IMF Says Indonesian GDP to Expand 5.3% in 2018

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November 14, 2017/IMF

  • The Indonesian economy continues to perform well, with GDP projected to expand by 5.1 percent in 2017 and 5.3 percent in 2018.
  • In the near term, policies should focus on promoting growth while preserving stability. Monetary policy should focus on price stability and supporting growth, while fiscal policy should rebuild buffers to protect stability.
  • Boosting medium-term growth requires revenue-enhancing tax reforms to finance development spending, and reforms in the product, labor, and financial markets.

An International Monetary Fund (IMF) team led by Mr. Luis E. Breuer visited Indonesia from November 1 to 14, 2017, to conduct the discussions for the 2017 Article IV Consultation. At the conclusion of the visit, Mr. Breuer issued the following statement:

“The Indonesian economy continues to perform well, supported by prudent macroeconomic policies, improved global growth and commodity prices, and sustained efforts to strengthen competitiveness.

“Growth is projected at 5.1 percent in 2017 and 5.3 percent in 2018, led mainly by higher exports and investment. Domestic demand, which has been relatively subdued, is expected to rise modestly along with credit growth. End-year inflation is projected to remain low at 3.7 percent in 2017 and 3.6 percent in 2018, due to broadly stable food and administered prices, and a slightly negative output gap. The current account deficit is expected to remain contained at 1.7 percent of GDP in 2017 and 1.9 percent in 2018, with the overall balance of payments remaining in surplus.

“Notwithstanding this positive outlook, the balance of risks is on the downside and mainly external. They include a reversal in capital inflows, slower growth in China, and geopolitical tensions. Domestic risks include tax revenue shortfalls and tighter global financial conditions that could push up domestic interest rates. On the upside, the global growth and commodity prices could be stronger than expected.

“The near-term policy mix should balance the objectives of supporting growth while at the same time maintaining stability. 

“Fiscal policy is appropriately geared towards rebuilding fiscal buffers by targeting a lower budget deficit in 2018. The budget also incorporates continued actions to rebalance the budget away from untargeted subsidies and other unproductive spending toward social spending and investment. These actions, combined with the authorities’ efforts to support structural reforms, will enhance confidence and higher inclusive growth.

“Monetary policy should continue to maintain price stability while supporting growth. The current monetary stance is broadly appropriate. Monetary transmission has improved, although further progress can be achieved, including by completing a risk-free yield curve. The authorities should continue to allow the exchange rate to move freely in line with market forces.

“Financial policies should remain focused on safeguarding financial stability. The banking system is well capitalized, profitability is high, and system-wide liquidity remains ample. Non-performing loans have stabilized but special-mention loans and restructured loans remain elevated and require close monitoring. Efforts should continue to enhance financial oversight and crisis management in line with key recommendations of the 2017 Financial Sector Assessment Program.

“Boosting inclusive growth over the medium term 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.

“The 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.”

The team exchanged views with officials in the government, Bank Indonesia, Financial Services Authority (OJK), other public agencies and representatives of the private sector. The team wishes to express its gratitude to the authorities and counterparts for their hospitality and constructive discussions.

opan



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