Indonesia Needs to Work Hard to Achieve 2016 Economic Growth Target
Indonesian President Joko Widodo has formed a task force that is tasked to monitor the full implementation of Indonesia's 12 economic policy packages throughout the nation. Since September 2015 the government of Indonesia has been unveiling a series of economic policy packages that include tax incentives, deregulation as well as logistics solutions with the overall aim of boosting economic growth. However, businessmen have complained about the weak implementation of these packages. This may also explain why Indonesia's economic growth in Q1-2016 was weaker-than-expected.
In the first quarter of 2016 gross domestic product (GDP) of Indonesia expanded 4.92 percent (y/y), slightly below the 5 percent (y/y) mark that was predicted by most analysts. The positive news, however, was that the nation's economic growth had accelerated from the 4.73 percent (y/y) growth pace that was recorded in the same quarter one year earlier. Accelerating growth was mainly supported by government-led infrastructure development, while household consumption and private investment remained sluggish in Southeast Asia's largest economy. Easing consumption and sluggish investment jeopardize the achieving of the central government's 5.3 percent (y/y) economic growth target in the 2016 State Budget.
Last week, Indonesia's central bank (Bank Indonesia) announced it decided to cut its economic growth forecast for Indonesia in 2016 from the range of 5.2 - 5.6 percent (y/y) to 5.0 - 5.4 percent (y/y). This decision was made based on sluggish global economic growth, persistently low commodity prices (implying the nation's export performance remains bleak), and Indonesia's slightly disappointing Q1-2016 GDP growth figure. Bank Indonesia emphasized that household consumption (traditionally the greatest pillar of support for macroeconomic growth in Indonesia) as well as non-government investment are yet to experience a rebound.
And this is where the economic policy packages (should) come in. Although the packages include some measures that are designed to boost people's purchasing power (for example through the waiver of income tax for workers in Indonesia's labor-intensive industries; part of the seventh package), the packages particularly aim at improving the attractiveness of the investment climate for both domestic and foreign investment. As such, smoother and full implementation of the packages could spark higher non-government investment. Currently, investors are still in a wait & see-mode, particularly as Indonesia has a history of not - or only partially - fulfilling and implementing its reform policies. This is caused by the nation's severe bureaucracy, the low quality of human resources (especially in the regions), the lack of smooth cooperation and coordination between the central and regional governments, and the lack of commitment to the reform policies. It may also require the "mental revolution" that Widodo spoke about during his presidential bid in mid-2014.
Meanwhile, the controversial Tax Amnesty Bill could surely help. This bill, which still requires approval from the House of Representatives (DPR), makes it attractive for (former) tax evaders to come clean and repatriate their wealth to Indonesia. According to Indonesian Finance Minister Bambang Brodjonegoro, the Tax Amnesty Bill could bring home at least IDR 160 trillion (approx. USD $12 billion) in additional tax revenue in 2016 (a higher estimate than the Finance Ministry's earlier estimate). Brodjonegoro added that Indonesian citizens are estimated to hold a staggering IDR 11,400 trillion in unreported funds offshore (a figure that exceeds the nation's 2015 GDP).
Bank Indonesia holds a more moderate view. According to the central bank, Indonesians keep some IDR 3,148 trillion in undeclared offshore funds. Bank Indonesia Governor Agus Martowardojo previously stated that the Tax Amnesty Bill could bring back home at least IDR 560 trillion worth of funds, and IDR 53.4 trillion worth of tax revenue.
The Tax Amnesty Bill could be implemented - if agreed upon by the House of Representatives - in late July 2016. The government has been preparing several investment instruments in order to absorb the additional funds. These instruments include government/corporate bonds, bank deposit accounts and stocks.
With the full implementation of the 12 economic policy packages, the government's continued focus on infrastructure development, better government spending realization, enhanced usage of government funds at the regional level, and effective usage of additional funds that enter the country through the Tax Amnesty Bill, Indonesia's economic growth could still reach the 5.3 percent (y/y) as is targeted by the central government. However, it will be a difficult undertaking that requires extra effort.
Economic Stimulus Packages of the Indonesian Government:
| Package | Unveiled | Main Points |
| 1st | 9 September 2015 |
• Boost industrial competitiveness through deregulation • Curtail red tape • Enhance law enforcement & business certainty |
| 2nd | 30 September 2015 |
• Interest rate tax cuts for exporters • Speed up investment licensing for investment in industrial estates • Relaxation import taxes on capital goods in industrial estates & aviation |
| 3rd | 7 October 2015 |
• Cut energy tariffs for labor-intensive industries |
| 4th | 15 October 2015 |
• Fixed formula to determine increases in labor wages • Soft micro loans for >30 small & medium, export-oriented, labor-intensive businesses |
| 5th | 22 October 2015 |
• Tax incentive for asset revaluation • Scrap double taxation on real estate investment trusts • Deregulation in Islamic banking |
| 6th | 5 November 2015 |
• Tax incentives for investment in special economic zones |
| 7th | 4 December 2015 |
• Waive income tax for workers in the nation's labor-intensive industries • Free leasehold certificates for street vendors operating in 34 state-owned designated areas |
| 8th | 21 December 2015 |
• Scrap income tax for 21 categories of airplane spare parts • Incentives for the development of oil refineries by the private sector • One-map policy to harmonize the utilization of land |
| 9th | 27 January 2016 |
• Single billing system for port services conducted by SOEs • Integrate National Single Window system with 'inaportnet' system • Mandatory use of Indonesian rupiah for payments related to transportation activities • Remove price difference between private commercial and state postal services |
| 10th | 11 February 2016 |
• Removing foreign ownership cap on 35 businesses • Protecting small & medium enterprises as well as cooperatives |
| 11th | 29 March 2016 |
• Lower tax rate on property acquired by local real estate investment trusts • Harmonization of customs checks at ports (to curtail dwell time) • Government subsidizes loans for export-oriented small & medium enterprises • Roadmap for the pharmaceutical industry |
| 12th | 28 April 2016 |
• Enhancing the ease of doing business in Indonesia by cutting procedures, permits and costs |