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Cablegate: Indonesia Fiscal Transparency for Congressionally Mandated

VZCZCXRO9389
RR RUEHCHI RUEHCN RUEHHM
DE RUEHJA #0397/01 0590539
ZNR UUUUU ZZH
R 280539Z FEB 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 8121
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 1570
RUEHBJ/AMEMBASSY BEIJING 4753
RUEHBY/AMEMBASSY CANBERRA 2058
RUEHUL/AMEMBASSY SEOUL 4424
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 JAKARTA 000397

SIPDIS

SIPDIS


DEPT FOR EAP/MTS AND EAP/RSP KIM ARCHEA AND AMIT MATHUR
DEPT FOR EEB/IFD/OMA ANDREW SNOW AND RICHARD FIGUEROA
TREASURY FOR IA-SETH SEARLS
SINGAPORE FOR SUSAN BAKER
COMMERCE FOR 4430-BERLINGUETTE
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR FINEMAN
DEPARTMENT PASS EXIM BANK

E.O. 12598: N/A
TAGS: EFIN ECON EAID PREL PGOV ID
SUBJECT: INDONESIA FISCAL TRANSPARENCY FOR CONGRESSIONALLY MANDATED
REPORT

REF: STATE 16737

1. (U) This cable responds to reftel request for an update on fiscal
transparency and accountability of countries receiving USG
assistance.

2. (U) The Government of Indonesia (GOI) has achieved major
accomplishments in maintaining macroeconomic stability and
restructuring of the financial sector. GOI has worked directly with
the IMF, notably producing a September 2003 White Paper that has
guided reforms. In 2003-2004, the Indonesian Parliament enacted
State Finance Law 19/2003, Treasury Law 1/2004, and the State Audit
Law 15/2004. These laws aim to improve fiscal responsibility at the
national and local government levels. These reforms are supported
by reorganizations within the Ministry of Finance (MOF),
specifically a more solid treasury management system. A set of
three tax law amendments have been under discussion in Parliament
since September 2005. Parliament finally approved the Law on
General Tax Rules and Procedures in June 2007. The other two draft
tax law amendments, on Value Added Tax (VAT) and income tax, remain
in Parliament.

Treasury and Public Accounts
----------------------------

3. (U) The Treasury Law provided a legal basis for the
rationalization of government bank accounts. Thousands of the
accounts, prior to the Asian financial crisis, were opened in the
GOI's name by ministries. These accounts were outside the control
of the MOF's Directorate General (DG) of the Treasury. An external
audit report called for greater clarity in the central government's
financial accounts. The GOI consolidated government bank accounts
to improve transparency to address this issue. New regulations were
adopted in July 2007 that permitted the Finance Minister to bring
all government bank accounts under Treasury control. Short-term
cash planning in DG Treasury and an integrated cash and debt
management, however, are still undergoing reform.

4. (U) An IMF study highlights the 2003-2004 laws for financial
management as major steps towards improving the clarity of roles and
responsibilities for increased transparency and accountability.
However, significant quasi-fiscal and extra-budgetary activities,
particularly with state-owned enterprises (SOEs), are not covered in
the fiscal data. Progress in treasury reforms and improving
accounting include strengthening the open budget preparation,
execution, and reporting process. However, coverage of explicit and
implicit fiscal risks is not comprehensive. The internal audit
function is also in need of strengthening and rationalization.
Delay in the sub-national reporting system is an area of weakness
that needs continuing coordinated action. Approximately 30% of
Indonesia's budget is now the responsibility of provincial, regency
and city and local governments, which have varying levels of
capacity in budget implementation and monitoring. In an October
2007 report, the Indonesian Supreme Audit Board (BPK) reported that
only 362 of 467 local governments submitted financial reports to the
BPK for fiscal year 2006.

Budget Information Publicly Available
-------------------------------------

5. (U) Indonesia's central government budget shows good standard
practices for the public availability of information. Budget
statistics, outlining main items of revenues and expenditures, are
available on the internet at http://www.anggaran.depkeu.go.id/. The
lengthy and complicated process of budget formulation and customary
revisions to the budget makes it difficult for the public to stay
updated. In addition to delays in publishing budget reports,
especially an audited one, lack of reporting on off-budget activity
is the main area of weakness. Public disclosure of detailed oil
revenue flows would also improve transparency. Regarding
accountability, the independent status of the Supreme Audit Agency
(BPK) and the establishment of the Anti-Corruption Commission (KPK)
represent important institutional reforms, which should be
strengthened. Parliament had also become more active in examining
government performance.


JAKARTA 00000397 002 OF 002


Ongoing Reforms in Fiscal Management:
Donor Assistance
------------------------------------

6. (U) Finance Minister Sri Mulyani Indrawati, the most dynamic
reformer in the current GOI cabinet, has been strategically using
bilateral and multilateral assistance to assist in her internal
reforms at the MOF. A USAID-funded U.S. Treasury Department Debt
Advisor is currently in place providing technical assistance to
support Indrawati's goals of broadening and deepening the variety of
debt instruments and the investor base. USAID has also assisted the
MOF to improve fiscal policies, accelerate public sector debt
restructuring, and reform tax policies. Efforts to strengthen the
public sector debt restructuring process improved capacity and
implementation of the MOF's policy at the State Asset Management
Company (PPA) and strengthened the development and implementation of
the MoF's risk management and restructuring capabilities. Major
achievements include the debt restructuring of Garuda and Merpati,
two of the largest national Indonesian airlines. USAID and
Treasury's Office of Technical Assistance (OTA) also coordinate
effectively with other donors. AUSAID - the Australian USAID
equivalent - has advisors at the Fiscal Policy Office, the IMF has
advisors at MOF's DG Tax, and the World Bank has advisors in several
MOF directorates under its Government Financial Management and
Revenue Administration Project (GFM-RAP) program. Japan also has
advisors assisting the MOF.

7. (SBU) Although the legal and institutional environment has
improved, it is difficult to make necessary institutional, long-term
reforms at certain levels. Many vested interests are at stake. For
example, an attempt in 2006 to conduct a census of all government
bank accounts was met by strong resistance as it was a bold decision
to re-launch an enquiry. Remaining weaknesses in GOI fiscal
operation are mainly due to technical capacity for fiscal policy
formulation. However, a lack of political will also impedes further
reform. Limited planning capacity in regional government level has
also caused some budgetary inaccuracies and delayed disbursement.

8. (U) The MOF also makes public its fiscal risk assessment report,
which discusses contingent liabilities not explicitly in the budget
(e.g. state-owned enterprise debt/losses) and advises the public on
sensitivity analysis of key budget assumptions (e.g. the oil price).
The IMF report on GOI's compliance with standards and codes
covering fiscal transparency can be found at
http://www.imf.org/external/pubs/
ft/scr/2006/cr06330.pdf.

HUME

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