Indonesia is given an "Enacted" rating in Oxford Analytica's (OA) 2006 Fiscal Transparency report. In its 2006 Report on the Observance of Standards and Codes on Fiscal Transparency in Indonesia, the International Monetary Fund (IMF) notes that the country has significantly improved over the past years by introducing a legal and administrative framework to promote transparency. However, much more needs to be done in all areas of fiscal transparency. The 2006 Open Budget Index gave Indonesia a score of 41% out of a possible 100%, suggesting that citizens' access to information about the budget can be improved. The enactment as well as the implementation of the State Finance Law, the Treasury Law, and the State Audit Law in 2003-2004 has laid out a strong foundation for further fiscal management reform. OA reports that the enactment of the 2006 State Audit Law helped to substantially improve auditing transparency, and the Supreme Audit Commission intends to seek authorization from the Constitutional Court to conduct audits of the Tax Office. OA notes that it is still unclear how roles and responsibilities are divided between government levels. Expenditure allocations for central and local governments are not clearly defined, and there is a considerable lag in data reporting by subnational governments. The IMF report recommended reforms for the central government budgetary sector and an increased reform in the general government. The government plans to implement a medium-term expenditure framework in 2008 and identify government accounts not presently overseen by the treasury in order to better monitor the budget.

General Overview

Oxford Analytica's (OA) 2006 Fiscal Transparency report gave Indonesia an "Enacted" rating, which has not changed from its previous assessment. According to the IMF 2006 ROSC on Fiscal Transparency, Indonesia has shown improvements in certain areas over the past years. The establishment of a legal and administrative framework has contributed to more awareness on the issue of transparency. The same assessment cautions that much more needs to be done in all areas of fiscal transparency. Through the enactment and implementation of the State Finances Law, the Treasury Law, and the State Audit Law in 2003-2004 the authorities have laid out a strong foundation for additional fiscal management reform. OA reports that the enactment of the 2006 State Audit Law helped to substantially improve auditing transparency, and the Supreme Audit Commission intends to seek authorization from the Constitutional Court to conduct audits of the Tax Office.

Writing for the International Budget Project's Open Budget Initiative, Dedi Haryadi compiled an Open Budget Index (OBI) for 2006 that rated Indonesia's budget process, overall, at 41% out of a possible 100%. The OBI is based on tracking the production of seven key budget documents: the Pre-Budget Statement, the Executive's Budget Proposal, the Citizens' Budget, In-Year Reports, the Mid-Year Review, the Year-End Report, and the Auditor's Report. Indonesia produces all but one of these documents (the Citizens' Budget), and of the documents it produces, it makes publicly available all but the Pre-Budget Statement and In-Year Reports.

According to the IMF's 2006 assessment, government officials are addressing weaknesses in the area of fiscal transparency. The IMF has recommended that the authorities strengthen technical capacity for fiscal policy formulation; improve budget disclosure practices; and strengthen key fiscal integrity institutions. The IMF has also advised authorities to promote transparent practices at a regional level and between the regions and central government; and to incorporate all extra budgetary activity in the budget. In its assessment, the IMF acknowledged that Indonesia has advanced significantly in recent years to establish a sound legal and administrative system to improve transparency via above mentioned laws. According to the IMF's 2007 Article IV Consultation, good progress was also made in the area of fiscal structural reforms. The restructuring of the tax agency was completed and recent enactment of a tax reform bill will help improve revenue collection. The IMF supports the authorities' decision to introduce a fiscal risk statement and a medium-term fiscal framework in 2008's budget. The structural reform agenda has shown significant progress, according to the IMF's 2006 Fiscal Transparency ROSC. Parliament passed 19 amendments to the Law on General Tax Rules and Procedure. The newly amended law, set to be effective on January 1, 2008, provides a better equilibrium between taxpayers' rights and the tax agency's powers. Tax revenues stemming from property tax, personal income tax, and natural resources are shared with subnational governments using specific rates. Although the Government Financial Statement for 2004 is a crucial step forward, lack of reporting on off-budget activity is a main concern, as is the lack of public disclosure of oil revenues, which hinders transparency.

In its 2007 Article IV Consultation with Indonesia, the IMF asserts that the overall deficit is expected to reach 1.8% of GDP and indicates that for 2008, government officials are aiming at a rate of 1.7%. According to OA's 2006 assessment, the fiscal rule given in provisions in the State Finance Law and Government Regulation No. 23 of 2003 requires that consolidated national and local government budget deficits do not exceed 3% of GDP, and that total central and local government debt be limited to 60% of GDP. The IMF notes that the government's objective is to reduce the debt-to-GDP ratio to around 30% by 2009 from a projected ratio of 36% for end of 2007.

The general government in Indonesia comprises the central government and subnational governments. The State Finance Law No. 17 of 2003 governs the fiscal relationship between the government and the legislature, according to OA. The IMF notes in its 2006 assessment that some provisions in the State Finances Law of 2003 and the Treasury Law of 2004 have not been implemented. However, the transitional arrangements of the new laws allow a sufficient time window for full implementation. Some ministries still maintain bank accounts outside of the Treasury, even though the State Finances Law clearly stipulates that all ministers are responsible for paying all nontax revenues into the State treasury. Indonesia subscribed to the IMF's Special Data Dissemination Standard (SDDS) on September 24, 2003. The IMF's SDDS website notes that the generation and dissemination of all Indonesian statistics are based on: (1) the Statistical Law of Indonesia of 1997 (No, 16 of 1997); (2) Central Bank Act (No. 23 of 1999); and (3) Banking Act (No.7 of 1992 and No. 10 of 1998). The website further lists Statistics Indonesia (Badan Pusat Statistik, or BPS), the Ministry of Finance (MoF), and Bank Indonesia (BI) as the institutions involved in data dissemination in Indonesia.

The Principles

Clarity of roles and responsibilities.

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OA's 2006 Report on Fiscal Policy Transparency in Indonesia rates Indonesia's compliance with this principle as "Enacted," while the IMF's 2006 ROSC notes that the laws introduced for financial management are significant and have helped Indonesia comply with this principle. The IMF, however, urges the government to include quasi-fiscal and extrabudgetary activities in the fiscal data. OA observes that Indonesia is defined as a unitary republic in the amended 1945 Constitution. Fiscal relationships between the government and legislature are defined in the State Finances Law while budget planning and execution is governed by both the State Finances Law and the Treasury Law.

The Treasury Law gives authority to the MoF to manage the central government treasury. The MoF is responsible for fiscal policy and preparation of the annual budget, as stated in Law No. 17 of 2003 on State Finances. Per OA's 2006 report, two laws, Regional Autonomy Law No. 32 of 2004 and Revenue Sharing Law No. 33 of 2004, were introduced in 2004 with the objective to improve relationships between the central government and local administrations. The Regional Autonomy Law; however, did not achieve its goal of assigning clear responsibilities within the different sectors. Furthermore, the responsibilities and powers of the MoF and the Ministry of Home Affairs to establish the rules for fiscal management have overlapped, creating a lack of harmonization between the two ministries. Despite the fact that a joint task force was created to draft laws and amendments on fiscal management, ambiguity still exists in the roles of different government levels and bodies. According to OA, a draft budget is prepared annually by the executive branch (the president, the MoF and the National Development Planning Agency (Bappenas)) and presented to the House of Representatives (DPR). Upon review, the president and the DPR enter an agreement to pass the budget.

Open budget processes

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The 2006 OA report rates Indonesia's compliance with this principle as "Compliance in Progress." The IMF's 2006 ROSC observes that although progress in treasury reforms and accounting standards has been made, other areas still face weaknesses. The Government Work Plan, an annual plan introduced by the Yudhoyono administration, aims to implement development objective, and serves as a guideline for the drafting of the State Budget Bill. The fiscal rule given in provisions in the State Finances Law and Government Regulation No. 23 of 2003 requires that consolidated national and local government budget deficits do not exceed 3% of GDP and that total central and local government debt be limited to 60% of GDP. Indonesia is presently shifting to a three-year rolling medium-term expenditure framework (MTEF) from an annual basis, but implementation is not planned until 2008. While preparing the budget, consultations on macroeconomic assumptions used in the budget occur among the Bappenas, the MoF, and the BI. There are significant fiscal risks associated with off-budget accounts and the contingency liabilities incurred by the government during the late 1990s' financial crisis. In an effort to remedy this problem, the government has included a contingency fund in the budget. In 2006, the contingency fund had 2 trillion Indonesian rupiah representing 0.1% of GDP, while the 2007 budget provided 4 trillion Indonesian rupiah for the contingency fund. State-owned banks' non-performing loan (NPL) ratio of almost 16% also poses a fiscal risk to the country.

The 2006 IMF assessment indicates that the State Finances Law governs rules around budget preparation and adoption. During budget preparation, which starts 11 months before the new year, the DPR consent is required twice. The first approval is given on budget policies, priorities, and expenditure ceilings. The second agreement comes after assessment of the draft budget. During this process the DPR has unlimited power to make amendments to the draft budget as it sees fit. Indonesia sets aside around 6% of total expenditure for un-itemized expenditures. This practice can decrease transparency, according to the IMF's 2006 report. Presently, Indonesia does not have programs in the budget that connect output to performance. Though budget plans are at present prepared annually, The MoF has been working on providing MTEFs for all ministries by 2008, to help guide budget policy.

Public availability of information.

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The 2006 OA report rates Indonesia's compliance with this principle as "Enacted," while the IMF ROSC observes that the central government budget and accounts documents meet this principle's requirements. However, the IMF asserts that providing public off-budget activities and oil revenues would improve transparency. OA observes that the annual Semester Report on the State Budget makes data publically available on revenue and expenditure items from the central government for the first six months of the current fiscal year. The annual Supplementary Budget, published at the end of the fiscal year, provides annual data for expenditure lines covering the current fiscal year. In addition, summary information on the current and following year's budgets is publically available. The OA report further notes that although data is available and disseminated for general government operations, budgetary central government, and the provincial and local governments, social security and extra-budgetary funds data is missing.

Independent assurances of integrity.

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The 2006 OA report rates Indonesia's compliance with this principle as "Enacted." The 2006 IMF ROSC praises Indonesia for the independence of its audit institution and the establishment of the Anti-Corruption Commission, but recommends that these agencies be further reinforced. According to the IMF's 2007 Article IV, Indonesia has been a subscriber to the SDDS since September 1996. It has observed most of the SDDS requirements, with the exception of timeliness in the production index data category. The IMF concludes that the country produces macroeconomic statistics and employs a statistical base that, together, are broadly adequate for effective surveillance. OA notes that the State Budget Law, the Supplementary State Budget Law, and Law on the Audited State Budget all govern the dissemination of fiscal data in Indonesia. There is no external systematic mechanism in place that can independently examine the government's budgetary projections. There has been more transparency with auditing as the agency has started vigorously implementing provisions in the new laws (State Finance, Treasury, and Audit).