WASHINGTON, May 31, 2016—The World Bank’s Board of Executive Directors today approved the first Indonesia Fiscal Reform Development Policy Loan to boost revenue collection and improve the quality of spending, key elements to accelerating growth, reducing poverty and sharing prosperity more widely in South East Asia’s biggest economy.
The $400 million budget financing will support the Government of Indonesia’s policy and institutional reforms to improve revenue collection and spending. Relative to its regional and emerging market peers, Indonesia has one of the lowest revenue-to-GDP (13.1 percent in 2015) and tax-to-GDP (10.8 percent) ratios. It is estimated that Indonesia collects less than half of its potential tax revenue.
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 underspending on healthcare and social assistance programs, which increases vulnerability to poverty.
“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 ordinary Indonesians 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.”
The Fiscal Reform Development Policy Loan is the first of a proposed series of 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.
“Collecting more 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. The important reforms that Indonesia is now undertaking strengthen the country's economic resilience as well as signals to investors that Indonesia is truly open for business,” said Ndiame Diop, World Bank Lead Economist for Indonesia.
The World Bank’s support to fiscal reforms in Indonesia is an important component of the World Bank Group’s Country Partnership Framework for Indonesia, which focuses on government priorities that have potentially transformational impact. This DPL builds on fiscal reforms supported by other World Bank programs related to public financial management.