International Monetary Fund (IMF) Completes Visit to Indonesia
An International Monetary Fund (IMF) team, led by Luis E. Breuer, visited Indonesia between 7 and 18 November 2016 to conduct the annual Article IV Consultation. The IMF team exchanged views with Indonesian government officials, Indonesia's central bank (Bank Indonesia), and other public agencies, as well as representatives of the private sector, academics, and students on recent economic and financial market developments and the near-to-medium-term economic outlook.
The following statement was issued by the IMF team (however, the views expressed in this statement do not necessarily represent the views of the IMF’s Executive Board):
The economy of Indonesia continues to perform well, supported by a prudent mix of macroeconomic policies and structural reforms. The nation's authorities have skillfully navigated through the changing currents in the global economy. Macroeconomic growth remains strong, inflation has dropped sharply, and the current account deficit has been contained. These achievements underpin a favorable economic outlook according to the IMF team.
Economic growth of Indonesia in 2016 is expected to reach 5 percent (y/y) on account of strong private consumption. In 2017, growth is expected to reach 5.1 percent (y/y), driven by private consumption and a gradual pickup in private investment in response to a recovery of commodity prices and lower interest rates. Inflation is projected to rise from around 3.3 percent (y/y) at end-2016 to just above the middle of the official target band at end-2017 due largely to better targeting of electricity subsidies, and to remain within the official target range (3-5 percent). The external current account deficit is projected to rise from about 2 percent of GDP in 2016 to around 2.3 percent next year due to a pickup in fixed investment and imports.
Downside risks to Indonesia's outlook are largely external, stemming from uncertainties about policies of the next US administration under the leadership of president-elect Donald Trump, tighter global financial conditions, slower-than-expected economic growth in China, a faster pace of monetary tightening in the USA, and a renewed fall in commodity prices.
Domestic risks include a smaller fiscal buffer, reflecting tax revenue shortfalls or higher domestic interest rates due to tighter global financial conditions.
The government’s fiscal strategy - namely broadening the revenue base and raising growth-enhancing expenditures, while making them more efficient within the 3 percent of GDP fiscal deficit rule - will anchor stability and support medium-term inclusive growth. The authorities have embarked on a gradual fiscal consolidation. The revised 2016 fiscal plan that was approved by the Indonesian cabinet in August 2016 incorporates prudent revenue and spending projections, and protects government priorities. Nonetheless, weak tax revenues continue to constrain spending.
The 2017 budget rebuilds fiscal buffers by targeting a lower deficit (2.4 percent of GDP). The IMF team welcomed Indonesia's budget plans to expand the taxpayer base, improve targeting of subsidies, increase transfers to local governments, and ensure financing for public investment and social programs. The authorities plan to upgrade the main tax laws in 2017. Ongoing expenditure reviews in agriculture, health, as well as education are expected to improve spending efficiency. Implementation of these actions will strengthen the medium-term fiscal framework and contribute to growth through productivity gains and better infrastructure.
The current stance of monetary policy is appropriate. Bank Indonesia reduced policy rates in 2016 in an environment of falling inflation and easing external pressures. The implementation of Bank Indonesia’s new policy rate in August 2016 has been smooth. Given the uncertain external environment, the team welcomes the bank's recent decision to keep the policy rate unchanged, as well as its policy to allow the exchange rate and government bond yields to adjust, while reserving intervention to ensure the orderly operation of markets. Keeping this flexibility will be important to allow the economy to adjust smoothly to volatile external conditions.
Financial sector indicators reveal a well-capitalized and profitable banking sector. Non-performing loans have increased from low levels, and indicators suggest they may have peaked. Significant progress has been made with the approval of the financial crisis prevention law, and the IMF team concurred with the authorities on the importance of issuing implementing regulations expeditiously. Progress has been made with consolidated financial sector supervision and the close monitoring of corporate and financial sector developments, where pockets of vulnerabilities remain. The introduction of hedging requirements for corporate foreign currency borrowing will help mitigate these vulnerabilities.
Following the landmark 2015 fuel subsidy reform, the authorities have been implementing reforms aimed at improving the business environment, including on infrastructure, regulations, opening sectors of the economy to private investment, and a new minimum wage formula. The team agreed with the authorities on the need to continue structural reforms in these areas to support private investment and growth.
Source: IMF Communications Department