The Indonesian Economy: Several Remarks by the IMF Team
The International Monetary Fund (IMF) released several preliminary statements related to the latest visit of a IMF team, led by Luis E. Breuer, to Indonesia (the visit took place between 1 - 14 November 2017). Overall, the team sees the continuation of good economic growth in Indonesia, supported by prudent macroeconomic policies, improved global GDP growth and rising commodity prices, as well as sustained efforts to strengthen the nation's competitiveness.
Economic growth in Indonesia is projected (by the team) to expand at a pace of 5.1 percent year-on-year (y/y) in 2017, followed by a 5.3 percent (y/y) pace in 2018. Accelerating economic growth is supported by improving exports and investment. In fact, the team said that global economic growth and recovering commodity prices could actually be stronger than expected.
Meanwhile, domestic demand, which has been relatively subdued, is projected to improve modestly along with accelerating credit growth. The IMF team also believes that Indonesia's inflation rate will remain low (for Indonesian standards that is) at 3.7 percent (y/y) in 2017 and 3.6 percent (y/y) in 2018, due to broadly stable food and administered prices, and a slightly negative output gap.
The current account deficit of Indonesia is expected to remain under control at 1.7 percent of gross domestic product (GDP) in 2017 and 1.9 percent of GDP in 2018, with the overall balance of payments remaining in surplus.
So far, a positive picture. However, the IMF team also detects some risks, mainly external ones. These external risks include a reversal in capital inflows, slower economic growth in China, and geopolitical tensions.
Domestic risks include tax revenue shortfalls and tighter global financial conditions that could push up domestic interest rates.
Regarding medium term growth, the team believes that boosting inclusive growth and unleashing the economy's potential to address the employment needs of a young labor force will require revenue-enhancing reforms to finance development spending and continued reforms to the product, labor, and financial markets.
There is a critical need to implement a medium-term revenue strategy that centers on early tax policy reforms and improved tax administration to strengthen the business environment. Given limited fiscal space, immediate reform priority could be given to structural reforms with low fiscal costs, such as reforming product markets to encourage higher private investment, further streamlining and harmonizing complex regulations and improving coordination with local governments, and fostering financial deepening with a sound oversight framework.
Lastly, the IMF team says Indonesian authorities have made progress in the framework for public infrastructure investment. These efforts should be strengthened by closer integration of public investment to the macroeconomic program to better monitor potential risks, including from the buildup of leverage by state-owned enterprises (SOEs). Greater private sector participation and adequate cost-recovery policies in SOEs, including in the electricity sector, would support the authorities' intention to close the infrastructure gap.