Ferino Putra(Antara Photo/Siswowidodo)

World Bank's Approves $400m Loan for Indonesia Fiscal Policy Reform


JUNE 02, 2016

Jakarta. The World Bank on Wednesday (01/06) approved a $400 million loan to boost Indonesia's revenue collection and improve the quality of government spending.

The loan, dubbed the Fiscal Reform Development Policy Loan, would support government policy and institutional reforms to improve revenue collection and spending — all deemed key elements in accelerating growth, reducing poverty and distributing prosperity more widely.

“Fiscal reforms will allow the government to allocate more funds to programs that will directly benefit the poor,” said Rodrigo Chaves, World Bank Country Director for Indonesia.

“It is  the country's citizens that benefit most from collecting more and spending better, as they are the direct beneficiaries of more roads and electrification in rural areas, of clean water and better healthcare services in inner cities.”

Relative to its regional and emerging market peers, Indonesia has one of the lowest revenue and tax ratios compared to its gross domestic product. The country's revenue-to-GDP ratio is 13.1 percent and tax-to-GDP 10.8 percent ratios in 2015. It is estimated that Indonesia collects less than half of its potential tax revenue, the World Bank said.

As a result, public spending has been insufficient to support Indonesia’s development plans, with expenditure accounting for only 16.9 percent of GDP in 2014, compared to an average of 28 percent for middle-income countries in Asia.

Inadequate budgeting for key investments has led to a large infrastructure deficit, which impedes growth potential, and to under spending on healthcare and social assistance programs, which increases vulnerability to poverty.

“Collecting more funds requires intensified, coherent, and sustained efforts in both revenue policy and administration. It is not easy, but it is critical due to the impact of low commodity prices on government revenues,” said Ndiame Diop, World Bank Lead Economist for Indonesia.

The Fiscal Reform Development Policy Loan is the first of a proposed series in budget financing to support reforms related to improving spending composition and efficiency, budget execution, strengthening tax administration, reducing the costs of paying taxes and increasing revenue potential through broadening the tax base.