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RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #0486/01 0540056
ZNR UUUUU ZZH
R 230056Z FEB 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 3400
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 0251
RUEHBJ/AMEMBASSY BEIJING 3845
RUEHBY/AMEMBASSY CANBERRA 0456
RUEHUL/AMEMBASSY SEOUL 3873
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 04 JAKARTA 000486 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EAP/MTS AND EB/IFD/OMA 
TREASURY FOR IA-SETH SEARLS 
COMMERCE FOR 4430/GOLIKE 
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR FINEMAN 
DEPARTMENT PASS EXIM BANK 
 
E.O. 12598: N/A 
TAGS: EFIN EINV ECON PGOV ID
SUBJECT: INDONESIA - MINISTRY OF FINANCE AND BANK INDONESIA 
LAUNCH REFORM EFFORTS 
 
 
¶1.  Summary.  On December 27, 2006, Minister of Finance Sri 
Mulyani Indrawati officially launched a new organizational 
structure for the Directorate General for Tax (DGT) that 
reduces the operational role of the DGT headquarters in 
Jakarta, divides the DGT headquarters into functional 
Directorates, and establishes formal work units to lead the 
further modernization of the DGT.  Two days later, the 
Minister signed a new decree outlining parameters for a 
Primary Dealer system for government bond auctions.  The 
Ministry of Finance (MOF) is currently accepting 
applications for Primary Dealers with the first auctions to 
take place in March.  The MOF will also issue Indonesia's 
first T-bills on April 3, July 10 and December 4, 2007 and 
will again issue the popular "retail bonds" launched in 
¶2006.  At Bank Indonesia's (BI) annual policy speech event 
on January 12, BI Governor Burhanuddin Abdullah announced 
several policy initiatives for 2007 to help support 
economic growth, and encourage lending to the real sector. 
BI also plans to issue bank guidelines limiting foreign 
manpower at the middle-management level and requiring a 
"transfer of knowledge" to domestic employees within three 
years.  This report uses an exchange rate of Rp 9,115 to 
the dollar.  End Summary. 
 
Tax Administration Reform Picks Up Speed 
---------------------------------------- 
 
¶2. On December 27, 2006, Minister of Finance Sri Mulyani 
Indrawati officially launched a new organizational 
structure for the DGT that reduces the operational role of 
the DGT headquarters in Jakarta, divides the DGT 
headquarters into functional Directorates, and establishes 
formal work units to lead the modernization of the DGT. 
The new structure dissolves separate Directorates that 
formally administered all aspects of Indonesia's income, 
value-added (VAT), and land and building taxes from 
taxpayer relations to audits, and replaces them with units 
that perform a specified function for all tax types.  This 
reform reduces duplication of multiple investigative units 
for each tax type.  In addition, for the first time, the 
DGT will have dedicated, full-time staff to lead 
Indonesia's ambitious tax modernization program.  Tax 
authorities mainly concentrate tax modernization efforts in 
the new directorates of "Internal Compliance and 
Organizational Transformation;" "Communication and 
Technology Transformation;" and "Business Process 
Transformation."  Under the new structure, DGT headquarters 
will function as a policy-making body that also provides 
back office support to local tax offices, which will have 
the main operational tasks. 
 
----------------------------------------- 
Table 1: DGT: Old vs. New Structures 
----------------------------------------- 
Previous Directorates/   New Directorates/ 
Units                    Units 
----------------------------------------- 
Secretary General        Secretary General 
 
SIPDIS 
 
Taxation System and      Potential, Compliance, 
Potential Planning       and Collection 
 
Tax Regulation           Tax Regulation I 
 
   ---                   Tax Regulation II 
 
Tax Audit, Collection,   Audit and Collection 
And Investigation 
   ---                   Intelligence and 
                         Investigation 
 
Tax Information          Tax Information Technology 
 
Tax Dissemination        Tax Dissemination, 
                         Service, and PR 
 
Income Tax                   --- 
 
 
JAKARTA 00000486  002 OF 004 
 
 
VAT and Electricity Tax      --- 
 
Land & Building Tax and 
Land & Building 
Acquisition Tax            --- 
 
   ---                   Tax Extensification and 
                         Appraisal 
 
   ---                   Tax Objection and Appeal 
 
   ---                   Internal Compliance and 
                         Resources Transformation 
 
   ---                   Information & Communication 
                         Technology Transformation 
 
   ---                   Business Process 
                         Transformation 
 
Regional Offices         Regional Offices 
 
   ---                   Data Processing Center 
 
Source: DGT 
 
¶3. On December 29, 2006, Minister Mulyani also swore in 81 
new Echelon II (director level) officials at the MOF, 44 of 
whom work at DGT.  The DGT also officially opened 13 
"Medium Tax Offices" (MTOs) in Jakarta and eight other 
large cities in December 2006 which will start operations 
in April 2007.  Like Indonesia's Large Tax Offices (LTOs), 
which have provided improved service to the country's 
largest corporate taxpayers since 2002, the MTOs aim to 
provide better and faster services, simplify tax compliance 
and optimize tax audits through online tax filing.  The tax 
audit process will include a closing conference with the 
taxpayer, at which the taxpayer can submit any objections. 
 
¶4. Foreign and domestic investors and businesses welcome 
the tax reform: lack of transparency in the tax office had 
been a frequent source of complaints.  A number of donors, 
including International Monetary Fund (IMF), the Australian 
Agency for International Development (AUSAID), USAID, World 
Bank, the Japan International Cooperation Agency (JICA), 
Australian Taxation Office (ATO), and Swedish Tax 
Administration (under SIDA), are providing DGT with 
technical assistance on a range of tax administration 
reform issues, including tax return management, audit, 
database development, internal compliance and human 
resource development. 
 
New MOF Regulation on Primary Dealer System 
------------------------------------------- 
 
¶5.  On December 29, 2006 Finance Minister Sri Mulyani 
Indrawati signed Ministerial Decree No. 144/2006 
establishing a Primary Dealer System for rupiah-denominated 
government securities.  The decree outlines the 
requirements, rights, and obligations for financial 
institutions (banks and securities firms) that wish to 
serve as MOF-appointed primary dealers.  The decree 
obligates the primary dealers to report regularly to the 
Director General for Debt Management, and sets out 
procedures relating to price quotations.  The MOF began 
accepting applications for primary dealers on February 2 
and plans to organize the first auctions under the new 
system in March 2007.  Indonesia's existing Inter-Dealer 
Market Association's 24 members (14 domestic banks, six 
foreign banks, and four securities companies) had 
previously acted as a de facto primary dealers market. 
 
¶6.  The decree specifies a facility under which the MOF 
could lend government securities to primary dealers if the 
demand for bonds in the secondary market is heavy.   Under 
the facility, primary dealers can borrow government bonds 
from the MOF by submitting a guarantee worth 1.2 times the 
value of the bonds.  The MOF will impose a weighted average 
 
JAKARTA 00000486  003 OF 004 
 
 
interest rate of the inter-bank overnight rate plus two 
percent.  Primary dealers can also obtain loans from BI in 
the case of excessive sales or bond market volatility by 
putting up bonds as a guarantee. 
 
Indonesia Announces First T-Bills 
--------------------------------- 
 
¶7. The MOF announced on January 22 a schedule for the first 
ever issuance of short-term Treasury Bills (T-bills) in 
Indonesia.  Director General for Debt Management Rahmat 
Waluyanto said the proceeds from the T-bill issuances will 
help finance the state budget deficit, expected to be 1.1% 
of GDP in 2007.  BI officials stated the issuance will 
probably not exceed Rp 7.5 trillion ($823 million) in 2007. 
According to Waluyanto, the MOF will issue the T-bills on 
April 3, July 10 and December 4, 2007.  The Ministry also 
plans to issue popular retail treasury bonds in March, June 
and November 2007.  The MOF issued Rp 3.3 trillion ($364 
million) in retail bonds in July 2006, which proved popular 
with investors.  Waluyanto also said that the MOF has 
tentatively scheduled Indonesia's first sharia bond 
issuance for September 2007, pending approval of related 
legislation by lawmakers.  Legislation to facilitate sharia 
bond issuance has been pending in Parliament since at least 
early 2005. 
 
BI Relaxes Bank Lending Regulations 
----------------------------------- 
 
¶8. During his annual policy speech on January 12, BI 
Governor Burhanuddin Abdullah described several new policy 
initiatives for 2007 aimed at stimulating bank lending and 
economic growth in the wake of high-interest rates and slow 
loan growth in 2006.  BI Governors traditionally use the 
annual speech to announce policy priorities and 
initiatives, allowing banks time to provide feedback before 
BI issues implementing regulations.  Analysts particularly 
focused on initiatives relating to the bank intermediation 
function, guidelines to evaluate credit collectibility and 
prudential principles. 
 
¶9. During a press briefing prior to the speech, BI Deputy 
Governor Muliaman Hadad explained that BI designed the 
lending stimulus package to reduce loan provisioning by 
domestic banks in order to free up capital that they could 
then steer to private sector lending.  In order to 
implement the policy package, BI intends to relax the asset 
quality classification regulation No 8/2/PBI/2006 from 
January 2006, which followed on a regulation first issued 
in January 2005.  The introduction of the regulation in 
January 2005 led several state banks to significantly raise 
the amount of their non-performing loans (NPLs) in the 
first half of 2005 (state-owned Bank Mandiri's NPLs rose 
from 7% to 25% at that time).  BI plans to issue detailed 
regulations later in 2007 to implement the package. 
 
¶10. According to Hadad, BI intends to make the following 
changes to BI's credit collectibility guidelines and 
prudential regulations to encourage lending: 
 
- Adding machinery and inventory (warehouse receipts) to 
the types of collateral that banks can use to secure loans 
and reduce the provisioning levels for NPLs.  This 
initiative aims at boosting lending to small-and-medium 
enterprises (SMEs), which are often unable to meet current 
loan collateral standards. 
 
- Confirming a previous regulation allowing banks to lend 
an amount up to 30% of their capital to state-owned 
enterprises (SOEs) operating in the infrastructure sector. 
In addition, BI plans to expand the coverage of the 
regulation to allow lending up to the same level to SOEs 
operating in "other sectors". 
 
- Clarifying the definition of "related parties" under 
Indonesia's Maximum Credit Allocation Limit to permit more 
liberal lending to jointly-financed projects.  BI plans to 
 
JAKARTA 00000486  004 OF 004 
 
 
issue implementing regulations to set forth the new rules. 
 
- Reiterating that it is possible to provide new loans to 
problem borrowers providing: a) the borrowers ""maintain 
good intentions" to repay and; b) the loan is distressed 
for reasons beyond the borrower's control. 
 
- Raising the ceiling for loans subject to "timely 
repayment" criteria from Rp 500 million ($55,000) to Rp 5 
billion ($550,000).  Currently, banks must consider three 
parameters when considering loans over Rp 500 million 
($55,000): business prospects of the borrower, debtor 
performance, and promptness of payment.  BI intends to 
revise current regulations to drop the requirement that 
banks evaluate the business prospects and performance of 
debtors for loans to micro enterprises and SMEs.  In 
addition, BI intends to grant exceptions to the three 
parameters for specific project-related loans that have 
government guarantees and are a high priority for the 
government.  Banks still must consider business prospects 
and performance in classifying loans above Rp 5 billion 
($550,000).  Currently, 54% of domestic banking sector 
lending is for individual loans of less than Rp 5 billion 
($550,000), according to Hadad. 
 
¶11.  Abdullah also announced that BI intends to further 
restrict the number of expatriates employed in banks in 
Indonesia.  For foreign banks, BI will limit the expatriate 
personnel to two levels below the board of directors, 
except for specialized functions local employees cannot 
fill.  For specialized functions, BI plans to give foreign 
banks three years to train and "transfer knowledge," 
gradually replacing expat workers with local staff. 
 
HEFFERN