Indonesia is pursuing public financial management reforms with the support of IMF technical assistance and other donors. The measures aim to bring greater transparency to treasury operations and allow the ministry of finance (MOF) to exercise fuller control over central government operations.
At the time of the Asian financial crisis in the late 1990s, treasury management in Indonesia was particularly lax. Within the ministry of finance, there was no treasury directorate general (DG): all treasury operations were subsumed under the budget DG.
During this period, diagnostic studies by the IMF recommended the establishment of a fully functional treasury DG, as well as the modernization of the legal framework for fiscal management (see Box 1), which had not been updated since Dutch colonial times. However, the government was preoccupied with the country’s financial, banking, and exchange rate crises, and, as a consequence, institutional reforms in public financial management barely advanced.
Box 1Improving Treasury Management, 1998-2007
Asian crisis phase: 1998-2001
Achievements: Completion of diagnostic studies of the complex government banking arrangements. Formulation of a reform strategy. Proposals to overhaul the inherited legal framework. Blueprint for MOF reorganization, including creating a treasury DG.
Challenges: Cope with the fallout of the financial crisis. Little action on proposals.
Institutional reforms: 2002-05
Achievements: Reform-minded minister of finance reestablished a public financial management reform committee. New MOF structure, including a strong treasury DG, established. New laws—for budget management, planning, and treasury operations—adopted by parliament.
Main challenge: Implement the new laws.
Early implementation phase: 2005-06
Achievements (in the area of government accounting and treasury management): New government accounting framework adopted. Testing of zero-balance arrangements for treasury-controlled bank accounts. Discussion on remuneration of treasury accounts held at Bank Indonesia.
Challenges: Complete the analysis of all government bank accounts. Close unjustified accounts. Establish full treasury authority over all accounts. Further improve quality of annual accounts. Reach final agreement on remuneration and placement of idle government cash balances.
(See Box 2 for 2007 reforms.)
Fiscal transparency report
In 2006, the authorities published and disseminated a report on fiscal transparency. It was used to identify areas of public financial management in which development partners, including the IMF’s Fiscal Affairs Department, could provide technical assistance to help the authorities improve fiscal transparency and accountability.
The government acted to improve the transparency of government financial operations, taking steps, for example, to consolidate government bank accounts. This was partly in response to the external auditor’s report, which called for greater clarity in the government’s financial accounts.
Prior to the Asian financial crisis, thousands of bank accounts had been opened in the name of the government. These are now seen to represent nontransparency in central government financial operations. To address the issue, new government regulations were adopted in July 2007 that allow the finance minister to bring all government bank accounts under treasury control.
New legal framework
During 2003-05, the minister of finance oversaw the establishment of a treasury DG. The internal restructuring of the MOF was modeled in line with what was advocated during 1998-2001.
By 2005, new laws relating to the budget, national planning, the treasury, and external audit were adopted by parliament. The Treasury Law provided a legal basis for the rationalization of government bank accounts, many of which had been established by spending ministries and were outside the control of a treasury DG.
The Treasury Law envisages only one main operational account for government transactions, held at Bank Indonesia, the central bank. The objective is to transmit all government revenues into this account by the end of each business day and to use the account for making all government payments, without holding non-interest-bearing deposits in other government accounts.
This had not been the practice previously: powerful ministries, such as defense, obtained financing from substantial resources off budget. Smaller ministries, including even the ministry of religious affairs, as well as directorates of the MOF, also held accounts in commercial banks, outside the main operational account at Bank Indonesia.
Results beginning to show
Although the legal and institutional environment improved, it was not easy to make the necessary changes at the transaction level. Many vested interests were at stake. An earlier attempt to conduct a census of all government bank accounts had been met by strong resistance, so it was a bold decision to relaunch an inquiry. However, times had changed: both parliament and the external audit office had become more active in critically examining government performance.
With hands-on leadership from the minister of finance, implementation of reforms leaped ahead in 2007 (see Box 2). By early 2008, it is expected that the bank account consolidation reforms will be nearly completed and that differing views concerning the rate of remuneration of government deposits held at Bank Indonesia will be resolved. Further efforts will be necessary to improve short-term cash planning in the treasury DG and to integrate cash and debt management.
Besides specific treasury reforms, the government is beginning to implement other budget management reforms, including
taking steps toward introducing a performance-based budget system;
introducing medium-term budget and expenditure frameworks (in the 2008 annual budget, aggregate revenues, expenditures and fiscal targets for 2008-10 were presented for the first time); and
identifying the main fiscal risks (a first-ever statement of fiscal risks accompanied the 2008 annual budget).
In these and other areas, the IMF, the World Bank, and Australia are providing technical assistance to the Indonesian government in its reform efforts. The World Bank is also providing financing for the eventual computerization of budget and treasury operations, for which the IMF provided advice on functional design.
Box 2Selected Treasury Reform Actions in 2007
Signing, by the president of Indonesia, of new government cash management regulations in July 2007. These provide strong authority for the minister of finance to rationalize government bank accounts and close bank accounts that are no longer justified.
Conducting a census of all government bank accounts by end-2007. In its annual report covering the 2005 annual accounts of government, the external audit office (BKP) found more than 6,000 undisclosed accounts. In response, the minister of finance is taking actions to identify government accounts in commercial banks and to ascertain who opened the accounts, when, for what purpose, and whether the accounts should remain open.
Securing agreement by the ministry of finance and Bank Indonesia on the principle of remunerating excess government funds at Bank Indonesia. An important objective for the central bank is to avoid the transfer of government deposits to commercial banks, which would increase bank liquidity and make monetary management more difficult.
Accelerating the deposit of government revenues into the main treasury account and reducing lags for making transfers from the main treasury account in Bank Indonesia to the treasury DG’s commercial bank accounts in its regional offices (KPPNs) (these accounts are used to pay suppliers of goods and services to government).
Replicating “showcase” KPPNs, based on the Banda Aceh model established in 2005 for safely transiting tsunami-related donor funds through the central government’s treasury system.
Key lessons arising from a decade of reform efforts center on realistic assessments of the time required to draft and implement meaningful measures and on the need for political support to maintain legislative momentum.
It can take considerable time to move from completion of initial diagnostic studies to concrete actions on the ground.
Strong and competent political leadership and commitment to reform—especially at the ministerial level—are needed to promote reforms and ensure implementation of government decisions.
New laws and regulations, while necessary, are insufficient. If not implemented, a new legal framework can be a misleading indicator of reform progress.
Strong domestic ownership, combined with technical assistance, can be beneficial for helping governments undertake reforms, especially when international experiences are adapted to the specific institutional, legal, and cultural arrangements.
IMF Fiscal Affairs Department