Vendor sells hats in downtown market in Jakarta, Indonesia. Private consumption is a large driver of economic growth for the country, says IMF (photo: Bagus Indahono/EPA/Newscom)

Vendor sells hats in downtown market in Jakarta, Indonesia. Private consumption is a large driver of economic growth for the country, says IMF (photo: Bagus Indahono/EPA/Newscom)

Indonesia: Resilient Economy Can Benefit from Stronger Reforms

February 3, 2017

  • Indonesia’s growth at 5 percent highest in large emerging market economies in 2016
  • External risks, like China’s rebalancing, pose challenges to favorable outlook
  • Government to continue with reforms to boost investment, growth

Indonesia’s economy continues to register strong growth, thanks in large part to solid economic policies and increased household consumption, says the IMF in its latest report. The country’s growth at 5 percent for 2016—up from 4.8 percent in 2015—remains among the highest in large emerging market economies.

Household consumption—one of the main drivers of growth for Indonesia—is strengthening due to people's improving purchasing power amid low inflation and a stronger rupiah. Still, while strong household consumption should continue to support growth, Indonesia needs more investment to sustain and even accelerate the pace over the medium term.

Continuing with reforms

The government has already started to implement reforms to improve the investment climate and boost growth. These include expanding investment in public infrastructure, reducing the layers of government regulations, and opening up new areas of the economy to private investment. The government’s strategy to strengthen tax collection and broaden the tax base through tax reform will also generate additional revenues to pay for priority government investment.

Indonesia’s youthful workforce has the potential to be one of the country’s most powerful economic levers. Reforms that can help narrow the skills gaps between what employers need and what employees have—such as expanding vocational training opportunities—can help strengthen the economy’s productivity.

Current shifts in the global economy

Indonesia’s positive economic outlook, however, is challenged by global uncertainties, including around policies from the new United States administration, and the possible impact from China’s rebalancing and expected economic slowdown. To best adapt to this new environment, the country needs to stand ready to manage short-term risks and, at the same time, ramp up economic reforms to increase potential growth.

Indonesia Article IV Report Infographic

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