Jokowi’s second year: the challenge is on fiscal side

Forget the mumbo jumbo speculation on the impact of external effects to Indonesian economy, for this year. The long-boring prediction of Federal Reserve’s rate hike, or the Brexit “terrifying” impact have yet to give any effect to the country.

It is more sensible to examine the economic challenges during the second year of President Joko “Jokowi” Widodo’s administration through the domestic point of view.

And, one can easily find a clue about what the government is worrying the most in regard to economic performance from the political changes.

The cabinet shakes up in July, which brought back Sri Mulyani Indrawati, and the appointment of duo Ignasius Jonan and Arcandra Tahar in October to helm the energy and natural resources ministry, showed the need for urgent changes in the economic squad to address the fiscal deficit and the current account deficit (CAD) amid the slowdown in the global economy.

After recklessly set a huge tax revenue target for 2016 at Rp 1,54 quadrillion (US$118.27 billion), Jokowi seemed to have understood his mistake and tried to mend it by hiring Sri Mulyani, an economist and then-managing director and chief operating officer at the World Bank, to clean the messes.

Rationalizing the budget posture, by slashing several spending as well as tax revenue target, was the first step she took. The tax revenue target was slashed by Rp 221 trillion, or 14.35 percent to Rp 1,318 trillion, the biggest tax revenue target revision in Indonesian history.

“We acknowledge that the 2016 state budget, apart from having a quite ambitious revenue target, also included additional revenues from the amnesty,” Sri Mulyani said at her first day in office.

Thus, she set a leaner budget for the year ending December 2017 with estimated state expenditures of Rp 2,07 quadrillion and revenues Rp 1,740 trillion. The budget deficit which previously set at 2.15 percent was revised to 2.7 percent.

She also carried out the long-planned tax amnesty program, eyeing Rp 165 trillion in windfall revenue from the penalty. As of Oct, 20 the taxation directorate general has reached 59 percent of the target, worth Rp 97.6 trillion.

Will that be enough? Probably no, if the government sticks with its ambitious growth target of 5.2 percent in 2016. A high economic growth requires a massive consumption and investment, two of which have their light getting dimmer amid global and domestic economic slowdown.

Amid the situation, the source of growth would be from the government. Several delays in infrastructure projects, in which the Rp 300 trillion of the government spending supposed to oil the economy, signaled the need to have other sources of spending aside from infrastructure.

However, Indonesian law requires the budget deficit to be kept below 3 percent of the current gross domestic product. It might hamper the effort to spend more above the state revenue.

At this situation, Sri Mulyani might prepare counter cyclical move as her last call to shape the economy, meaning that she will expand the deficit level above 3 percent. But before she can do that, the country must first lower the CAD, a job that can be assisted by the duo Jonan and Arcandra.

Oil-gas deficit
The repositioning of Jonan and Arcandra who both previously sacked from the cabinet was to address the reform in the energy and mining sector, according to Jokowi and the Coordinating Maritime Minister Luhut B. Pandjaitan.

Which problem that should be reformed first? Executive director Komaidi Notonegoro of Jakarta-based energy research organization ReforMiner Insititute said the upstream industry must get the priority to reform as it was the root of the problem in Indonesian energy dilemma.

While many parties applauded Jokowi’s strong moves in cutting the fuel subsidy and liquidating Pertamina Energi Trading Ltd (Petral) and its subsidiaries, they only improved the energy sector's downstream industry but did not address the upstream industry.

Turning itself into a net oil importer in 2004, when domestic oil output declined sharply amid skyrocketing consumption, Indonesia saw a worsen dependency on oil imports year by year. The huge oil and gas imports, up to 30 percent of the total trade has been hurting the CAD.

In the first quarter of the year, the CAD reached $4.7 billion or 2.14 percent of the GDP, worsening compared to the same period in 2015 which stood at 1.94 percent. The oil and gas recorded a deficit of $0.8 billion.

An analyst at Daewoo Securities Indonesia Christine Natasya said the energy reform could be a solution to tackle the CAD. She urged Jokowi to complete the revision of the Government Regulation Number 79 Year 2010 on cost recovery to attract investment in oil production.

She expects the government to lower the cost recovery by 30 percent for new oil and gas projects that yet to be started. The government has previously planned to lower the cost recovery target to $10.4 billion this year and to further drop it next year.

“Although this means lower tax revenue, we believe it will be paid off in the future such as by narrowing Indonesia’s current account deficit. Currently, Jonan and Arcandra are working on the best possible outcome for investors as well as the government,” she said on Thursday.