Statement by Alisara Mahasandana, Executive Director for Indonesia; Keng Heng Tan, Alternative Executive Director; Muslimin Anwar, Senior Advisor to Executive Director; and Dian Susiandri, Advisor to Executive Director July 3, 2019

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Indonesia


2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Indonesia

On behalf of the Indonesian authorities, we would like to thank the IMF mission team for the comprehensive and constructive policy dialogue during the 2019 Article IV consultation. The consultation has provided valuable venues to discuss the many progress of home-grown policies as well as reforms that Indonesia is currently undertaking. We appreciate staff’s effort to understand the domestic economy and country specific challenges as well as authorities’ policies and objectives. The authorities are encouraged by staff’s acknowledgement of Indonesia’s solid macroeconomic performance as well as favorable outlook. Accordingly, the authorities broadly concur with the thrust of staff’s appraisal with an important caveat on key recommendations, namely on macroprudential policy.

Recent Economic Development and Outlook

The authorities’ policy mix has successfully preserved macroeconomic stability and maintained growth momentum amidst rising global uncertainty in 2018. Economic growth gradually improved to 5.2% in 2018, with macroeconomic and financial stability intact as indicated by low and contained inflation and well-maintained financial system stability. External stability remained solid supported by the flexible exchange rates as an important shock absorber of the economy. Appropriate policy mix was implemented last year to strengthen macroeconomic stability, particularly the external stability, while preserving economic growth momentum.

Going forward, the outlook remains buoyant with economic growth expected to improve gradually in the medium term, as growth rate is seen to be slightly higher than staff’s estimates. This favorable outlook benefitted in large from the structural reform efforts, which have started to bear fruit in terms of improved productivity. For 2019, the authorities projected economic growth to be within the range of 5.0–5.4% and will continue to grow further to 5.5–6.1% in the medium term. Inflation is forecasted to be below the midpoint of the 3.5%±1% target corridor in 2019, in line with well anchored inflation expectations. The current account deficit is expected to narrow due to various measures to curb imports and to promote exports. The authorities will continue to monitor global economic developments while assessing their policy mix.

Fiscal and Structural Reforms

In 2018, the authorities remain committed to maintaining fiscal sustainability, by ensuring that the primary balance and the budget deficit were below state budget target of -0.6% and 2.2% of GDP respectively. During the period of heightened global uncertainty, the authorities’ policy consideration was mainly focused on ensuring fiscal sustainability to maintain economic stability. The primary balance and the budget deficit in 2018 were smaller than the target at -0.08% and 1.8% of GDP, respectively. This has enabled the Government to maintain the official debt level at 29.8% of GDP, far below the legal threshold of 60% of GDP. Going forward, the policy thrust will be to preserve fiscal sustainability while supporting economic growth. Overall, the authorities agreed on the merits of a broadly neutral fiscal stance. The Government has set the target for primary balance and budget deficit in 2019 to be -0.12% and 1.84% of GDP, respectively.

The authorities concur with staff that revenue mobilization should be a top fiscal reform priority to build the fiscal buffers. In this vein, the comprehensive tax reform has been focused on improving tax administration, streamlining tax structures, broadening the tax base, and increasing compliance in order to increase fiscal buffer. The authorities supports the improvement of tax revenue mobilization through integrated and up-to-date data and information utilization, international tax treaty optimization, and the effectiveness of Automatic Exchange of Information implementation. The authorities have also been simplifying tax structures as a part of a tax reform plan and reviewing the income tax and value-added tax law.1 They will also lessen the complexity of the current tax system, including to review tax exemptions to ensure the effectiveness. To this end, the authorities would welcome the IMF’s support to enhance the current draft amendment of the income tax law.

On the expenditure side, the authorities will maintain their efforts to further improve the quality of public spending. This includes refocusing priority spending on infrastructure, ensuring efficiency in spending, as well as implementing better-targeted subsidies and more effective social protection programs. In this view, the Government implemented several short-term measures to stimulate the economy, while keeping long-term measures to boost the productivity including through human capital quality improvement. To this end, the authorities welcome the IMF’s expertise to improve government capital expenditure strategy through technical assistance and capacity development. The authorities remain committed to energy subsidy reform, and will ensure that the economy can adjust smoothly. Gradual implementation of subsidy reform will be complemented by targeted measures for the vulnerable groups.

The authorities will also continue to pursue structural reforms to achieve sustainable and inclusive growth. Expanding infrastructures investment, improving the business climate, and promoting financial market deepening are some of the noteworthy actions. In order to maintain a healthy investment climate, the authorities commit to maintain market confidence. The authorities’ steadfast implementation of the structural reform agenda as well as consistent performance in terms of macroeconomic stability have been recognized by the credit rating agencies. S&P has upgraded Indonesia’s rating to BBB from BBB- with a stable outlook in May 2019. Therefore, Indonesia’s sovereign ratings from all of the three major rating agencies, S&P, Moody’s, and Fitch, are currently one notch above minimum investment grade level.

Authorities agree that maintaining market confidence is crucial in the period of global uncertaity. While financial market deepening is a strategic policy for strengthening economic resilience, the fact that most of export proceed never return to or stays in Indonesia has hampered financial deepening process and impacted domestic financial market. As a natural resource base economy, the repatriation of natural resource export proceed to Indonesia is very important for the economy to address the structural issues related to economic development.

Monetary and Exchange Rate Policy

Monetary policy has focused on maintaining macroeconomic stability amidst heightened global uncertainty. In this regard, the central bank employed various policy instruments, including monetary policy rate, exchange rate flexibility, and foreign exchange intervention to meet its objectives.

In 2018, Bank Indonesia (BI) pursued a preemptive, front-loading, and ahead-of-the-curve policy by raising the policy rate by 175 bps to weather risks posed by interest rate hike in the US and other emerging markets, as well as uncertainty in global financial markets.2 Looking ahead, BI concurs with staff’s suggestion to cautiously consider the room for accommodative monetary policy to help stimulate domestic economy while ensuring inflation remains on target. Nevertheless, BI remains mindful of the global financial market dynamics and external stability and will undertake a comprehensive assessment of the policy direction to avoid adverse effects to macroeconomic and financial stability.

The authorities affirmed their commitment to allow exchange rate flexibility to serve as a shock absorber. In this context, intervention in the FX market will be limited to curbing excessive volatility. On the IMF’s advice to publish the Forex Intervention (FXI) data, BI views that this requires prerequisite conditions to be met such as the existence of a deep, efficient and market driven foreign exchange market. BI will reconsider the publication of the FXI data once these preconditions are fulfilled.

BI continues to enhance its monetary operation strategy to maintain adequate liquidity in the money market and banking sector, especially during periods of high market volatility. In this light, BI increased the auction frequency of government securities reverse repo, reactivated the BI Certificate auctions, conducted forex swap auctions, and increased the portion of average statutory reserve requirement.3 The implementation of reserve requirement (RR) averaging is aimed at giving more flexibility to banks in managing their liquidity, which can reduce the volatility of the interbank money market and strengthen the monetary policy transmission mechanism. The authorities took note of staff’s recommendation on expanding the coverage of the averaging portion to all portions of the RR. BI will consider staff’s advice when reviewing the effectiveness of RR averaging.

External Sector

In 2018, the heightened global uncertainties posed increasing risk on external stability. This unfavorable condition adversely affected BoP performance, adding pressure to the rupiah, particularly during the second and third quarter of 2018. The policy mix executed by the authorities helped restore Indonesia’s external stability. The current account deficit was kept at 2.98% of GDP for the whole 2018, despite widening to 3.6% of GDP in the fourth quarter. The current account deficit then narrowed to 2.6% of GDP in the first quarter of 2019. The improving trend of capital inflows by non-residents in the fourth quarter of 2018 and first quarter of 2019, together with the narrowing current account deficit in the first quarter of 2019, had a positive effect on external sector balance. The BoP eventually returned to surplus in the fourth quarter of 2018 and first quarter of 2019. External stability was further bolstered by adequate reserve assets to cover imports and to service government external debt, well above the international reserve adequacy standard of three months of imports.

Reiterating previous Article IV consultation, authorities view the estimated CA norm resulting from EBA model to be too low and does not adequately reflect Indonesia’s need for higher investment and structural reforms. We encourage staff to consider how to better incorporate country-specific factors in the assessment of the current account norm, in particular the substantial infrastructure investment needs and critical structural reforms that the country is undertaking to promote sustainable growth.

External debt remained sustainable, including private debt. The authorities believe this favorable environment was backed by the prudential regulations on external borrowings. The corporate sector external debt regulation was aimed at ensuring macroeconomic and financial stability through the implementation of prudential principles on corporate foreign borrowings.4 The authorities will review regularly the appropriateness of this regulation in supporting external stability.

Going forward, external stability is projected to improve. The current account deficit is predicted to ease, supported by close coordination between BI and the Government to address the issue, including through various measures to curb excessive import and to promote export. The current account deficit is projected at about 2.5–3.0 % of GDP in 2019 and will decline further in the medium-term. The capital and financial account surplus is also set to improve, exceeding the level achieved in 2018, bolstered mainly by higher inflows of FDI, improvements in the business climate, and a solid domestic economy outlook.

Macroprudential and Financial Sector Policy

Macroprudential policy will continue to safeguard financial system stability and mitigate systemic risk. Nevertheless, in the event that the financial cycle is below the long-term trend, macroprudential policy can be calibrated to support a more balanced growth of credit. The current accommodative macroprudential policy has helped boost bank lending growth. Meanwhile, financial system stability continues to be maintained by a well-capitalized banking sector. Going forward, the authorities view that there is room to maintain current accomodative macroprudential policy, while remaining vigilant to ensure financial system stability.

Financial system stability was maintained, underpinned by a robust banking capital position and adequate liquidity, as well as improvement in corporate financing. At the end of 2018, the capital adequacy ratio (CAR) and the liquid assets to deposits ratio stood at 22.9% and 19.3%, respectively. Credit growth was at 11.8%, while credit risk was kept within prudent limits as reflected in the low NPL ratios of 2.4% (gross) and 1.0% (net), both of which were within the 5% sound territory. Improvement also took place in non-bank financing. Total issuance of shares (IPOs and rights issues), corporate bonds, medium-term notes and negotiable certificate of deposits (NCDs), all representing various forms of financing from the capital market, were recorded at IDR168.1 trillion (gross). This points to an improvement in corporate financing from domestic sources, including from both banks and the capital market.

The authorities have made encouraging progress in harnessing the benefits and opportunities of rapid advances in the digital economy which have transformed the economic and financial landscape, while at the same time managing emerging risks. In this context, authorities have outlined a vision of Indonesia’s Payment System (IPS) 2025 as well as an initiative for a new payment system blueprint to ensure that the current trend of digitalization develops within a conducive digital economic and financial ecosystem, along the lines of Bali Fintech Agenda.

Financial Market Deepening (FMD)

In 2018, the FMD policy was focused on improving the efficiency of money and forex markets to lay the foundation for promoting long-term economic financing. BI has taken several actions by introducing domestic non-deliverable forward (DNDF) transaction, developing market for call spread options (CSOs), establishing Indonesia Overnight Index Average (IndONIA) as a benchmark rate on the Rupiah money market and as a reference rate for Overnight Index Swap (OIS), as well as strengthening the Jakarta Interbank Offered Rate (JIBOR). BI, MoF, and OJK have also developed more innovative financing schemes to finance infrastructure development in Indonesia, including public-private partnerships (PPP), project bonds, infrastructure funds, asset and earning backed securities as well as blended finance. After successfully launching the SDG One Blended Finance roadmap at the IMF-World Bank Annual Meetings in Bali, the Indonesian government also released the first Green Sukuk bond at the beginning of this year. This represents Indonesia’s tangible and avowed commitment to environmental infrastructure development.

The authorities also strengthened coordination to speed up financial market deepening. To that end, BI, the MoF, OJK have established the Coordination Forum on Development Financing by means of Financial Market.5 The Coordination Forum was mandated to formulate a National Financial Market Development and Deepening Strategy as a comprehensive and measurable single policy framework oriented towards realizing the vision of creating deep, liquid, efficient, inclusive and secure financial markets.6 The authorities have introduced a national blue print to accelerate the pace of financial market deepening. The authorities have also been working on legal upgrade to align and strengthen the mandate of BI, OJK, and Indonesia Deposit Insurance Corporation (LPS) going forward in order to pursue financial deepening objectives.


Indonesia’s economy continues to perform well, underpinned by sound macroeconomic policy aimed at maintaining macroeconomic stability while also promoting higher potential growth. The authorities’ policy-mix has successfully preserved macroeconomic stability and maintained the growth momentum amidst rising global uncertainty in 2018. The central bank policies were brought into synergy with the Government’s fiscal and structural reform policies. Fiscal policy was aimed to preserve fiscal sustainability outlook, while also providing room to promote economic growth. These policies were further supported by the acceleration of structural reforms efforts. Going forward, the authorities remain committed to maintain economic stability as well as to step up structural reforms to achieve strong, sustainable, balanced and inclusive economic growth.


The income tax and value added tax are known as PPh and PPN respectively.


The preemptive increases in the policy rate, namely BI 7-Day Reverse Repo Rate (BI7DRR), were linked to the forward-looking, anticipatory response of Bank Indonesia to the risk of increases in the Federal Funds Rate (FFR) and uncertainty on global financial markets. The front-loading response meant that the magnitude of the increase in the Indonesian policy rate had considered the possible extent of an increase in the FFR, so that the interest rate differential would remain sufficiently large to maintain the attractiveness of domestic assets. Alongside this, the ahead-of-the-curve response was related to the fact that the magnitude of Indonesia’s policy rate increases would also anticipate interest rate increases in other emerging markets so that the domestic financial market would remain competitive.


The government securities reverse repo and the BI Certificate are also called RR-SBN and SBI respectively.


This regulation is also known as KPPK.


This forum is also called FK-PPK.


The National Financial Market Development and Deepening Strategy is also known as SN-PPPK.