Journal Issue

IMF Executive Board Concludes 2012 Article IV Consultation with Indonesia

International Monetary Fund
Published Date:
September 2012
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On September 7, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Indonesia.1


Indonesia’s economic performance remains strong. At 6.5 percent, growth in 2011 was the highest in over a decade. Growth is now easing modestly on account of the weakened external environment, offset partly by continuing strong domestic demand. Exports have declined in volume terms so far in 2012, while import growth has accelerated sharply on account of strong investment, which grew at 20 percent (Q2, year-on-year). Robust private consumption and a wider fiscal deficit have also provided some support to growth this year. With external demand expected to remain weak and inventories, which have built up significantly in recent months, expected to level out, economic growth is projected at 6 percent for 2012 before it picks up again in 2013.

Headline CPI inflation bottomed out at 3.7 percent (year-on-year) in January, but with sequential momentum strong for both core and noncore items, it rose to 4.6 percent in July. Inflation is expected to end the year at 5 percent, within the authorities’ target range of 4.5±1 percent. The fiscal stance is expected to continue to provide a moderate stimulus, with the 2012 deficit projected to rise to 1.8 percent of GDP, up from 1.1 percent in 2011. An increase in subsidized energy prices, proposed by the government for this year in April, was put off by parliament, unless oil prices exceed a revised higher threshold. The postponement of the price adjustment will boost energy subsidies to 3.5 percent of GDP, compared with the 2.6 percent of GDP in total allocated to all of development spending.

Both the rupiah and equity markets came under pressure during the spring of 2012 when outflows picked up sharply, compounding pressures on the exchange rate from the weakening current account. Bank Indonesia (BI) initially resisted market pressures, which contributed to illiquidity in the foreign exchange market, with onshore/offshore spreads widening sharply in early May. Market conditions improved subsequently after BI increased its sales of foreign exchange, while also allowing the rupiah to depreciate at a faster rate. The current account is expected to record a deficit of 1.9 percent of GDP this year, funded mostly by strong foreign direct investment inflows.

Despite some tightening of liquidity conditions and the imposition of prudential limits on consumer and property lending in recent months, financial conditions remain accommodative. As global conditions deteriorated and domestic inflation slowed during August 2011– February 2012, BI eased monetary policy. Since May, unsterilized sales of foreign exchange have helped absorb some excess liquidity, money market rates have risen 30-50 basis points (bps), and BI has increased the lower bound of its interest rate policy corridor by 25 bps. However, liquidity remains high in historical comparison and credit growth (26 percent year-on-year) continues at a robust pace.

Banking system asset quality remains satisfactory and banks are profitable and well capitalized. The authorities have taken several important steps recently to strengthen financial stability. These include: (i) the establishment of a Financial Services Authority that will be fully operational by end-2014; (ii) establishment of a high level forum for coordinating financial stability; and (iii) finalization of a Memorandum of Understanding among all entities currently responsible for financial stability. However, the passage of an effective financial system safety net legislation remains outstanding.

Executive Board Assessment

Executive Directors commended the authorities for their sound economic management, which has helped Indonesia maintain a strong economic performance despite a challenging global environment. Directors noted that, although downside risks remain elevated, the economy’s sound fundamentals and ample buffers would allow counter cyclical policy responses, if needed.

Directors noted that, while inflation is within the target band, excess bank liquidity and rapid credit growth warrant continued vigilance and a tightening bias for monetary policy. More broadly, they welcomed the ongoing review of the monetary policy framework, and encouraged the authorities to strengthen their communications strategy to send clearer signals to financial markets and better inform market expectations.

Directors commended the soundness and resilience of the financial system, noting that banks are well capitalized and profitable. They welcomed various initiatives underway to bolster financial regulation and oversight, and recommended careful implementation to minimize transitional risks. They also encouraged the authorities to move quickly to address the remaining gaps in the regime against money laundering and terrorism financing.

Executive Directors welcomed the authorities’ commitment to exchange rate flexibility. They underscored that official intervention in the foreign exchange market should take place in the context of a well defined strategy to limit short run volatility. Further development of domestic capital markets would also aid the intermediation of capital flows, reducing volatility. Directors took note of the staff’s assessment that the exchange rate is moderately under valued.

Directors commended the authorities’ prudent fiscal policies grounded on a strong fiscal framework that has led to a build up of fiscal buffers and a decline in the public debt. They generally considered the modest fiscal stimulus in 2012 to be appropriate in the face of headwinds to growth from the external environment. Directors encouraged the authorities to further advance with fiscal reforms, highlighting the need to improve budget execution, re orient government spending toward the social sectors and infrastructure, replace energy subsidies with targeted cash transfers to the vulnerable, and boost revenue collections.

Directors agreed that deeper structural reforms hold the key to sustained, broad based economic growth. In particular, an open foreign trade and investment regime will be crucial, and should be balanced carefully against domestic industrial policy considerations. In this context, Directors encouraged the authorities to push ahead with reforms to increase Indonesia’s productivity and competitiveness. These would include more investment in human capital, a reduction in the cost of doing business, deepening of financial markets, and labor market reforms. Infrastructure and supply bottlenecks also need to be addressed.

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2012 Article IV Consultation with Indonesia is also available.

Indonesia: Selected Economic Indicators


Real GDP (percent change)
Domestic demand7.
Of which:
Private consumption5.
Gross fixed investment11.
Change in stocks 1/0.1-
Net exports 1/
Saving and investment (in percent of GDP)
Gross investment 2/27.831.032.632.834.235.2
Gross national saving27.833.033.333.032.333.3
Foreign saving (external current account balance)0.0-2.0-0.7-
Prices (12-month percent change)
Consumer prices (end period)
Consumer prices (period average)
Public finances (in percent of GDP)
Central government revenue19.815.115.816.116.316.0
Central government expenditure19.916.716.417.318.117.7
Central government balance-0.1-1.6-0.6-1.1-1.8-1.8
Primary balance1.
Central government debt33.228.626.924.523.521.5
Money and credit (12-month percent change; end of period)
Rupiah M212.713.816.517.4
Base money-9.216.728.918.3
Private sector credit30.
One-month interbank rate (period average)
Balance of payments (in billions of U.S. dollars)
Oil and gas (net)-23.9-15.2-25.4-38.7-41.2-40.7
Non-oil exports (f.o.b)107.999.0129.4162.7159.6167.2
Non-oil imports (f.o.b)-92.8-73.5-102.0-127.9-143.5-154.6
Current account balance0.
Foreign direct investment9.34.913.818.921.421.5
Overall balance-1.914.230.313.8-2.22.5
Gross reserves
In billions of U.S. dollars (end period)51.666.196.2110.1107.8110.3
In months of imports5.
As a percent of short-term debt 3/178.5211.0226.5238.4225.7217.2
Total external debt
In billions of U.S. dollars155.1172.9202.4225.4233.2247.9
In percent of GDP30.432.128.626.625.723.9
Exchange rate (period average)
Rupiah per U.S. dollar9,69710,4069,0868,774
Nominal effective exchange rate (2005=100)90.886.695.293.5
Memorandum items:
Oil production (thousands of barrels per day)976949945907895890
Indonesian oil price (US$/bbl)97.061.679.4111.5107.2101.5
Nominal GDP (in trillions of rupiah)4,9495,6066,4367,4278,4699,745
Nominal GDP (in billions of U.S. dollars)5105397088469061,036
Sources: Data provided by the Indonesian authorities; and IMF staff estimates.

Contribution to GDP growth (percentage points).

Includes changes in stocks.

Short-term debt on a remaining maturity basis.

Sources: Data provided by the Indonesian authorities; and IMF staff estimates.

Contribution to GDP growth (percentage points).

Includes changes in stocks.

Short-term debt on a remaining maturity basis.

Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:

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