BASIC SOCIO-ECONOMIC INDICATORS
INCOME GROUP: LOWER MIDDLE INCOME
LOCAL CURRENCY: INDONESIAN RUPIAH (IDR)
POPULATION AND GEOGRAPHY
- Area: 1 916 862 km2 (2018)
- Population: 273.534 million inhabitants (2020), an increase of 1.1% per year (2015-2020)
- Density: 143 inhabitants / km2
- Urban population: 56.6% of national population (2020)
- Urban population growth: 2.2% (2020 vs 2019)
- Capital city: Jakarta (3.8% of national population, 2020)
- GDP: 3 302.2 billion (current PPP international dollars), i.e. 12 073 dollars per inhabitant (2020)
- Real GDP growth: -2.1% (2020 vs 2019)
- Unemployment rate: 4.4% (2021)
- Foreign direct investment, net inflows (FDI): 19 122 (BoP, current USD millions, 2020)
- Gross Fixed Capital Formation (GFCF): 31.7% of GDP (2020)
- HDI: 0.718 (high), rank 107 (2019)
MAIN FEATURES OF THE MULTI-LEVEL GOVERNANCE FRAMEWORK
Indonesia is a unitary state as stipulated by the Constitution of 1945 also called “UUD 1945”. In 1949, a new constitution established a federal state (United States of Indonesia) that only lasted eight months. The 1945 constitution was restored, and has been amended several times since, in particular during a period of reformasi (reformation) in February 1998.
Indonesia is a presidential representative democratic republic where the President is the head of both state and government. The Parliament (MPR) is bicameral, with the Council of the People’s Representatives (DPR) as the lower house and the Council of Regional Representatives (DPD) as the upper house. Members of the Parliament are elected for five years. The authority of the DPD is limited to areas related to subnational governments, more specifically “regional autonomy, the relationship of central and local government, formation, expansion and merger of regions, management of natural resources and other economic resources, and bills related to the financial balance between the centre and the regions” (article 22D of the Constitution). It has no direct law-making power and its senators can only propose and issue recommendations on bills to the DPR. Each province of Indonesia elects four members to the DPD who represent the interests of their provinces.
Chapter V of the Constitution is dedicated to “local government”, guaranteeing their autonomy and article 18 defines the administrative division of the country and guarantees the election of local self-government for all subnational governments. Article 18b of the constitution recognises the special nature of certain regions to reflect Indonesia’s tremendous diversity in terms of geography (a country composed of 16 056 islands including five main islands and four archipelagos), culture and religion (726 different spoken languages, over 300 distinct ethnic groups) and socio-economic characteristics.
Indonesia remained a deconcentrated state rather than a decentralised one until 1998. From 1998, a strong decentralisation process was introduced. There were two “big bang” decentralisation reforms in 2001 and 2005 that granted subnational governments greater political autonomy and transferred substantial responsibilities, personnel, assets and resources to them. First, Law 22/1999 on local government – also often referred to as the Regional Autonomy Law – and, second, Law 25/1999 on revenue sharing between the central and regional governments established the basis of administrative and fiscal decentralisation. These two laws were revised in 2004 through Law 32/2004 on local government and the Fiscal Balance Law 33/2004. In 2009, in order to expand the local base and adjust local taxation to regional autonomy, Law 28/2009 was passed on fiscal revenue allocated to subnational governments, local taxation and charges. In September 2014, the government enacted a new Local Government Law (no. 23/2014) to replace Law 32/2004, which aimed to restructure decentralisation to make the public sector more effective, although it recentralised some authority back to the central level whose authority is now stronger and more assertive. Another important law was adopted in 2014, Law no. 6 / 2014 (‘Village Law’) on villages’ governance and finance, through which villages are recognised as self-governing entities and have more authority and resources. Prior to the reform, villages were under the control of the districts.
Since the “Village Law”, Indonesia has a three-tier system of subnational government, with a regional tier composed of provinces (provinsi), an intermediate tier composed of regencies (kabupaten) and cities (kota) and a local tier composed of villages. Each province is headed by a governor and has its own regional assembly called the Regional People's Representatives Assembly. Governors and representative members are elected by popular vote for five-year terms. Regencies and cities are both at the same level, having their own local government elected by universal suffrage for a term of five years. The legislative body is the local council of representatives while the executive is the regent in regencies (Bupati) and the mayor in cities (Wali kota). Villages (kampung) and groups of villages (desa) exist in both rural and urban areas. Their leaders are usually elected in rural areas and appointed in urban ones. A village also has two neighbourhood associations at two different levels.
The central government does not have state territorial administration, except regional offices of central ministries or departments. However, the provincial governors - in addition to acting as the head of provincial government - also act as a representative of the central government in each province to carry out certain central government tasks (deconcentration).
Indonesia recently passed the Law n 1 of 2022 on Financial Relations between the Central Government and Regional Governments (UU HKPD), which shall be implemented by 2024. The reform aims to ensure transparent and accountable intergovernmental fiscal relations, which includes a strengthening of regional fiscal capacity and a harmonisation of central and regional expenditure (see below).
|MUNICIPAL LEVEL||INTERMEDIATE LEVEL||REGIONAL LEVEL||TOTAL NUMBER OF SNGs (2020)|
|83 813 villages
(desa and kelurahan)
|416 regencies (kabupaten) and
98 cities (kota)
|34 provinces (provinsi)|
|Average municipal size:
3 264 inh.
|83 813||514||34||84 361|
OVERALL DESCRIPTION: In 2020, the subnational government structure of Indonesia was composed of 34 provinces, 416 regencies and 98 cities, and 83 813 villages.
REGIONAL LEVEL: At the regional level, nine new provinces were created between 1999 and 2012. Five provinces have special status, Aceh (the Islamic Sharia Law as the regional law of the province), the Special Capital Region of Jakarta as the capital city, the Special Region of Yogyakarta (a sultanate that has a hereditary governor and vice-governor) and Papua and West Papua. They enjoy more autonomous powers.
The population of provinces ranges from 742 200 inhabitants in North Kalimantan (0.3% of the Indonesian population) to 46.7 million in West Java (18%). Population is distributed very unevenly. The six provinces located in the central island of Java account for 55% of the population. They include the Special Capital Region of Jakarta (i.e., the capital city), which accounts for 10.6 million inhabitants. There are strong inequalities among provinces. In 2021, the GDP per capita of the capital region of Jakarta was 66 times higher than per capita GDP in the poorest province (Gorontalo). Four provinces accounted for 53% of GDP in 2021.
INTERMEDIATE LEVEL: At the intermediate level, cities differ from regencies by their demographic size and economic profile. Small regencies comprise about 6 000 inhabitants whereas the largest city has 4.8 million inhabitants (Bogor in West Java). Regencies and cities are further divided into 7 252 administrative units called “districts” managed by a civil servant appointed by the regency or the city (Kecamatan). The number of regencies and cities have also grown from 303 in 1999 to 514 in 2017 in a bottom-up process. This sharp expansion, called pemekaran or ‘blossoming’, ended in 2010. Today, regency/city average size is 510 000 inhabitants, with large variations among them.
MUNICIPAL LEVEL: The 2014 Village Law gave village authorities (art. 18–21) an administration role in village affairs, social and economic development, and the empowerment of villagers. It also includes the Village Fund policy (art. 72), which allocates funding to village governments. Since 1999, the number of villages has increased by 20%. About a third have a population of fewer than 1 000 inhabitants.
Subnational government responsibilities
Following Law 32/2004, local governments gained broad responsibilities, making Indonesia one of the most decentralised countries in the world. Most competences were delegated to subnational governments with the central government retaining responsibility only for areas of national security, foreign and monetary policy, justice, governance and planning, religious affairs. Most responsibilities were transferred to regency/city governments, while provinces were granted mainly administrative and control tasks, in particular in their “deconcentrated” role as the regional representative of the central government.
The new Local Government Law no. 23/2014 has redefined the distribution of responsibilities across all levels of government, defining exclusive responsibilities for the central government (see above), concurrent responsibilities and general affairs. It also established a list of mandatory and discretionary functions. Mandatory functions are related to basic services in six areas (education, health, public works and spatial planning, housing and residential areas, peace, public order, and the protection of society, and social affairs) and 18 other functions that are “not related to basic services”. Law 23/2014 shifted the authority from municipalities to provinces in several areas, such as coastal management, mining, forestry and high school education. However, there is still no clear-cut separation of responsibilities between provinces and regency/city governments, resulting in several overlaps.
Overall, provinces are mainly responsible for supervisory functions and matters that require cross-jurisdictional cooperation, although they do not have hierarchical authority over local governments. The service responsibilities of villages are not clearly defined. The 2014 Village Law only provides general guidelines pertaining to these responsibilities.
To perform their tasks, subnational governments make use of locally owned public enterprises (state owned enterprises - SOE) at the local level). There were around 782 enterprises, including drinking water companies and marketplaces, owned and managed by regencies and cities by the end of 2019.
Main responsibility sectors and sub-sectors
|SECTORS AND SUB-SECTORS||Provincial level||Intermediate and municipal levels|
|1. General public services (administration)||Provision of public administrative services including inter-regency municipal services; Provision of other basic services that cannot yet be provided by regencies/municipalities; Population administration and civil registration; Community empowerment and village; Statistics||Provision of local public administrative services; Community and village empowerment (citizen participation in village government, more inclusive village institutions)|
|2. Public order and safety||Maintenance of public peace and order||Fire-fighting|
|3. Economic affairs / transports||Provincial economic development; SMEs policy (except for providing education, training and guidance) and inter-regental/ municipal businesses; Agricultural services; Capital investment services including inter-regental/municipal services; Provision of inter-regental/municipal manpower services; Provincial roads; Coastal management.||Local economic development including responsibility for the development of microenterprises (except for providing education, training and guidance); Manpower services; Agrarian services; Provision of capital investment services; Local roads; Management of fisheries|
|4. Environment protection||Protection of bio-diversity; Hazardous work; Environmental licences; Waste management; Conservation of natural resources and eco-system and national parks (but limited power on forestry).||Sanitation; Waste collection and management|
|5. Housing and community amenities||Provision and rehabilitation of victims of provincial disasters; Facilitation for the provision of housing for people affected by the relocation of provincial government programmes||Spatial and urban planning; Water provision; Provision and rehabilitation of victims of district or city disasters; Provision of housing for people affected by the relocation of the district or city government programmes; Issuance of building permits and housing development; Issuance of building ownership certificates (SKBG)|
|6. Health||Medical licences; Regulation concerning medicines and medical equipment; Food and beverage production; Provincial Referral Health Hospitals; Provincial health centres||Primary healthcare services; Small local hospitals/clinics; Local health centres|
|7. Culture & Recreation||Youth and sport; Culture||Youth and sport; Culture; Library; Archives|
|8. Education||Senior secondary education, including infrastructure and teachers’ salaries; Vocational education; Special education service||Early childhood education; Primary and junior secondary education, including infrastructure and teachers’ salaries; Non-formal education|
|9. Social Welfare||Social assistance policies and control of inter-regental/municipal social problem;||Social services|
Subnational government finance
|Scope of fiscal data: Provinces, regencies, municipalities and villages. At village level, the financial statistics were obtained through a Village Financial Survey, conducted on a sample basis covering about 10% of the total villages in Indonesia.||SNA 2008||Availability of fiscal data:
|Quality/reliability of fiscal data:
GENERAL INTRODUCTION: Fiscal decentralisation is grounded in Law 25/1999 on the fiscal balance between the central government and local governments, which was revised in 2004 through Law no. 33/2004., guiding the intergovernmental financial relationship between the central and local governments in Indonesia. While subnational governments play a major role in public spending and have significant discretion in terms of their expenditure mix, their revenue mostly comes from central government transfers, resulting in strong vertical fiscal imbalances.
The recently passed Law 1/2022 on financial relations between the central government and regional governments (UU HKPD), to be implemented by 2024, aims to reform intergovernmental fiscal relations. The reform includes restructuring local taxes and simplifying retribution. This implies a simplification of tax administration to reduce the costs of tax collection and support population in servicing their tax obligations. In addition, the number of regional retribution, which initially accounted for 32 types, will be reduced to 18 types according to three classifications: (i) general services, business services and certain permits.
Subnational government expenditure by economic classification
|2020||Dollars PPP / inhabitant||% GDP||% general government||% subnational government|
|Inc. current expenditure||915||7.6%||46.7%||83.6%|
|Compensation of employees||378||3.1%||56.2%||34.6%|
|Subsidies and current transfers||289||2.4%||71.6%||26.4%|
|Incl. capital expenditure||180||1.5%||46.4%||16.4%|
|Direct investment (or GFCF)||165||1.4%||44.3%||15.1%|
% of general government expenditure
- 60% 75%
SNG expenditure by economic classification as a % of GDP
- Compensation of employees
- Intermediate consumption
- Current social expenditure
- Subsidies and other current transfers
- Financial charges + other current expenditures
- Capital expenditure
- 10% 8%
EXPENDITURE: Subnational government expenditure in Indonesia accounted for 9.1% of GDP and 46.6% of public expenditure in 2020. Compared to OECD averages (17.1% of GDP, 36.6% of public expenditure), this level is low in terms of GDP but high in terms of its share in total public expenditure, especially compared to the average for unitary countries (27.5% of total public expenditure). The level of staff expenditure in public staff expenditure is quite high compared to OECD unitary countries (56.2% in Indonesia vs 41.4% in OECD unitary countries). Although staff expenditure accounts for more than one-third of subnational government expenditure, the ratio reaches 37% for regencies and cities (vs 26% in the provinces). In Indonesia, subnational governments employed around 77.6% of total public civil servants in 2018, which is around 3.2 million workers, according to the Asian Development Bank (ADB). Regency/city governments and villages accounted for 76% of subnational government expenditure in 2020. Their expenditures amounted to 6.9% of GDP and 35.5% of public expenditure. The provincial level accounted for only 2.1% of GDP and 11.1% of public expenditure.
DIRECT INVESTMENT: Public investment accounted for 1.4% at the subnational level in 2020, which is higher compared to the OECD average (1.9% for all OECD countries and OECD unitary countries) but it is much lower when compared to other emerging economies and Asian countries (3.2% of GDP in South Korea; 4.1% of GDP in Vietnam). Decentralisation devolved much infrastructure expenditure (e.g., local roads and water treatment) to subnational governments. Despite the impact of COVID-19, subnational governments in Indonesia remain key investors, representing 44.3% of public investment (vs 20% before decentralisation), slightly below the OECD average in 2020 (54.6% for all OECD countries and 48.9% for OECD unitary countries).
In 2020, subnational investment stood at 15.1% of their expenditure, which is higher than in the OECD on average (11.3% and 14.8% in OECD unitary countries), confirming that investing is a major function of subnational governments. Subnational public investment is mostly undertaken by regency and city governments. They represented 1.3% of GDP and 86% of subnational investment, whereas investment at the provincial level accounted for 0.2% of GDP and 14% of subnational governments investment. The MP3EI (Masterplan for the Acceleration and Expansion of Indonesian Economic Development) published in 2011 seeks to foster effective coordination of subnational governments’ investments with national plans. The MP3EI set out a three-stage plan for Indonesia to achieve economic connectivity and accelerated growth in order to largely develop the country by 2025.
PPPs are encouraged at the subnational level to leverage up the impact of public spending but they remain in gridlock in Indonesia due to the lack of capacities and unstable regulatory framework. In 2015, the Ministry of Finance created a Directorate to facilitate subnational governments to prepare and conduct PPP contracts. For selected subnational PPP projects, the Directorate can appoint a state-owned enterprise to assist the subnational government in question. On the other hand, to finance public infrastructure provisions, subnational governments can issue municipal bonds, which are tax-exempted.
Subnational government expenditure by functional classification
|2020||Dollars PPP / inhabitant||% GDP||% general government||% subnational government|
|Total expenditure by economic function||1094||9.1%||-||100%|
|1. General public services||362||3.0%||26.3%||33.1%|
|3. Security and public order||15.2||0.1%||11.2%||1.4%|
|4. Economic affairs/transports||68||0.6%||17.9%||6.2%|
|5. Environmental protection||23||0.2%||69.2%||2.1%|
|6. Housing and community amenities||138||1.1%||88.6%||12.6%|
|8. Recreation, culture and religion||8||0.1%||45.1%||0.7%|
|10. Social protection||15||0.1%||6.0%||1.4%|
SNG expenditure by functional classification as a % of GDP
- General public service
- Public order and safety
- Economic affairs / Transport
- Environmental protection
- Housing and community amenities
- Recreation, culture and religion
- Social protection
- 10% 8%
SNG expenditure by functional classification as a % of SNG expenditure
- General public service : 33,08%
- Defence : 0%
- Public order and safety : 1,38%
- Economic affairs / Transport : 6,23%
- Environmental protection : 2,09%
- Housing and community amenities : 12,61%
- Health : 15,07%
- Recreation, culture and religion : 0,74%
- Education : 27,42%
- Social protection : 1,35%
In 2020, the areas of general public services, education and housing and community amenities represented the largest categories of spending – respectively 33.1%, 27.4% and 12.6% of subnational governments expenditure. The high ratio of subnational spending on public administration (26.3% of general administration expenditure vs 15% in the OECD on average) may be due to the multitude of subnational governments in Indonesia, driving administrative and related staff costs higher.
At the regency and city level, the largest spending item is general public services (33% of their expenditure), followed by education (25%), health (17%) and housing and community amenities (13%). Regencies and cities are also heavily involved in environmental protection (53% of public expenditure).
Subnational government revenue by category
|2020||Dollars PPP / inhabitant||% GDP||% general government||% subnational government|
|Grants and subsidies||812||6.7%||-||78.7%|
|Tariffs and fees||50||0.4%||-||4.9%|
|Income from assets||13||0.1%||-||1.3%|
% of revenue by category
- 100% 80%
SNG revenue by category as a % of GDP
- Tax revenue
- Grants and subsidies
- Tariffs and fees
- Property income
- Other revenues
- 10% 8%
OVERALL DESCRIPTION: Subnational governments rely on two primary revenue sources to finance their expenditures: own-source revenue and intergovernmental transfers. The latter represent the bulk of subnational governments’ resources, resulting in a high dependence of subnational governments on central government funding. In 2020, 78.7% of their budget was financed by transfers from the central government (vs 41.2% in the OECD on average and 53.3% in OECD unitary countries), while tax revenue only accounted for 15.2% of their total revenues (to be compared to 42.4% in the OECD on average and 35.4% for the unitary countries) and non-tax revenue for a negligible portion. The share of subnational governments in public tax revenue is 2.4 times less than in the OECD on average (13.5% vs 32.3% in 2020).
In addition, the regency and city governments and villages accounted for 74.8% of all revenues at the subnational level (6.4% of GDP), while provinces accounted for the remainder (2.15% of GDP). Provinces are mostly funded through taxes while regency/city governments and villages are almost exclusively funded through central government transfers.
TAX REVENUE: The allocation of tax revenue is regulated by Law 28/2009 on Regional Taxes and User Charges. This Law transferred certain taxes from regency and city governments to provinces. Provincial tax revenue represented 62% of all subnational governments’ tax revenue, while regency and city governments accounted for the remaining 38%.
The main taxes allocated to the provinces include a motor vehicle tax (annual tax on the value of the vehicle) and a motor vehicle ownership transfer tax (levied when a motor vehicle is resold). Both combined accounted for 18% of subnational governments’ tax revenue in 2020. Provincial taxes also include a fuel tax and a surface water tax. 30% of these provincial taxes are redistributed to regencies and cities. Two property taxes (the land and building tax and the duty on the acquisition of land and building) are part of provincial taxes. According to the Regional Taxes and Retribution Law, each regional government has to issue a regulation for these taxes in its territory. The land and building tax rate is set at a maximum of 0.3% of the sale value, while the duty on the acquisition of land and building is set at a maximum of 5% of the greater of the transaction value or the provincial government-determined value.
Municipal taxes include a hotel tax, a restaurant tax, an entertainment tax, an advertisement tax, a public lighting tax, a mining tax (non-metal and stone minerals), a parking tax, etc. Some property taxes (tax on land and buildings transfer and the rural and urban land and building tax) were only decentralised with the enactment of Law no. 28/2009. Local governments started collecting them in 2011, but the central government put an end to the to the transition period for the transfer of competences concerning local collection and administration of these taxes in 2014. At the end of the transition period, all but 35 cities and districts had issued the required local regulation.
Overall, subnational governments have low fiscal autonomy. They can set up tax rates within the limits set by the central government and their ability to raise their own revenue must fall within the criteria set by the central government. In 2021, the central government passed Law No. 7 of 2021 on Harmonisation of Taxation Regulation (Harmonisasi Peraturan Perpajakan or “HPP Law”), which transferred a limited number of VAT, exempt economic activities, to provincial taxation.
GRANTS AND SUBSIDIES: Law no. 33/2004 provides instructions for the sharing of financial resources between the central government and subnational governments. The number of transfers has substantially increased despite decentralisation. Central government transfers accounted for 86% of subnational revenue in 2020 (vs 7.6% for tax revenue), 82% of which was for the regency and city governments and the villages.
The intergovernmental fiscal transfer system, which has a strong focus on equalisation, consists of several types of grants.
The General Allocation Fund (Dana Alokasi Umum DAU): the DAU is a general-purpose block grant and by far the largest transfer, accounting for around half of all central government transfers in 2020. Although general, half is dedicated to wages and salaries. As per the national budget, total amount of the DAU must be equivalent to at least 26% of all central government revenue (after revenue sharing). Transfers from DAU are formula-based, consisting of a base allocation (equal to the amount of staff expenditure) and a fiscal gap allocation (which can be positive or negative) based on a difference between needs and capacity and a set of variables (level of government, population, natural resources, surface area and regional socio-economic inequality).
The Special Allocation Fund (Dana Alokasi Khusus DAK) became a special-purpose grant in 2016. It aimed at funding responsibilities that are considered national priorities. It consists of DAK Fisik, mainly for financing capital expenditures, and DAK Non Fisik, to provide additional financing for the operational cost of service delivery (e.g., schools and health centres).
The Revenue-Sharing Fund (Dana Bagi Hasil DBH) redistributes revenue earned from the central budget, regional share of taxes (land and building tax, property tax, personal income tax, tobacco) and natural resources revenue (forestry, mineral mining, fishery, oil, natural gas and geothermal) in order to reduce vertical imbalance between central and regional governments. 20% of DBH from the personal income tax (PPh) is allocated to subnational governments. This share is divided between the province (40%) and regency/city governments (60%).
The Village Fund is a new fund, created by the Village Law of 2014. Both central governments and regency/city governments contribute to the fund through a share of their own resources and grants. Prior to 2018, the majority of the funds (90%) were distributed in equal amounts to all villages. The remaining 10% was distributed according to a “needs-based” formula. After, 2018, 77% were distributed as equal allocations per village, 20% was distributed according to a new “needs-based” formula (which gives more 50% of importance to the share of poor people in the village) and the remaining 3% is saved exclusively for “lagging” villages. The Village Fund accounted for 9% of all central government transfers in 2021.
Other funds include: 1) autonomy funds, which are special arrangements with the three regions (i.e., Aceh, Papua and West Papua); 2) a special fund for Yogyakarta; 3) regional incentive grants (DID) – which are distributed to local governments according to their performance rank by the Ministry of finance – and 4) “deconcentration funds”, which provide grants directly from line ministries to subnational governments to fund specific national programmes.
OTHER REVENUE: Other sources of subnational government revenue include service fees for healthcare, education, cleaning, parking, waste processing, etc. User charges and fees remain a limited source of subnational government revenue (6.2% of subnational revenue and 0.5% of GDP) compared to international standards (16.5% of subnational government revenue in the OECD and 11.3% in unitary OECD countries). This is in large part because there is a predetermined list of regional fees and charges established by national laws. In addition, any new levies decided by subnational governments require the approval of the central government and are subject to centrally-stipulated guidelines. Subnational governments also receive property income, mainly dividends from their local companies. Other revenues benefit mainly provinces and large cities.
Subnational government fiscal rules and debt
|2020||Dollars PPP / inh.||% GDP||% general government debt||% SNG debt||% SNG financial debt|
|Total outstanding debt (consolidated)||52||0.4%||1.0%||100%||-|
|Currency and deposits||0||-||-||0.0%||0.0%|
|Bonds / debt securities||0||-||-||0.0%||0.0%|
|Other accounts payable||33||-||-||64.1%||-|
SNG debt by category as a % of total SNG debt
- Currency and deposits : 0%
- Bonds/Debt securities : 0%
- Loans : 35,93%
- Insurance pensions : 0%
- Other accounts payable : 64,07%
SNG debt by level of government as a % of GDP and as a % of general government debt
- 1,5% 1,2%
FISCAL RULES: The State Finance (Law no. 17/2003) and the Law on “Auditing Management and Accountability of State Finance” impose a uniform system of financial accounts, audit rules, and disclosure requirements for borrowing by all levels of government. The Audit Law in particular includes a performance and compliance audit in addition to the traditional financial audit, which also applies to subnational governments. The State Finance Law adopted the fiscal and debt rules of the European Union by limiting the budget deficits of the central government and subnational governments to 3% of their respective annual GDP (or regional GDP in the case of subnational governments). The debt-to-GDP ratio (or debt/regional GDP) is set at a maximum of 60%. Each year, the central government sets a ceiling for the subnational government budget deficit.
DEBT: Subnational governments are allowed to borrow long term but borrowing is strictly controlled. They can only borrow for capital development (“Golden Rule”) subject to a set of specific conditions. Subnational government borrowing should be used to finance infrastructure that directly generates own-source revenue. Subnational government debt must not exceed 75% of the previous year’s budget revenue and the debt service ratio to revenue is capped at 40%. In addition, subnational governments cannot borrow more than the maximum amount determined by the central government, nor can they borrow while past loans remain in arrears. Subnational governments with outstanding arrears on government loans are prohibited from borrowing. A cumulative lending limit for subnational loans is set by the Ministry of Finance. Finally, subnational governments are not allowed to directly borrow internationally. However, under the Ministry of Finance Regulation No. 111 of 2012, they are allowed to raise domestic or municipal bonds with prior permission from the Ministry of Finance and an audit opinion from the BPK (Badan Pemeriksa Keuangan), the audit commission established by the central government. Municipal bonds can only be issued in the domestic capital market in Rupiah, and only in the form of revenue bonds, which are bonds backed by revenue from a specific project.
Subnational government debt levels are very low both as a share of GDP (0.4%) and overall public debt (1%). In addition, subnational borrowing is mostly composed of arrears (almost 64%), with financial debt accounting for the remainder (36% of debt stock, i.e. 0.2% of GDP). Subnational government debt is composed of loans (granted through government lending programs) and, only on occasion, through regional banks owned by local governments or other private sources, in particular multilateral institutions.
The impact of the COVID-19 crisis on subnational government organisation and finance
TERRITORIAL MANAGEMENT OF THE CRISIS: On 13 April 2020, the President of Indonesia declared the COVID-19 crisis a national disaster through Presidential Decree N 12 of 2020. The Task Force for the Acceleration of the Response to COVID-19 was established and developed a National Response and Mitigation Plan for COVID-19. The plan was organised in accordance with the disaster management phases of preparedness, disaster readiness/alert, disaster response, and rehabilitation and assigned responsibilities to national agencies and subnational governments, including provinces and districts. Regional (Provincial) Task Forces for COVID-19 were created on the basis of the Presidential Decree that requested the governors to form local task forces for the acceleration of the COVID-19 response and to coordinate efforts with head districts and municipalities. Each Regional Task Force was led by and administratively reported to the head of the provincial government.
In addition, provincial governments, with support from the World Health Organization and the Ministry of Health and National Disaster Agency, each prepared provincial response plans covering the issues of coordination with the central authorities, pharmaceutical interventions, continuity of essential services, risk identification, and surveillance. They supported national efforts to fight against the pandemic through increasing the level of public health service delivery, conducting epidemiological investigation and contact tracing, mitigating the impact of the pandemic on other public services, and providing social and economic relief to citizens. However, the inherent inequities in the distribution of healthcare infrastructure and differential level of provincial capacities were a challenge to the COVID-19 response.
EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: Provinces played an important role in four areas in the fight against the coronavirus pandemic: (i) increasing the level of local public health service delivery; (ii) preventing transmission and epidemiological investigations and tracking; (iii) mitigating the impact of the pandemic on other local services; and (iv) supporting social and economic relief activities. For instance, the provincial government of Central Java implemented a community-based programme (Jogo Tonggo) to identify vulnerable groups, conduct contact tracing and manage quarantines. The programme empowered community units to form a task force consisting of youth, women, midwives, integrated health centre officials, religious leaders, and other local organisations. The provincial government provided essential equipment such as gloves, masks, personal protective equipment (PPE), and disinfectant. Another example comes from the city of Bogor, which launched a programme to connect donors and recipients by developing an ICT for crowdfunding. The Bogor City Foster Family Network Programme targeted low-income populations not registered as aid recipients in the government’s database and set a minimum donation of IDR 1 million (USD 70). Donors and recipients must register on the government’s websites with their data verified by subdistrict staff.
IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: The pandemic negatively affected subnational public finances, and in particular the provinces, which were more strongly affected than the regencies, cities and villages.
Regarding subnational revenue, grants and subsidies increased by 11% between 2019 and 2020, which corresponded to a 18% increase for villages and a 2% decrease for provinces. In fact, the provinces experienced falls in all their sources of revenue, except tariffs and fees (+2%). On the contrary, the villages registered increases in all their sources of revenue (tax revenue +17%; tariffs and fees +30), except revenue from assets (-2%).
For its part, subnational spending increased in all its components in aggregate terms in 2020 compared to 2019, spending on subsidies and transfers being the most significant (+37%). However, the situation is very different between provinces and villages. The provinces increased spending only for subsidies (+9%), current social spending (+3%) and to pay interest on the debt (+27%). The highest provincial current spending went to pay higher spending on environmental protection (+75%) and higher educational spending (+33%). For their part, the villages recorded increases in spending on all components, with spending on transfers being the most significant (+64%).
ECONOMIC AND SOCIAL STIMULUS PLANS: In 2020, the government disbursed a total of IDR 579.8 trillion (about 3.8% of GDP) as part of a national economic recovery program (PEN). The PEN comprises (i) support to the health care sector to boost testing and treatment capacity for COVID-19 cases; (ii) increased benefits and broader coverage of existing social assistance schemes to low-income households such as food aid, conditional cash transfers, and electricity subsidies; (iii) expanded unemployment benefits, including for workers in the informal sector, (iv) tax reliefs, including for the tourism sector and individuals (with an income ceiling); and (v) permanent reductions of the corporate income tax rate from 25% to 22% in 2020−21 and 20% starting in 2022. The PEN also includes capital injections into state-owned enterprises and interest subsidies, credit guarantees, and loan restructuring funds for micro, small, and medium enterprises.
Village governments and village funds also played an important role in supporting the central government's response to the pandemic and associated economic fallout. The central government quickly revised its regulation on priority usage of village funds (Permendes 20/2020) to help communities deal with the pandemic, including activating the cash for work program to support COVID-19 response, activating community response systems for isolation, monitoring, and mutual support, and prioritising spending towards COVID-19 response and recovery. By March 2020, around 40% of the Dana Desa (Village Fund) had already been disbursed to village governments. By October 2020, the Ministry of Villages estimated that of the IDR 72 trillion (USD 5.6 billion) in Dana Desa, villages had spent a total IDR 33.2 trillion (USD 2.3 billion) for COVID-19 response, including IDR 17.4 trillion (USD 1.2 billion) for a new village cash transfer program.
|World development indicators||World Bank|
|Link: https://data.worldbank.org/indicator/" target="_blank|
|World population prospects||United Nations|
|Link: https://population.un.org/wpp/" target="_blank|
|Demographic and Social Statistics||United Nations|
|Link: https://unstats.un.org/unsd/demographic-social/index.cshtml" target="_blank|
|Unemployment rate by sex and age||ILOSTAT|
|Human Development Index (HDI)||United Nations Development programme; Human Development Reports|
|Link: http://hdr.undp.org/en/content/human-development-index-hdi" target="_blank|
|Statistical Yearbook of Indonesia 2018||BPS-Statistics Indonesia|
|Government Finance Statistics||IMF|
|Link: https://data.imf.org/?sk=a0867067-d23c-4ebc-ad23-d3b015045405" target="_blank|
|OECD (2020) Subnational governments in OECD countries||OECD|
|Link: https://stats.oecd.org/" target="_blank|