Indonesia Needs to Spend Better, Smarter

Tell us ‘how,’ Sri Mulyani admonishes World Bank after release of latest report

By Gilang Ardana
Tuesday, January 31, 2017

Improving the quality of budgetary spending will help Indonesia achieve its development goals in the short to medium term, according to the latest World Bank Indonesia Economic Quarterly report.

The report, Sustaining Reform Momentum, was launched on Jan. 17, 2017 with Finance Minister Sri Mulyani Indrawati as the keynote speaker. It forecasts Indonesia’s economic growth in 2017 to be 5.3 percent, year-on-year, and applauds improvement in the country’s investment climate, raising its Ease of Doing Business ranking from 106 to 91 for 2017. However, the bank also expressed caution over Indonesia pursuing further reforms in the face of global financial challenges and uncertainties.

The key element discussed in the report is the use of effective government spending to help the country achieve its desired growth and poverty reduction rates. The report notes that he current impact of government spending has been disappointing and the quality of many public services is still lagging, despite increased expenditures.

However, with the current low levels of revenue collection and the budget deficit cap at 3 percent of gross domestic product (GDP), the report says that increasing the level of public expenditure is not a wise choice for Indonesia. Thus, better spending allocation at both the national and sub-national levels is essential for progress, while the country continues to pursue revenue reforms.

The 2017 State Budget, according to the report, has taken some steps towards improving the quality of public spending, but further reform is required.

The report elaborated on two actions the government can take to improve the quality of spending. First, reallocating spending toward priority sectors that have the greatest impact on poverty and growth. For Indonesia, these include infrastructure, health and social assistance.

Second, reallocating spending on education and agriculture to programs that have the highest impact on sectoral goals, as well as effective sectoral policies that support the impact of increased spending.

The report notes that many key public spending levels in Indonesia remain low. For instance, public infrastructure investment has remained at around 2 percent of GDP over the past decade, below the infrastructure investment rates in fast-growing neighboring countries like China, India and Vietnam. Public spending on social assistance and health in Indonesia is also low in comparison with other middle income countries, at 0.6 percent and 1.4 percent of GDP, respectively. Spending for agriculture and education is adequate, but spending effectiveness is poor. 

Cutting and reallocating spending from subsidies and personnel, according to the report, would make for more effective spending.

Local government capacity

Responding to the World Bank report, Sri Mulyani, the Bank’s former No. 2 official, agreed that better allocation and quality of spending is essential.

“Proper budget allocation is important, but equally important also is how it will be spent,” she said during the launch.

She also noted the context of the challenge, as a big chunk of government spending is allocated to local governments, and, as the budget end-users, the quality of local governments vary in effectiveness. She noted some that stand out as good, but there are also some that need lots of improvement.  

She also spoke of the village transfer fund program, which takes up a big portion of the annual budget. The fund is distributed to 75,000 villages all over Indonesia, with – as she emphasized again – very diverse quality of local administrators.

She said the government is working on this, especially to guarantee that spending will make economic growth more inclusive.

“In Indonesia growth is still not enjoyed by many, that is our homework,” she said.

Acknowledging that it is not an easy job only for the government, Sri Mulyani also challenged the Bank to come up with useful specific ideas on how the government can make spending better.

“I will challenge the World Bank to give us more than just economic reports, I need not only ‘what’, but also ‘how’,” she said in her closing.

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