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Growth is a must

Interview - March 23, 2015

World Report talks to H.E. Prof. Bambang Brodjonegoro about the new reforms implemented by the new administration which are aimed to increase the efficiency of Indonesia’s national budget.


President Joko Widodo’s ascension to Indonesia’s Presidency back in October of 2014 is a true landmark in the country’s democracy as it is the first election of a ‘businessman’ for the presidency. It has created excitement and raised hopes as his government, together with the most prominent players of the economy, are believed to achieve major progress on the country's key issues. Could you give us an introduction to the top reforms implemented in the 2015 national budget and what are the main differences in comparison to the previous ones?

I think it’s a very good new reform that’s been done by the new government back in November and continuing in December last year. I think it’s very important for a much healthier and much more productive budget. So, in 2015, for example, we can spend almost 100 trillion Rupiah extra for infrastructure, despite the fact that the expediency declined in our oil and gas revenue by about 150 trillion Rupiah. This means that the fiscal space has been bigger although the revenue is declining. I think the reform is right on time because the oil price is low and we can take advantage of this situation.

After that, of course, we need to reallocate the savings from the fuel subsidy into a product spending that will effectually create the economic growth. Of course reallocation has to support the government investment and this kind of government investment has to focus on the infrastructure. So far, we have allocated an infrastructure spending for the irrigation system to especially support agricultural productivity, also for road network, in order to improve the connectivity and electricity transmission, to solve our irrigation issue. Aside from the budget we also give capital injection to our oil enterprise in infrastructure, so we can invest on commercial infrastructure like airports, seaports, etc.  So, in general, the Hispanic side of budget is good.

We hope the government investment combined with the private investment, where we are now reforming our business climate by launching the national launcher office, will hopefully deal with all the documents, such as number of licenses, permits, etc. So, in general, a combination of private investment and government investment will be the key to economic growth and we hope that the target that has been set in 2015 of 5-7% will be achieved. Of course, at the beginning of the year it will be rather slow, but I believe things will be moving on faster in the last quarter of this year. 

It is no secret to anyone that the major problem of these mega projects is the lack of funding, both from the public and the private sector. The government has now decided to allocate large sums of money to SOE’s which are said to take full responsibility of these projects if the private sector doesn’t see the financial feasibility. Do you see the new SOE’s approach as a reflection of former president Suharto’s policy on making SOE’s (State-owned Enterprise) an agent for development?

I think the better comparison is China. The excellent way in which China has busted the economical growth for a long time, almost more than ten years, is simply a result of a properly utilization of their SOE. In our case, I believe we utilized our SOE simply because we need to accelerate the infrastructure development. Although we have a lot of physical space, as I mentioned, in our budget, it is still not enough. So we have to use something that is not directly in the budget, which is the State-owned Enterprise. So far, we have many state oil enterprises dealing with infrastructure. So we need to give some capital injection to them in order to expand this area.

What is more, the president has a maritime vision, in which we need to build a lot of seaports. Parts of the small seaports will be built by the budget, but the biggest part will be built by the SOE. Then, it doesn’t mean that we give a lot of power to the SOE, it’s just our way to inform the private sector in infrastructure, and this private sector is SOE. We hope that the pure private sector will follow, in order to work hand by hand with the Government to build infrastructure.

One of the top priorities for the current administration is to stage Indonesia in the International arena as a safe destination for investment and as a power house for the whole Asian region.  How do you see Indonesia entering the ASEAN Economic Community at the end of 2015?

I think we should take advantage of the ASEAN economy community. First, we have a largest economy; second, a larger population as well, so it’s clear the margin is big. As a result, this is an attraction for other ASEAN members to exploit our market. However, I believe that we should take advantage of our big market size in order to create economic soft-skill in our manufacturing sector.  I believe the most important thing is to revitalize our manufacturing sector. I think this will be the leading sector of Indonesia in order to compete with other ASEAN countries.

What is more, we have the advantage of agricultural based and plantation based manufacturing. Secondly, we can revitalize the manufacturing centre, which has already big economic soft-skills, like the automotive industry. Now we are exporting more and more automotive to other countries and we should continue doing so. 

The other advantage would be having manufacturing that is still based on labor-intensive. Partly because we still have a big size of population, especially younger population, and our business climate is still favorable. So I believe manufacturing will be the answer to be economically competitive. 

Benign inflation, low borrowing costs and a thriving economy helped Indonesia’s banking sector achieve remarkable growth amidst the global financial crisis. However, in recent years, the macroeconomic environment deteriorated due to several factors. What is your evaluation on the need to reduce fragmentation in the banking system in order to create strong enough institutions to compete at a regional level?

It will be up to the business decision, and, of course, my colleague the Minister of State-own Enterprises will have thoughts on this issue. The most important thing is the idea of having a big banking sector. So, I’m not only looking for a consolidation among the SOE, but also to the fact that we need to have a good, active banking sector in which we need to reduce the number of banks. As a result, consolidation is very important, but, of course, it doesn’t have to be consolidation only in SOE; consolidation of small banks is more important, since sometimes, when there are issues with the financial system, usually small banks could create problems. Then, although they are small, they cannot be underestimated. This is the dilemma we have to face. We then need to work hard in the banking sector consolidation to make it more solid. 

Indonesia's sharia banks held assets worth 251 trillion RP (around $20.8 billion USD) as of August 2014. This amounts to less than 5% of domestic banking assets and fades in comparison to Malaysia, where Islamic banks hold more than 20% of total assets and Saudi Arabia, where it is more than 50%. To what extend may the country become a regional player in the Islamic banking industry and what are the main reasons behind the low market penetration of Islamic financial products we can find today?

I think Islamic financial has a big prospect here in Indonesia. Unfortunately, last year was not a good year for Islamic banks, so that’s why the Shariah in the total bank assets still has the 5%.  And it has been there for a long time. This meaning that we need to do extra effort. We also need to stop thinking what kind of polices are necessary to push up this development of the Islamic Banking. Maybe one way to increase the Islamic finances in Indonesia is through Islamic Bond or Sukuk. The idea of the Islamic megabank will be important because that kind of bank will stimulate the Sukuk market primary as well as secondary. Then, if the Sukuk market has been growing, especially in Indonesia, then, of course, it will create space for Islamic banks in Indonesia to also become bigger and to be more liquid. As a consequence, we really trust having this Islamic infrastructure bank because they will beneficiate us through financial infrastructure, Sukuk issuance, and providing a kind of "liquidity". 

How enthusiastic are you about the potential of developing the industry further?

Yes, I think this is a potential that’s still missing in Indonesia. We have to admit that Malaysia is still some steps ahead because they have been developing the financial reform for quite a lot of time, but I believe we can still catch up, but the attitude of the business players in the Islamic finance will have to be of improvement as well. They have to realize that they still have to compete with the concessional banking and it might still have higher costs of funds. The challenge, then, will be how to reduce that cost, how to make the Islamic bank more efficient, so it will be at the same level with the concessional ones. 

You recently stated that: “revenues from taxes and customs will come to about Rp 1,000 trillion, just below the initial target. The objective for next year will be 1,380 trillion”. How do you intend to increase the revenues and which are the challenges you will need to overcome?

We know that last year our achievement was below the target. We know there’s a reason, and it’s that we are doing business as usual. Now, our approach to get into the target, which is high, more than 30% increased, is by revitalizing the tax office itself. We also need to motivate the tax officers. In order to do so, first, we are going to provide them with a better remuneration.

Secondly, we are going to offer more supportive organization sectors. And in third place, we are going to offer a kind of legal support, so as to make them work in a more convenient way. So that’s for the inside of the tax.

We know that with more than 1,000 trillion Rupiah taxation is only 11.7% of GDP, which is low compared to neighbors and our peers’ investing market. It means tax potential is there. So, of course, this year we have time to increase this tax potential into 12.7%, which is still low, compared to our neighbors but at least, it has to grow. So, our strategy is to increase the compliances of our tax payers, especially for personal income tax. So far, the revenue personal income tax is very low compared to, for example, personal income tax revenue in the US, where this kind of tax is the most dominating revenue compared to other types of taxes in the US. However, in Indonesia it is simply one of the lowest. So, it means that we have to increase the capacity and, more importantly, the compliance. Now, we have improved our IT system, aside revitalizing our tax office. Then, with the combination of more motivated officials and a better IT system, we hope we can improve the tax payers’ compliance.

The second strategy will be to reduce the liquids of the FAT revenue. In the past, the tax refund was so high, sometimes unbelievable because we didn’t see a lot of tax coming in but somehow we have to give back the refund in a larger amount. Then, we are now switching the system from a more manual system into a more electronic system. As a result, we hope we can reduce the liquid and, of course, this means increasing the revenue.

Third, there’s the intensification of tax pay; Indonesia has a population of 250 million people. However, the registered tax payers are not more than 20 million people; from that 20 million only less than 10 million really pay their annual income tax. It means we need to extend our tax pays and combine it with the compliance. So, these are basically the strategies that we are going to put into practice in order to catch up with the much higher banks in 2015. 

Moreover, beta is very important, since you cannot say that somebody is underpaying his tax. For example, if you have beta you know that you have something and you got it from somewhere, but why is your tax payment of such a very low amount? So, we can make some kind of comparison and they have to pay if there is a difference.

You recently stayed in Turkey, how important is to interact with the other members of the community? What is the importance for Indonesia to stage itself with the global players around the world?

I think it is very important basically because now the word economy is very globalized and it’s very open, and being part of G20 is crucial. We need to learn from other countries but at the same time we need to cooperate with them. Sometimes we share similar problems and successes, but the most important thing is that we have to be around, that is to say, to be in the community. I believe you get a lot of advantages by being part of the G20 members. 

What would be your final message for the readers of the Worldfolio Magazine?

Indonesia is the new home for the higher economic growth in the future because potential is there but we haven’t used it enough yet. Then, I believe that, compared to many countries, the potential is much bigger in Indonesia.