Regional autonomy and the IFIs

Down to Earth No. 46, August 2000

The response to regional autonomy by Indonesia's main creditors has been mixed. While they officially acknowledge the need for decentralisation and greater decision-making powers at regional level they also express doubts about the capacity of Indonesia to implement regional autonomy in a way that will avoid economic chaos.

For the International Monetary Fund, which is Indonesia's biggest lender and decides Indonesia's economic "rescue" strategy, regional autonomy raises awkward questions. The main problem is the need to offset the probability of sparking unrest by not introducing decentralisation against the desirability of strong central control over finances for debt servicing requirements.

The IMF sees the return of foreign investment and the generation of revenues from natural resources as key components of its economic recovery programme for Indonesia - an approach that emphasises the large-scale exploitation of resources over the need for their sustainable use and which ignores their cultural and religious significance for indigenous communities.

The IMF used its position during the drafting of law 22 and 25 to try and influence the shape of regional autonomy legislation, particularly in the area of natural resource revenue flows. According to press reports at the time, soon after the draft legislation was unveiled in October 1998, it ran into opposition from the IMF. This, according to the Far Eastern Economic Review, "raised questions about inconsistencies and the government's future ability to make debt repayments." As a result, when the law was first put before parliament in February 1999, it made no mention of natural resource revenues and authorised only the transfer of regional taxes and levies from provincial to district level. The draft was later changed when Jakarta realised it would have to offer something more substantial if it had any hope of warding off more unrest and distrust of the central government. (FEER 13/May/99)

What the IMF would like to see happening with regional autonomy is spelt out in the succession of "Letters of Intent" agreed with the Indonesian government. These set out the conditions for IMF loans, and outline the basic economic strategy to be followed by the government during the following months. The Letter of Intent (LoI) signed in June this year commits Indonesia to carry out the following steps related to regional autonomy by the end of June 2000:

• establish a new timetable for implementing decentralisation;
• hold consultations with provinces/districts on devolution of functions in line with capacity;
• draft assessments of the financial, civil service and regulatory implications of decentralisation;
• draft all regulations for the devolution of functions.

The June LoI states that the IMF and the World Bank have organised a joint "decentralisation technical assistance mission" to consult with the Jakarta government on implementation - a clear sign that these institutions want to keep a firm grip on the way the Wahid government handles the process. (June LoI, Section III/8-9 and Box 1).

One of the key points for the IMF here is that regional autonomy should maintain 'fiscal neutrality' - during implementation, meaning that the transfer of revenues to central government should be equal to the reduction in expenses of central government in regional spending. This, along with regional equity is set out as the 'strategic objective' of decentralisation in the June LoI. Ensuring fiscal neutrality is considered important by the IMF because it means ensuring that central government can still afford to service its debts and stay within the confines of the economic recovery package as dictated by the IMF. Closely connected with this is the idea that devolution should take place "in line with capacity", implying that transfer of authority should only happen if local governments are up to it. There is no definition in the LoI as to how a region's capacity should be evaluated.

Clear signs that the IMF and World Bank are seriously worried about the impact of decentralisation and the speed of its implementation emerged at a seminar sponsored by both institutions in March. "It could be chaotic" said Ehtisham-Uddin Ahmad, the IMF's adviser on financial affairs. Ahmad said the IMF fears problems such as districts taking income from Jakarta before they take over responsibilities for expenditures. This, for example, could leave millions of civil servants who have been transferred to district government unpaid, and could leave basic services unfunded. Bert Hofman, a Jakarta-based World Bank expert on autonomy, said he was getting "cold feet" about decentralisation "because the preparation has been less than perfect." "The districts still don't know what they're supposed to do" he said. Hofman was also concerned that devolving authority to district/municipality level would do nothing to dissipate demands for greater self-rule. There were fears among the donor community too, that decentralisation would lead to greater disparity between resource-rich and resource-poor regions.
(Asia Wall Street Journal 20/Mar/00)

Note: the latest Letter of Intent, issued as we went to press and which contains items on 'fiscal decentralisation' can be found in English at http://www.thejakartapost.com.