Special Reports / August 2016

President Jokowi Leads Indonesia Out of Its Comfort Zone

President Joko Widodo did not get off to a perfect start when announcing his new cabinet line-up. His much publicized tax amnesty program has also not fully taken off but the president continues to push his ambitious agenda and in the process is expanding the country’s comfort zone. By Shoeb Kagda

Not much has changed for President Joko Widodo over the past 12 months. Judging from his state-of-the-nation address on August 16 at the People’s Consultative Assembly, the president is still besotted with the same issues as he was a year ago.

Then he called for greater unity within the cabinet to fulfill his government’s goals including cutting bureaucratic red-tape, accelerating infrastructure development and reducing income inequality. He also asked his ministers to adhere to one agenda and one vision – his – and not to have competing personal agendas.

But his decision to reshuffle the cabinet on July 27th, for the second time in two years, illustrates the difficulties the president is facing in pushing through his ambitious agenda and in getting his multi-party cabinet to work as a team.

In the latest cabinet reshuffle, the president brought in highly respected technocrat Sri Mulyani Indrawati as the finance minister. He also replaced Rizal Ramli, the coordinating minister for Maritime Affairs, with Luhut Pandaitan, his trusted political operative.

But even before the new cabinet could get down to work, it was rocked by revelations that newly appointed Energy minister Arcandra Tahar had dual citizenship and was thus disqualified from holding a ministerial position. He was hastily discharged from his duties, with Luhut temporarily appointed to also fill that position.

The question many analysts and Indonesia watchers are asking was the president’s decision to reshuffle his cabinet a sign of desperation or acknowledgement that things are not moving as smoothly and as quickly as he wants?

The answer lies in the numbers rather than in the politics, in this case the government’s 2016 budget projections and anticipated tax revenues.

The appointment of Sri Mulyani, the former World Bank managing director, highlights the single biggest challenge facing the government over the next few months – keeping the budget deficit under 3% of GDP as mandated by the Finance Law. Currently that threshold is under serious threat.

 

Jokowi has staked huge political capital on the tax amnesty program by pushing it through parliament and cannot afford for it to fail.

 

It was thus no surprise that one of the first decisions the new finance minister made was to severely cut expenditure. Sri Mulyani slashed some Rp133 trillion ($10 billion) or 1 % of GDP from this year’s budget. That move was in anticipation of lower than expected tax revenues in the coming months.

Despite the fact that GDP grew by 5.18% in the second quarter year-on-year, a decline in global demand will have ramifications for Indonesia’s economy. In his state-of-the-nation address, President Jokowi acknowledged that state revenues in 2017 would be lower than the previous projections due to slower economic growth.

Question mark

Much of the government’s current budget projections are riding on the tax amnesty program, which is targeted to generate some Rp165 trillion in tax income.  The government also hopes that Indonesians will repatriate some Rp1,000 trillion of previously undeclared overseas assets which it can use to fund its ambitious infrastructure projects and to boost GDP growth.

Meeting this target remains a big question mark as, nearly a month into the program, the funds are only trickling in. As of mid August, some Rp20 trillion in assets had been declared, earning the government Rp500 billion in tax revenue. Tax officers, however, have been actively promoting the program and anticipate larger inflows over the next two months.

How much money ultimately is repatriated and declared is crucial for the government’s reputation as so much is riding on it. Jokowi has staked huge political capital on the tax amnesty program by pushing it through parliament and cannot afford for it to fail but privately many senior officials are preparing worst-case scenarios.

How much money will ultimately flow back to Indonesia from overseas remains unclear but estimates put the figure as low as Rp150 trillion, significantly lower than the government’s target. But while the tax amnesty program may not achieve the government’s shorter-term targets, its impact on the economy over the longer term will be significant.

Over the years, wealthy Indonesians have avoided declaring their full wealth and hid assets worth billions of dollars. As a result, these assets have not been computed into the growth of gross domestic product of the country, in the process reducing the size of the formal economy.

Indonesia’s grey economy is in fact estimated to be as large as 30% of GDP. That comes to nearly $300 billion. The tax amnesty will allow a significant number of these assets to enter the formal economy, which in future years will add to productive capacity.

In his address to the nation, President Jokowi said that the new world order will require Indonesians to have the courage to leave their comfort zones in order to boost the country’s development and improve competitiveness. He is leading the way through innovative policies such as the tax amnesty and setting up tax havens, subjects that were taboo just a few short years ago.

“To become a winning nation, we need to get out of our comfort zones. We must be creative, innovative, optimistic and willing to help each other,” he noted. “Without the courage to leave our comfort zones, we will continue to face poverty, unemployment and social inequality. “

Leaving one’s comfort zone is never easy. President Jokowi is in fact operating outside his comfort zone in pushing for new policies that are not politically palatable. That has endeared him to his countrymen who continue to support him despite his many missteps.