This policy brief is based on a report titled “Exposing illicit financial flow in Indonesia: The scale and the potential of tax revenue loss from the top six export commodities”

Trade balance is one of the important indicators of economy because it helps economists and investors to determine the economic relative power in a certain country compared to others. Furthermore, trade balance is also useful for policy makers and other relevant parties to delve information on the performance of export and import of a certain country in a certain period. However, many did not know that the trade balance data often does not reflect the real condition of export and import because of recording manipulation by exporters and importers, thus the reason why illicit financial flow occurred.

In general, illicit financial flow is a form of movement of money or capital that occurs when it is illegally earned, transferred, or utilized (Baker, 2005). Within the last few years, illicit financial flow was understood to be the cause of economic slowdown in developing countries since it causes the loss of potential fund for investment sourced from tax or non-tax revenue. This issue then receives a global attention and became one of the key issues in Sustainable Development Goals number 16 and indicator 16.4 where minimizing the illicit financial flow is one of the indicators to be achieved.

In Indonesia, the issue of illicit financial flow is a necessary and crucial matter to overcome since Indonesia is on its way to become a developed country but challenged by a low ratio of tax to Gross Domestic Product (GDP). In 2017, income per capita in Indonesia still hovering around USD 3,540 which is considered to be a lower-middle country. On the other hand, the ratio of tax to GDP has stagnated within the range of 10-13 percent within the last 20 years.

In the last few decades, the driving force of Indonesian exports came from non-oil and gas commodities (extractive, manufacture, and agriculture), specifically the top six commodities which were coal, copper, palm oil, rubber, coffee, and crustaceans. Unfortunately, we never discover whether the Indonesian economy so far received the maximum benefit from the contribution of those top six export commodities. This document is a policy brief to highlight leakage in trading in a form of illicit financial flow of the top six export commodities and provide policy recommendations which will address the matter of illicit financial flow in Indonesia.

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