For Indonesia, high stakes in taxation reform . . .

On the second anniversary of his unlikely election as Indonesia’s President, Joko Widodo (better known as Jokowi) has undertaken a massive reshuffle of his Cabinet.

The most significant change is the appointment of Sri Mulyani Indrawati, who, until her appointment as the country’s new Finance Minister, was Managing Director and Chief Operating Officer of the World Bank in Washington.

Sri Mulyani, regarded as one of the world’s 100 most powerful women by Forbes magazine, is tasked with putting in place Indonesia’s financial reforms,  which are set to be the centrepiece of  Jokowi’s Administration in the remaining three years.

One of Indonesia’s best known economists, she was Finance Minister from 2005 to 2010 during the Presidency of Susilo Bambang Yudhoyono (SBY).

Economists commenting on her appointment recall that one of her achievements during her first term as Finance Minister was to fix the bureaucracy at the Ministry.

She was also credited with managing to keep the Indonesian economy steady during the 2008/9 global financial crisis.

There is a hopeful expectation that her appointment signals the intention of Jokowi to forge ahead with reforms, badly needed to lift Indonesia’s growth potential.

Indonesia has suffered its second consecutive quarter of growth of less than five per cent, largely on the back of China’s continuing slowdown and a collapse in demand for Indonesia’s raw materials.

But a key focus will be on how Sri Mulyani move to implement Jokowi’s tax amnesty programme.

As a comparison, observers refer to her performance with what was known as a “sunset policy” from January 2008 to February 2009, which erased the late tax payment administrative penalty for those who had registered for tax identification numbers.

Looking back, commentators say Jakarta at the time recovered 7.5 trillion rupiah (US$571.65 million) in tax revenue, and
recorded 1.8 million new taxpayers.

Yose Rizal Damuri, an economist with
Indonesia’s Centre for Strategic and International Studies (CSIS), says a similar programme launched in 2015 was not as successful. Yose said the tax amnesty will be a bigger project for her.

Indeed the stakes are much higher this time round.

Jokowi’s ambitious tax amnesty is aimed at encouraging wealthy Indonesians to repatriate capital from Singapore and other offshore locations.

Like all developing countries where corruption and political patronage is rife, the Indonesian Government has lost a chunk of its tax revenues because the rich and powerful shift their wealth offshore to tax havens. Many wealthy Indonesians have long parked their money in neighbouring Singapore.

Tax leakage is Indonesia’s Achilles heel. The Indonesian Treasury, till June 9, had been able to collect just 29 per cent of its 2016 State Budget target.

Under the amnesty, Jokowi is offering tycoons the chance to pay a low, one-off penalty for bringing their money back. The Government hopes to boost liquidity in the domestic economy and significantly increase the future tax base.

Bank Indonesia has predicted that the amnesty could generate around US$40 billion in inflows.

Sri Mulyani is back to finish what she started — this time with the full backing of Widodo, according to the English language newspaper, Jakarta Post.

Under former President SBY, Sri Mulyani steered the Indonesian economy through the global financial crisis and gained the respect of financial markets with a drive to stamp out corruption.

Along the way, however, she incurred the wrath of the rich and powerful, in particular, tycoon-politician Aburizal Bakrie, the then-Chairman of Indonesia’s second-biggest political party, Golkar, as she pushed to stamp out tax evasion.

The Jakarta Post reported that she placed Bakrie’s coal firm on a list of 100 top tax dodgers to put pressure on the business elite to pay up. But, just four months after naming and shaming the tax dodgers on the list, she was gone – some say forced out of her job by the elite.

Sri Mulyani resigned under a barrage of criticism for allegedly causing State losses during a bank bailout. She denied any wrongdoing.

Observers note that Bakrie is no longer Golkar Chairman, and that the party has joined Widodo’s Coalition.

If anything, her stint at the World Bank would have sharpened her distaste for tax evasion. She knows more than most that tax evasion undermines the fight against poverty. Sri Mulyani has often spoken of the fact that illicit financial flows are a major enemy in the fight against poverty. “The diversion of money from development priorities such as health and education is bad enough in itself. But equally damaging are the activities that enable these outflows,” she said in a speech last year.

She said illicit financial flows cover a wide range — from undeclared profits from multinational companies to the proceeds of corruption and bribes, to the earnings of traffickers of drugs, weapons, and people.

“These activities erode the rule of law and perpetuate impunity for the powerful. This is why addressing — and stopping — illicit financial flows is not a choice but a necessity for every economy, large or small. It means going to the heart of the issue,” she said.

“The goal of combatting illicit financial flows is to help countries mobilise domestic resources to finance their development goals. Illicit financial flows are a symptom of broader issues – of how Governments mobilise, manage and allocate their resources; of how the private and financial sector behave; of how the international financial system is regulated.”

In that speech, she also said tax evasion and dubious financial transactions are often rooted in a country’s legal, economic, and financial system. “This is why we at the World Bank Group are working with our client countries to strengthen these systems,” she said.

She also spoke of the Bank’s focus on concrete measures that countries can take to “shut off the tap” and to deal with issues including taxation, governance, natural resource management, anti-money-laundering, and asset-recovery.”

Second-time-around as Finance Minister, Sri Mulyani may well  prevail, her own status heightened after the stint in Washington and on the international financial stage — if Jokowi maintains his reformist zeal.

“Her previous market-friendly policy stance, now strengthened with a global aura, will be a big plus to [Mr Widodo’s] economic reform agenda,” Wellian Wiranto, an economist at Singapore’s OCBC bank, told the Financial Times.

“Investors looking to the large Indonesian market will certainly hope that  her return will increase confidence in Indonesia’s performance and will be highly important for promoting transparency,” Jim Yong Kim, President of the World Bank, said in an email to staff when announcing Sri Mulyani’s departure to return to Indonesia.

 

* Florence Chong is Editor of ATI Magazine