IMF Executive Board Concludes 2020 Article IV Consultation with Indonesia

March 2, 2021

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the 2020 Article IV consultation [1] with Indonesia.

The Indonesian economy is gradually recovering, owing in part to a bold, comprehensive, and coordinated policy response to address the socio-economic hardship inflicted by the COVID‑19 pandemic in the first half of 2020. Real GDP increased by 3.2 percent in 2020:Q3 (q/q, s.a.) and is expected to have contracted by a modest 1.9 percent in 2020 as a whole. Headline inflation reached 1.7 percent (y/y) at end‑2020, below the Bank Indonesia’s target band (3±1 percent), partly due to a strong harvest leading to lower food prices. The current account deficit is expected to have narrowed to 0.5 percent of GDP in 2020, mostly due to a relatively sharper contraction of imports.

The outlook is positive. Real GDP is projected to expand by 4.8 percent in 2021 and 6 percent in 2022, led by strong policy support measures, including increased public investment and COVID‑19 vaccine distribution plans, as well as improved global economic and financial conditions. Inflation is projected to rise gradually to 3 percent (y/y) at end‑2021. The current account deficit is projected to widen to 1.5 percent of GDP in 2021, reflecting higher imports driven by economic recovery. Credit growth is expected to pick up in 2021 with stronger activity, albeit remaining below nominal GDP growth due to increased risks to asset quality and bank profitability. The uncertainty surrounding the growth outlook is nevertheless larger than usual. Early widespread vaccination is an upside risk, while delays could lead to a more protracted pandemic, a downside risk. The macro-financial fallout of the pandemic and economic downturn could be larger-than-expected, and credit conditions could be slow to improve.

Executive Board Assessment [2]

Executive Directors commended the authorities’ containment measures and supportive macroeconomic policies, which have been instrumental in cushioning the economic impact of the pandemic. They noted that Indonesia’s strong fundamentals and prudent macroeconomic policy track record have contributed to its economy’s resilience.

Directors noted that supportive monetary and fiscal policies along with the envisaged increase in public investment should help foster economic recovery. They observed that risks to the outlook are tilted to the downside, mainly due to domestic and global uncertainties associated with the pandemic. Early completion of a widespread vaccination program, however, is an upside risk, and Directors were encouraged by the recent increase in the funding for the health policy response to the pandemic. They observed that Indonesia has the macroeconomic policy space to provide additional support if downside risks materialize. They welcomed the measures to foster transparency and ensure the effectiveness of pandemic-related spending.

Directors commended the authorities’ commitment to return to the statutory budget deficit ceiling by 2023, noting the importance of unwinding the exceptional measures in a balanced manner. They stressed the need to underpin the fiscal rules with a medium-term fiscal strategy that includes revenue measures. Higher government revenues would help create space to boost development spending and support sustainable and inclusive growth. Capacity building support will be crucial.

Directors agreed that maintaining an accommodative monetary policy stance, contingent on the inflation outlook, is appropriate. They noted the authorities’ strategy of pursuing monetary accommodation through a combination of lower policy interest rates and government bond purchases by Bank Indonesia in the current exceptional circumstances. To balance the benefits and risks of temporary monetary budget financing, they welcomed Bank Indonesia’s plan to conduct bond purchases in 2021 only as a last resort under the market mechanism. They suggested that clarifying the last-resort criteria would help enhance the monetary policy framework and safeguard Bank Indonesia’s operational independence. Directors also noted the role of exchange rate flexibility in absorbing shocks.

Directors noted that the banking system remains stable, but continued monitoring on bank asset quality is warranted. They emphasized that proactive loan loss provisioning will be critical for banks’ ability to weather any deterioration in asset quality. They noted that additional targeted policy steps to revive credit might be necessary if bank lending to the private sector does not rebound. Directors also highlighted the importance to continue upgrading crisis management and resolution frameworks.

Directors welcomed the authorities’ push for structural reforms with the omnibus bill on job creation, as well as their plans to close infrastructure gaps. They encouraged the authorities to sustain the reform momentum, with a focus on developing a medium-term government revenue strategy, financial deepening and digitalization, and fostering a greener economy and tackling challenges related to climate change.


Indonesia: Selected Economic Indicators

2016

2017

2018

2019

2020 1/

2021

Est.

Proj.

Real GDP (percent change)

5.0

5.1

5.2

5.0

-1.9

4.8

Domestic demand

4.6

5.0

6.1

4.0

-2.8

5.1

Of which:

Private consumption 2/

5.0

5.0

5.0

5.2

-2.5

5.0

Government consumption

-0.1

2.1

4.8

3.2

6.0

5.0

Gross fixed investment

4.5

6.2

7.9

4.4

-4.7

4.5

Change in stocks 3/

0.2

-0.1

0.4

-0.6

-0.3

0.3

Net exports 3/

0.1

0.3

-1.2

1.4

0.8

-0.1

Saving and investment (in percent of GDP)

Gross investment 4/

33.9

33.7

34.6

33.8

32.5

32.7

Gross national saving

32.0

32.1

31.6

31.1

32.0

31.2

Prices (12-month percent change)

Consumer prices (end period)

3.0

3.6

3.2

2.6

1.7

3.0

Consumer prices (period average)

3.5

3.8

3.3

2.8

2.0

2.0

Public finances (in percent of GDP)

General government revenue

14.3

14.1

14.9

14.2

12.1

12.1

General government expenditure

16.8

16.6

16.6

16.4

17.8

18.0

Of which : Energy subsidies

0.9

0.7

1.0

0.9

0.7

0.6

General government balance

-2.5

-2.5

-1.8

-2.2

-5.7

-5.9

Primary balance

-1.0

-0.9

0.0

-0.5

-3.7

-4.0

General government debt

28.0

29.4

30.4

30.6

35.7

40.1

Money and credit (12-month percent change; end of period)

Rupiah M2

10.0

8.3

6.3

6.5

11.5

7.0

Base money

3.9

8.9

0.2

2.9

-6.5

7.0

Claims on private sector

7.7

7.2

10.3

5.8

-0.5

5.6

One-month interbank rate (period average)

6.5

5.6

6.2

6.4

4.5

…

Balance of payments (in billions of U.S. dollars, unless otherwise indicated)

Current account balance

-17.0

-16.2

-30.6

-30.4

-5.5

-17.4

In percent of GDP

-1.8

-1.6

-2.9

-2.7

-0.5

-1.5

Trade balance

15.3

18.8

-0.2

3.5

23.4

20.3

Of which : Oil and gas (net)

-4.8

-7.3

-11.4

-10.3

-9.2

-8.7

Inward direct investment

3.9

20.6

20.6

23.5

13.6

18.8

Overall balance

12.1

11.6

-7.1

4.7

6.7

16.4

Terms of trade, percent change (excluding oil)

0.4

1.3

0.4

-2.7

-5.4

1.7

Gross reserves

In billions of U.S. dollars (end period)

116.4

130.2

120.7

129.2

135.9

152.3

In months of prospective imports of goods and services

7.6

7.1

7.1

9.9

7.9

8.1

As a percent of short-term debt 5/

213

237

201

204

207

217

Total external debt 6/

In billions of U.S. dollars

320.0

352.5

375.4

403.5

416.6

446.9

In percent of GDP

34.3

34.7

36.0

36.1

38.3

38.5

Exchange rate

Rupiah per U.S. dollar (period average)

13,306

13,383

14,231

14,140

14,541

…

Rupiah per U.S. dollar (end of period)

13,473

13,568

14,390

13,866

14,050

…

Memorandum items:

Jakarta Stock Exchange (12-month percentage change, composite index)

15.3

20.0

-2.5

1.7

-5.1

…

Oil production (thousands of barrels per day)

820

815

810

805

710

707

Nominal GDP (in trillions of rupiah)

12,402

13,590

14,838

15,834

15,841

16,939

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

1/ Based on data as of January 29, 2021 and does not include the national accounts data for 2020:Q4 released on February 5, 2021. The actual real GDP growth rate in 2020 was -2.1 percent.

2/ Includes NPISH consumption.

3/ Contribution to GDP growth (percentage points).

4/ Includes changes in stocks.

5/ Short-term debt on a remaining maturity basis.

6/ Public and private external debt.


[1] 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.

[2] 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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