Indonesia is the fourth largest country based on the amount of population. Some economists predict that the large population is a bonus for Indonesia because it reflects an enormous workforce. Moreover, the current Indonesian government pays high attention to attract more foreign investors to Indonesia or to encourage domestic investors to expand their business in Indonesia. One of the ways of it is to improve Indonesian infrastructure. It is believed that if Indonesia has a good infrastructure, the investor can easily build factories and deliver their products to throughout Indonesia. Thus the good infrastructure benefits to investors and Indonesian people.
The plan of infrastructure improvement is not easy as it seems. To implement the plan, Indonesian government requires enormous funds to finance the infrastructure projects. There are two ways to finance the projects. First, the funds stem from the government debt. This option has been undertaken by the Indonesian government. Since 2012, the Moody's credit rating agency has classified Indonesia in investment grade. The rating is important because it can enhance investor's confidence level to provide loans to the country. In additions, the investment grade may reduce the interest costs of the Indonesian government in asking for loans from the lenders.
Second, the government should increase its revenue. At the moment, 90% of Indonesian government revenue stems from tax. The government has paid high attention to improve the revenue from the tax. One of the strategies which are applied by the government is tax amnesty program. The aim of this program is to improve the tax compliance of the Indonesian taxpayers. This program is successful to increase the government revenue from the tax. Yet the tax collection until November 2017 was only 78% from the target. Some economists have been pessimistic that the tax collection target in 2017 can be achieved.
Consequently, the government budget deficit will be wider due to the lack of revenue. The government may increase the debt either stem from the foreign debt of domestic debt. The aim is clear, i.e. financing infrastructure project. Without tax reformation to improve the tax collection, Moody's predicts the rating of Indonesia will drop to be non-investment grade. Indeed, it will be a big loss for the Indonesian government. If Indonesia rating is the non-investment grade, it will lower the investor confidence level to give loans to Indonesia and also Indonesian government has to pay higher interest costs to the investors since investment to Indonesia is riskier. Thus Indonesian government is suggested to find alternative ways to finance the infrastructure projects and to diversify its revenue sources.