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IMF Executive Board Concludes 2016 Article IV Consultation with Indonesia

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
February 2017
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On January 25, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Indonesia.

Indonesia has maintained macroeconomic stability, while adjusting well to recent shifts in the external environment. A prudent mix of macroeconomic policies and the launch of structural reforms has helped the economy weather slow global growth, the commodity down-cycle, and several episodes of financial turbulence affecting emerging market economies. While growth has slowed slightly, it has remained robust. Inflation has eased and the external position has improved. A gradual fiscal consolidation has begun. There has been major progress on the financial stability framework, and gaps related to the crisis management framework are being addressed. Structural reforms that began in 2015 have improved the business environment. Positive sentiment has been reflected in supportive capital inflows in 2016, which buoyed financial markets before undergoing some corrections starting in October.

Private consumption remains the main driver of growth, but higher inclusive growth will require deeper structural reforms. Consumption growth has been underpinned by an expanding middle class, lower fuel prices, and falling inflation. Investment has remained subdued, reflecting spillovers from lower commodity prices, some excess capacity in mining and manufacturing, and structural impediments, while external demand has been weak. In staff’s views, consumption-led growth can be sustained over the medium term, but meeting the authorities’ ambitious targets for inclusive growth will require deepening structural reforms.

The near-term outlook remains favorable. Growth in 2016 is projected at 5 percent on account of robust private consumption. In 2017, growth is expected to rise modestly to 5.1 percent, led by a gradual pickup in private investment in response to stronger commodity prices, low interest rates, and a recovery in external demand on the back of a pickup in global growth and trade. Inflation is expected to rise from 3.2 percent at end-2016 to around 4.5 percent at end-2017 largely due to lower electricity subsidies and some recovery in commodity prices. The current account deficit would remain at around 2 percent of GDP next year, with the expected pickup in fixed investment and imports offset by the impact of higher commodity prices on exports.

Executive Board Assessment2

Executive Directors commended the authorities for their successful management of macroeconomic policies and progress on structural reforms, which have preserved stability amidst challenging shifts in the external environment. Directors noted that, while the economy is subject to downside risks, the outlook is positive and Indonesia is better placed today to weather an uncertain external environment than in previous years. Against that background, they encouraged the authorities to continue strengthening the medium-term policy framework through fiscal and structural reforms to support inclusive growth and preserve macro stability.

Directors welcomed the authorities’ fiscal strategy, which aims to broaden the revenue base and expand priority expenditures, while enhancing their efficiency within the statutory fiscal deficit limit. They supported the government’s short-term fiscal stance, including the start of a gradual fiscal consolidation in August 2016 focused on rebuilding fiscal buffers. Directors saw merit in tax reform measures to generate the bulk of additional revenues needed to increase spending on infrastructure, health and education, which is low compared to peer emerging market economies. They supported the authorities’ plans to pursue growth-friendly tax reforms this year, including administration reforms that would lower taxpayers’ compliance costs.

Directors considered that the current monetary policy stance is broadly appropriate and encouraged the authorities to remain vigilant to the resurgence of inflationary pressures, and to stand ready to adjust the policy stance, as needed. They welcomed reforms to improve the transmission of monetary policy and financial market deepening, which will help manage external financial volatility. Directors concurred that the external position is broadly in line with medium-term fundamentals, and that continued exchange rate flexibility and market-determined bond yields would be critical to help absorb external pressures.

Directors considered that the banking sector is broadly healthy and noted the progress made by Bank Indonesia and the financial sector supervisor, OJK, in assessing financial and corporate sector risks. They encouraged continued close monitoring of pockets of vulnerability, particularly from somewhat higher NPLs and from corporate external debt exposure. Directors welcomed the adoption of the Financial System Crisis Prevention and Mitigation (FSCPM) Law, which has strengthened the financial stability framework. They encouraged the authorities to make the law fully operational as early as possible with the issuance of relevant regulations and to ensure the continued full implementation of corporate hedging regulations.

Directors welcomed the authorities’ efforts and early successes in revamping the business climate. They encouraged further structural reforms to improve the business environment and boost private investment to support greater and more inclusive growth. In this context, Directors highlighted priority areas, such as expanding infrastructure, enhancing the regulatory framework, opening new sectors of the economy to investment, and closing labor skill gaps through improved education and a more flexible immigration regime for skilled workers.

Indonesia: Selected Economic Indicators, 2012–2017
201220132014201520162017
Est.Proj.Proj.
Real GDP (percent change)6.05.65.04.85.05.1
Domestic demand7.34.75.04.44.75.1
Of which:
Private consumption 1/5.55.55.34.85.05.1
Government consumption4.56.71.25.40.94.5
Gross fixed investment9.15.04.65.14.65.4
Change in stocks 2/0.8−0.60.4−0.50.20.0
Net exports 2/−1.50.6−0.30.90.00.1
Saving and investment (in percent of GDP)
Gross investment 3/35.133.834.634.635.035.0
Gross national saving32.430.631.532.533.033.0
Prices (12-month percent change)
Consumer prices (end period)3.78.18.43.43.24.5
Consumer prices (period average)4.06.46.46.43.54.4
Public finances (in percent of GDP)
Central government revenue15.515.114.713.112.712.5
Central government expenditure17.317.316.815.715.314.9
Of which: Energy subsidies3.63.23.21.00.80.6
Central government balance−1.8−2.2−2.1−2.6−2.7−2.4
Primary balance−0.6−1.0−0.9−1.2−1.2−0.8
Central government debt23.024.824.726.828.028.4
Money and credit (12-month percent change; end of period)
Rupiah M214.49.413.59.06.58.5
Base money14.916.711.63.03.19.0
Private sector credit22.320.011.810.35.98.8
One-month interbank rate (period average)4.45.87.57.2
Balance of payments (in billions of U.S. dollars, unless otherwise indicated)
Current account balance−24.4−29.1−27.5−17.6−18.1−19.9
In percent of GDP−2.7−3.2−3.1−2.0−2.0−2.0
Trade balance8.75.87.013.315.116.3
Of which: Oil and gas (net)−5.2−9.7−11.8−6.5−5.6−6.4
Inward direct investment19.118.821.817.114.217.5
Overall balance0.2−7.315.2−1.111.85.1
Terms of trade, percent change (excluding oil)−3.1−3.4−3.0−12.31.16.3
Gross reserves
In billions of U.S. dollars (end period)112.899.4111.9105.9117.8122.9
In months of prospective imports of goods and services6.45.98.18.18.48.3
As a percent of short-term debt 4/206177189191217231
Total external debt 5/
In billions of U.S. dollars252.4266.1293.3310.1317.3325.1
In percent of GDP27.529.132.936.134.132.3
Exchange rate
Rupiah per U.S. dollar (period average)9,37510,41411,86213,391
Rupiah per U.S. dollar (end of period)9,63812,17112,43513,788
Memorandum items:
Jakarta Stock Exchange (12-month percentage change, composite index)12.9−1.022.3−12.1
Oil production (thousands of barrels per day)860830794800820815
Nominal GDP (in trillions of rupiah)8,6169,54610,56611,54112,40113,612
Sources: Data provided by the Indonesian authorities; and IMF staff estimates and projections.

Includes NPISH consumption.

Contribution to GDP growth (percentage points).

Includes changes in stocks.

Short-term debt on a remaining maturity basis.

Public and private external debt.

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

Includes NPISH consumption.

Contribution to GDP growth (percentage points).

Includes changes in stocks.

Short-term debt on a remaining maturity basis.

Public and private external debt.

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: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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