Bill Guerin – Jakarta has officially announced that regional governments can now borrow from foreign sources if certain conditions are met.
Regional administrations can qualify for central government permission to borrow from external sources as long as they fulfill the criteria. They must have additional financing sources and have no outstanding debts. If they have outstanding debts, the debts must have already been budgeted for and the administration must be committed to repaying them.The total amount borrowed should be no more than an amount equal to 75 percent of their previous year's budget.
The government's annual budget has had to provide for the allocation and transfer of contingency funds to local governments to avoid any fiscal gap in the regions and to ensure that the quality of public services is maintained throughout what is still seen as a transition period.
Regional governments receive support from the state budget in the form of a general allocation fund, known as DAU, and a specific allocation fund, really an emergency instrument but given every year, called DAK. By law, 25 percent of all national domestic revenues – excluding foreign loans, export revenues and the like – must be given via DAK directly to districts, which get the money in the form of block grants.
Revenue from natural resources such as oil, gas, forestry, etc is split between the central government and the producing regions under a revenue-sharing formula. Oil and gas-producing regions get 30 percent revenue from their gas production, and 15 percent from oil. In the case of other resources that are not mined, such as forests and fisheries, those regions retain 80 percent of the income.
Last, but certainly not least, the borrowing should be approved by the House of Regional Representatives (Dewan Perwakilan Daerah). This body, a local legislative assembly, is similar to the US Senate and was brought into existence after an amendment to the constitution. The assembly consists of an equal number of directly elected representatives from each province.
The new policy is intended to boost development and increase the quality of public services in the regions and to many will appear eminently sensible, although strangely there has been no official comment from the International Monetary Fund. In earlier days, similar moves were consistently criticized and vetoed by the IMF. The IMF feared that by loosening control, inexperienced regional governments would go on spending sprees and inflate the central government debt even further.
The separation of East Timor and ongoing demands for a referendum in Aceh forced then-president Abdurrahman Wahid to speed up the planned laws governing fiscal decentralization, namely Regional Autonomy Law 22/1999 and Revenue Sharing law 25/1999. The laws were implemented with haste, with little consensus, and with few outside the legislative process even understanding what they were all about.
The IMF was quick to point out glaring contradictions in the newly crafted laws. "Law 22 says the local government can borrow from external sources with approval from the central government ... but Law 25 says the local government can only borrow from the central government," the Fund said at the time.
Wahid, like B J Habibie before him, needed to ensure there could never be a return to the autocracy at the center, as well as act against the threat of a more radical decentralization, ie, a possible breakup of Indonesia. When vice president under Wahid, Megawati Sukarnoputri said the planned autonomy law went against the principle of Indonesia being a unitary state as laid down in the 1945 constitution, which she holds sacrosanct.
Letters of intent since then have included the promise from Jakarta that "to ensure that Indonesia's overall fiscal management is in line with our agreement with the International Monetary Fund ... the central government is committed to prohibiting local governments from borrowing independently to fund their budgets".
Local government officials, of course, are all for the new policy as they say it will give "flexibility" to local budgets.
Ambiguity and technical discrepancies pepper the existing autonomy laws, political issues remain unresolved and Jakarta appears unwilling to believe that local bureaucrats and legislatures have any real capacity to craft budgets, or know how to monitor performance.
However, last month's meeting with the Consultative Group for Indonesia (CGI) and donor groups, Finance Minister Boediono said the DAK allocations for 2003 would be used for development of basic education and health services (as well as infrastructure) but from next year on more attention would be paid to proposals from the regions themselves rather than central government considerations.
Decentralization was designed to empower regional and local authorities to help manage developments in their regions in an effort to help them be more responsive to the needs and desires of the local populations.
Understandably, local governments are after the highest possible local revenues, but demands for more tax revenues and greater financial independence have caused willy-nilly, non-standard income-boosting schemes and regulations. In the early days of the new autonomy, legislators in some regions increased their salaries threefold amid allegations of vote-buying and bribery. Several cases are awaiting judicial process.
Regional governors argued that the law is full of loopholes that can still be used by the central government to continue to wield power over them, but a study by the Research Triangle Institute showed that regional governments created almost 1,000 new taxes and charges during the run-up to and through fiscal year 2001. An estimated 60 percent of these were implemented directly by regional governments – that is, without central review and, therefore, in direct contradiction of the law.
At the same time as the news on regional borrowing was released, the big guns were being rolled out at a two-day seminar in Jakarta on regional borrowing. Though the Finance Ministry has issued a circular that discourages local banks and regional banks from lending to local governments, the regional administrations want to issue bonds for development financing.
Governors have been lobbying the People's Consultative Assembly (MPR) to push Jakarta to allow them to issue bonds, as an alternative funding source for financing badly needed development programs. They say the pace of economic development in the regions has been slow because of the lack of funding, and cite a "lack of financial commitment" on the part of the central government.
The seminar, officially opened by MPR Speaker Amien Rais, is the latest move by regions to pressure the central government to ease the existing policy that bans regional governments from issuing bonds. The Finance Ministry has long opposed any such idea, but has let it be known that it might be taken more seriously by next year at the earliest.
Bank Indonesia governor Sjahril Sabirin is even less happy. He said that issuing regional bonds was not an ideal policy at this moment, given the dimensions of the national debt burden. Sjahril prefers proper debt management, as he told the seminar. "What this hugely indebted country needs is a good debt-management program, because the huge debts have made investors perceive Indonesia to be a high-risk country in terms of investment," he said.
Regional autonomy, by its very nature, was meant to devolve monetary authority to the provinces. In the old days regions were in the share-out of local and foreign development loans through Bappenas, the National Development Agency, which controlled the national borrowing. The provinces want this authority for the regional legislative assemblies.
In 1999, Wahid's chief economics minister Rizal Ramli temporarily banned local administrations from raising both offshore and domestic loans without getting central government permission first. Four years later, amid different sets of pressure and with the benefit of experience, the Megawati administration will actually allow borrowing on the hope that there is more chance of controlling it. The interest on foreign and domestic debt is a stranglehold that forces Indonesia to seek new loans in a vicious circle that traps the government within a master-servant relationship with the major donors. Does the new paradigm make sense, given the level of existing national debt, which eats up some US$6 billion a year in capital and interest payments?