the State Income earned has exceeded its target for the first time. In other words, this is an indirect admission of failure to reach previous targets. The 2018 State Budget target was Rp 1,894.70 T, Rp 1,942.30 T realized, representing 2.5% above the target. However, when we look at this more in detail, the surplus source of State Income actually originates from or is caused by external factors rather than of internal ones (results of the Government’s own efforts). Tax income (from the Directorate General of Taxes and the Directorate General of Customs and Excises) continued to suffer a shortfall, the Rp 96.7 T figure 6% below the State Income target. Income from the Directorate General of Taxes alone only realized Rp 1,315.90 T of its Rp 1,424 T target, so there was a shortfall of Rp 108.1 T or 7.6%. This “small” shortfall was covered by a contribution from migas: an Income Tax surplus of 69.6%, or a surplus of Rp 26.6 T from the target of Rp 38.1 T). please note that this was the result of higher global oil prices, not because migas production rose. In fact, migas production actually came in below target.

The backbone of State Income was non-migas Income Tax and VAT, both of which remained below the State Income target. Only Rp 1,225.00 T of the Rp 1,358.80 T target was achieved, so there was a shortfall of Rp 133.80 T, or 9.8%. Apart from migas income tax, the Directorate General of Taxes only realized income of Rp 1,251.2 T of the Rp 1,385.90 T target, or a shortfall of 9.7%. Other surpluses that ended up covering the shortfall of Directorate General of Taxes’ income were seasonal incomes (depending on external factors), such as the increase of prices of oil and other commodities in global markets. There was also an increase of Rp 12.7 T or 1.061% in grants. This is something we must all be grateful for, but it is nothing to get cocky about, as it was not the result of any Government achievement.

The 2018 Tax Ratio was reported at 11.5%. With 2018 GDP at Rp 14,745.90 T, it is assumed that tax income would be Rp 1,695.00 T. In fact, the 2018 realized tax income was only Rp 1,521.40 T or 10.3% of GDP. Therefore, we need a clarification from the Government: for example, was it that tax income in the realized 2018 State Budget did not include calculations of the rural and urban Building and Land taxes managed by Regional Governments. Is this true? We need to have everything explained thoroughly in order to ensure that the tax ratio is not questionable.

  1. State Expenditures
    It is actually not problematical to determine the efficiency or effectiveness of State Expenditures without checking the numbers in “Satuan 6”. I believe that the expenditure on goods is the worst source of leaks. Even without Satuan 6, I would still like to helpfully raise the following points for the Minister of Finance:
  1. Realized Debt Interest Payment was Rp 258.10 T, while the budget was Rp 238.6 T, so there is an excess of Rp 19.50 T (8.2%). Naturally, the increased interest payment must be completely explained, as debt is a sensitive issue.
  2. The budget for petroleum fuel and LPG was Rp 46.90 T, while the realization was Rp 97 T (207%) or Rp 50.10 T higher. Was the Rp 97 T subsidy already an accrual figure (total 2018 load), or simply cash basis (the amount of subsidies actually paid out to Pertamina)? If there is still petroleum fuel and LPG subsidy that remains unpaid in 2018 other than this Rp 97 T, it means that the total subsidy is actually higher than Rp 97 T. If that is the case, this outstanding amount should still be included in the calculation of the 2018 load, which means that the budget deficit was actually considerably larger than reported.

In the 2018 State Budget, the budget deficit was set at 2.19% of GDP. According to the Minister of Finance’s 2 January 2019 Report, the amount realized was 1.76% of GDP. I honestly doubt the accuracy of this figure in the Report without a detailed clarification of the method of accounting and calculating subsidies and bills, such as interest payments. Sneaky State Budget practices, commonly known as “window dressing” must be avoided through an honest and full disclosure, by both the Minister of Finance and the Audit Board of Indonesia (Badan Pemeriksa Keuangan – “BPK”) for submission to the DPR.

  1. The same note also applies to electricity subsidies, which were budgeted at Rp 47.70 T but reported to be Rp 56.50 T. Does that figure really include all 2018 electricity subsidies, both ones paid to the State Electric Company (Perusahaan Listrik Negara – “PLN”) and the ones in arrears to PLN? If there is any unpaid electricity subsidy to PLN other than the above Rp 56.50 T, that would be added to the 2018 State Budget deficit. We need to clarify this too, because inconsistencies in the reporting of the State Budget frequently occur.
  2. Contingent Liability
    In view of the large volume of State-owned Enterprise (Badan Usaha Milik Negara – “BUMN”) funds guaranteed by the State, the Government needs to report the amount of contingent liability in full, as a footnote. This record is important, because if a BUMN fails to satisfy its obligations, that should be calculated as a liability. The Government also cannot justify this amount was for constructing infrastructure, as infrastructure is by definition facilities constructed by the State for free use by the public. These include public roads, bridges, irrigation, airports, etc. However, if we change this into private goods/commercial goods like toll roads with steep fees, it would be a normal business practice.