Bank Indonesia offices: 2007 reforms include agreeing on principle of remunerating government funds at central bank (photo: Crack Palinggi/Reuters)
IMF TECHNICAL ASSISTANCE
This article focuses particularly on those measures that will improve treasury operations, especially government banking arrangements.
At the time of the Asian financial crisis in the late 1990s, treasury management in Indonesia was particularly lax. Within the Ministry of Finance (MOF), there was no Treasury Directorate General (DG): all treasury operations were subsumed under the DG budget.
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.
Fiscal transparency report
In 2006, the authorities published and disseminated a report on fiscal transparency. This was used to identify areas of public financial management where development partners, including the IMF's Fiscal Affairs Department (FAD), 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 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.
Box 1.
Improving 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 DG Treasury
Challenges: Coping with the fallout of the financial crisis. Little action on proposals.
Institutional reforms: 2002-2005
Achievements: Reform-minded Minister of Finance re-established a PFM reform committee. New MOF structure, including a strong DG Treasury, established. New laws—for budget management, planning, and treasury operations—adopted by Parliament.
Main challenge: Need to implement the new laws.
Early implementation phase: 2005-2006
(see Box 2 for 2007 reforms)
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.
New legal framework
During 2003-05, the Minister of Finance oversaw the establishment of DG Treasury. The internal restructuring of the MOF was modeled along that 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 DG Treasury.
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 use it for making all government payments, without holding noninterest-bearing deposits in other government accounts.
This had not been the case 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 had improved, it was not easy to make the necessary changes at 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 enquiry. 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 DG Treasury, and integrate cash and debt management.
Box 2.
Selected 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) had found over 6,000 undisclosed accounts. In response, the Minister of Finance is taking actions to identify government accounts in commercial banks; ascertain who opened the accounts, when, for what purpose, and whether the account should remain open.
• Securing agreement by Ministry of Finance (MOF) and Bank Indonesia (BI) on the principle of remunerating excess government funds at the BI. An important objective for BI 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 BI to DG Treasury'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.
Other improvements
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 2008-2010 were presented for the first time)
• 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 government in its own 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.
Key lessons
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 from the time of 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—is 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 assisting governments to undertake reforms, especially when international experiences are adapted to the specific institutional, legal, and cultural arrangements.
