IMF Upbeat on Indonesia's Growing Economy, Consumption & Reforms
The International Monetary Fund (IMF) is optimistic about economic growth of Indonesia in the foreseeable future. In its latest report the Washington-based institution says Indonesia's solid economic policies and increased household consumption support strong growth. The stronger rupiah and low inflation have caused people's purchasing power to strengthen. This is a major positive boost for the economy as household consumption accounts for more than 55 percent of total economic growth in Southeast Asia's largest economy.
However, the IMF also emphasized that Indonesia needs more investment to sustain and accelerate the pace of economic growth over the medium term. Another concern involves the external risks. Apart from uncertainty stemming from the USA, China's re-balancing poses challenges to Indonesia's favorable outlook.
Regarding government policy, the IMF applauds the Indonesian government's eagerness to implement reforms to improve the investment climate and boost macroeconomic growth. These policies include expanding investment in public infrastructure, reducing the layers of government regulations, and opening up new areas of the economy to (foreign) private investment. The government’s strategy to strengthen tax collection and broaden the tax base through tax reform (particularly through the tax amnesty program) will also generate additional revenues to pay for priority government investment.
The IMF added that Indonesia’s youthful workforce has the potential to be a powerful economic strength. However, it requires reforms to narrow the skills gaps that exists between what employers need and what employees have. For example by expanding vocational training opportunities the government can help strengthen the economy’s future productivity.
However, existing global uncertainties are a real challenge, including the new economic and political policies under the US Donald Trump administration. Another challenge for Indonesia is China’s re-balancing. China is a key trading partner of Indonesia and therefore re-balancing or a continued economic slowdown in the world's second-largest economy will have an immediate impact on the Indonesian economy. To best adapt to this new environment, the IMF says Indonesia needs to stand ready to manage short-term risks and, at the same time, ramp up economic reforms to increase potential growth.
IMF on the Indonesian economy in 2017:
- The near-term outlook remains favorable
- Growth in 2016 is projected at 5.0 percent (y/y) and to rise modestly to 5.1 percent (y/y) in 2017
- Inflation is expected to rise from 3.2 percent (y/y) at end-2016 to around 4.5 percent (y/y) at end-2017
IMF's Policy Recommendations for Indonesia:
- Fiscal policy; continue improving the composition and efficiency of government spending and raise tax revenues through tax policy and administration reforms
- Monetary policy; maintain exchange rate flexibility and stand ready to respond to a possibly more volatile external environment
- Structural reforms; build on ongoing reforms to bolster investment and growth
Targeted Reforms:
- Expanding infrastructure
- Streamlining regulations and improving coordination between national and regional governments
- Opening new sectors to private investment
- Leveraging regional trade integration
Risks:
- External risks include uncertainties about the policies of the incoming US administration, tighter global financial conditions, spillovers from a significant China slowdown, and lower commodity prices
- Domestic risks include tax revenue shortfalls or higher domestic interest rates due to tighter global financial conditions, which could curb fiscal space
Concluding remark from IMF Mission Chief for Indonesia Luis E. Breuer: "private consumption remains the main driver of growth in Indonesia, but higher inclusive growth will require deeper structural reforms"