INDONESIA FISCAL TRANSPARENCY FOR CONGRESSIONALLY MANDATED

UNCLAS SECTION 01 OF 02 JAKARTA 000397 SIPDIS SIPDIS DEPT FOR EAP/MTS AND EAP/RSP KIM ARCHEA AND AMIT MATHUR DEPT FOR EEB/IFD/OMA ANDREW SNOW AND RICHARD FIGUEROA TREASURY FOR IA-SETH SEARLS SINGAPORE FOR SUSAN BAKER COMMERCE FOR 4430-BERLINGUETTE DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR FINEMAN DEPARTMENT PASS EXIM BANK E.O. 12598: N/A TAGS: EFIN ECON EAID PREL PGOV ID SUBJECT: INDONESIA FISCAL TRANSPARENCY FOR CONGRESSIONALLY MANDATED REPORT REF: STATE 16737 ¶1. (U) This cable responds to reftel request for an update on fiscal transparency and accountability of countries receiving USG assistance. ¶2. (U) The Government of Indonesia (GOI) has achieved major accomplishments in maintaining macroeconomic stability and restructuring of the financial sector. GOI has worked directly with the IMF, notably producing a September 2003 White Paper that has guided reforms. In 2003-2004, the Indonesian Parliament enacted State Finance Law 19/2003, Treasury Law 1/2004, and the State Audit Law 15/2004. These laws aim to improve fiscal responsibility at the national and local government levels. These reforms are supported by reorganizations within the Ministry of Finance (MOF), specifically a more solid treasury management system. A set of three tax law amendments have been under discussion in Parliament since September 2005. Parliament finally approved the Law on General Tax Rules and Procedures in June 2007. The other two draft tax law amendments, on Value Added Tax (VAT) and income tax, remain in Parliament. Treasury and Public Accounts -------------- ¶3. (U) The Treasury Law provided a legal basis for the rationalization of government bank accounts. Thousands of the accounts, prior to the Asian financial crisis, were opened in the GOI's name by ministries. These accounts were outside the control of the MOF's Directorate General (DG) of the Treasury. An external audit report called for greater clarity in the central government's financial accounts. The GOI consolidated government bank accounts to improve transparency to address this issue. New regulations were adopted in July 2007 that permitted the Finance Minister to bring all government bank accounts under Treasury control. Short-term cash planning in DG Treasury and an integrated cash and debt management, however, are still undergoing reform. ¶4. (U) An IMF study highlights the 2003-2004 laws for financial management as major steps towards improving the clarity of roles and responsibilities for increased transparency and accountability. However, significant quasi-fiscal and extra-budgetary activities, particularly with state-owned enterprises (SOEs),are not covered in the fiscal data. Progress in treasury reforms and improving accounting include strengthening the open budget preparation, execution, and reporting process. However, coverage of explicit and implicit fiscal risks is not comprehensive. The internal audit function is also in need of strengthening and rationalization. Delay in the sub-national reporting system is an area of weakness that needs continuing coordinated action. Approximately 30% of Indonesia's budget is now the responsibility of provincial, regency and city and local governments, which have varying levels of capacity in budget implementation and monitoring. In an October 2007 report, the Indonesian Supreme Audit Board (BPK) reported that only 362 of 467 local governments submitted financial reports to the BPK for fiscal year 2006. Budget Information Publicly Available -------------- ¶5. (U) Indonesia's central government budget shows good standard practices for the public availability of information. Budget statistics, outlining main items of revenues and expenditures, are available on the internet at http://www.anggaran.depkeu.go.id/. The lengthy and complicated process of budget formulation and customary revisions to the budget makes it difficult for the public to stay updated. In addition to delays in publishing budget reports, especially an audited one, lack of reporting on off-budget activity is the main area of weakness. Public disclosure of detailed oil revenue flows would also improve transparency. Regarding accountability, the independent status of the Supreme Audit Agency (BPK) and the establishment of the Anti-Corruption Commission (KPK) represent important institutional reforms, which should be strengthened. Parliament had also become more active in examining government performance. JAKARTA 00000397 002 OF 002 Ongoing Reforms in Fiscal Management: Donor Assistance -------------- ¶6. (U) Finance Minister Sri Mulyani Indrawati, the most dynamic reformer in the current GOI cabinet, has been strategically using bilateral and multilateral assistance to assist in her internal reforms at the MOF. A USAID-funded U.S. Treasury Department Debt Advisor is currently in place providing technical assistance to support Indrawati's goals of broadening and deepening the variety of debt instruments and the investor base. USAID has also assisted the MOF to improve fiscal policies, accelerate public sector debt restructuring, and reform tax policies. Efforts to strengthen the public sector debt restructuring process improved capacity and implementation of the MOF's policy at the State Asset Management Company (PPA) and strengthened the development and implementation of the MoF's risk management and restructuring capabilities. Major achievements include the debt restructuring of Garuda and Merpati, two of the largest national Indonesian airlines. USAID and Treasury's Office of Technical Assistance (OTA) also coordinate effectively with other donors. AUSAID - the Australian USAID equivalent - has advisors at the Fiscal Policy Office, the IMF has advisors at MOF's DG Tax, and the World Bank has advisors in several MOF directorates under its Government Financial Management and Revenue Administration Project (GFM-RAP) program. Japan also has advisors assisting the MOF. ¶7. (SBU) Although the legal and institutional environment has improved, it is difficult to make necessary institutional, long-term reforms at certain levels. Many vested interests are at stake. For example, an attempt in 2006 to conduct a census of all government bank accounts was met by strong resistance as it was a bold decision to re-launch an enquiry. Remaining weaknesses in GOI fiscal operation are mainly due to technical capacity for fiscal policy formulation. However, a lack of political will also impedes further reform. Limited planning capacity in regional government level has also caused some budgetary inaccuracies and delayed disbursement. ¶8. (U) The MOF also makes public its fiscal risk assessment report, which discusses contingent liabilities not explicitly in the budget (e.g. state-owned enterprise debt/losses) and advises the public on sensitivity analysis of key budget assumptions (e.g. the oil price). The IMF report on GOI's compliance with standards and codes covering fiscal transparency can be found at http://www.imf.org/external/pubs/ ft/scr/2006/cr06330.pdf. HUME