## 1. Indonesia’s Demographic Dividend: Opportunities and Challenges

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### Context and demographic challenge
- Working age population growth: 1.6 percent or 2.5 million people per year.
- Youth unemployment: 19.4 percent in 2016.
- Requirements to reap demographic dividend:
  - Diversify economy away from agriculture toward industry and services.
  - Create jobs through higher sustainable and inclusive growth.
- Policy focus:
  - Mobilize revenues to finance development spending (infrastructure, education, health, and targeted transfers).
  - Support structural reforms to product, labor, and financial markets.

### Recent macroeconomic developments (selected)
- Real GDP growth:
  - 5.0 percent in 2016 and H1:2017; 5.1 percent (y/y) in Q3:2017.
  - Projected: 5.1 percent in 2017 and 5.3 percent in 2018.
  - Medium-term projection: 5.6 percent.
- Output gap:
  - Estimated around –0.5 percent of GDP (late 2017).
  - Expected to close in 2020.
- Credit:
  - Credit growth: 7.7 percent (y/y) in September 2017.
  - Credit gap negative; projected to pick up to 12 percent by 2020.
- Inflation:
  - 3.3 percent (y/y) in November 2017.
  - Core inflation around 3 percent.
  - Inflation projections: 3.3 percent in 2017 and 3.6 percent in 2018.
  - Official target bands: 4±1 percent in 2017 and 3.5±1 percent in 2018.
- Fiscal:
  - Fiscal deficit projected to increase in 2017 near statutory ceiling of 3 percent of GDP.
  - Revised budget: fiscal deficit of 2.9 percent of GDP (original: 2.4 percent).
  - Expenditure restraint in H2:2017 contained fiscal deficit to around 2.7 percent of GDP, despite revenue shortages of 0.8 percent of GDP.
  - Total revenue grew by 4.4 percent (y/y) through October 2017 versus original budget assumption of 16.7 percent (y/y).
- External sector and reserves:
  - Current account deficit: 1.5 percent of GDP in Q1–Q3:2017 (down from 1.8 percent in 2016).
  - CA projected at 1.7 percent of GDP in 2017 and 1.9 percent of GDP in 2018.
  - International reserves: US$126 billion (8 months of imports) in November 2017; projected US$127.6 billion or 134 percent of the IMF’s reserve adequacy metric at end-2017.
  - External debt: 34.4 percent of GDP in September 2017.
  - Nonresident financing exposure: fiscal sector 61 percent of total debt; corporate sector 33 percent of total debt.
- Exchange rate:
  - Rupiah depreciated by 0.1 percent in nominal effective terms in first 10 months of 2017; appreciated by 2.1 percent in real effective terms.

### Financial sector soundness and vulnerabilities
- Banking system:
  - High capital, ample liquidity, and strong profitability.
  - Problem loans (NPLs, special mention and restructured loans) remain elevated at over 10 percent of total loans.
  - FSAP stress tests: banks broadly resilient to severe external shocks.
- Systemic vulnerabilities:
  - Corporate sector vulnerable to FX and external rollover risks.
  - Reliance on external financing amplifies exposure to reversals in capital inflows.
- Banking sector indicators (selected):
  - Capital adequacy ratio: 23.2 percent.
  - NPLs stabilized at slightly below 3 percent (system-wide measure).
  - Corporate FX debt: 45 percent of total corporate debt.
  - 71 percent of bank loans extended to the corporate sector.
  - NPLs in commodity-related corporates example: 8 percent in the mining sector.

### Outlook and risks
- Near-term outlook:
  - Improvement led by pickup in investment and credit, and higher commodity prices.
  - Infrastructure investment to increase but less than authorities’ plans.
- Medium-term outlook:
  - Favorable with output gap closing by 2020 and credit growth recovering.
- Downside risks (mainly external):
  - Reversal in capital inflows from global financial volatility and U.S. policy uncertainty.
  - Lower growth in China.
  - Geopolitical tensions.
- Domestic risks:
  - Tax revenue shortfalls, larger fiscal financing needs from higher interest rates.
  - Political uncertainty ahead of 2019 presidential elections.
  - Natural disasters.
- CA norm and assessment:
  - IMF EBA model CA norm estimated at –1.3 percent of GDP in 2017.
  - CA gap for 2017 estimated between −1.1 percent and 0.9 percent of GDP; consistent with a REER gap between –4.5 percent and 5.5 percent.

### Authorities’ views (summarized)
- Broad agreement with macro outlook and risks; committed to maintaining macrofinancial stability.
- Growth projection: strengthen in 2018 led by strong investment growth and higher commodity prices; medium-term growth above 5.5 percent with accelerated structural reforms.
- External position: considered resilient; authorities question EBA-based CA norm and urge country-specific considerations.

### Fiscal strategy and medium-term revenue strategy (MTRS)
- Fiscal constraints:
  - Constrained fiscal space due to weak revenues, fiscal deficit near statutory ceiling, and reliance on external financing.
  - Adhering to statutory 3 percent of GDP deficit ceiling is critical.
- Staff recommendation:
  - Early implementation of a MTRS to raise revenue by at least 3 percentage points of GDP in the medium term.
- Staff-recommended MTRS mix to raise 3.0 percent of GDP by 2022:
  - Value-added tax: 1.0 — Remove exemptions, lower VAT registration threshold, and increase rate from 10 percent to 12 percent.
  - Excise taxes: 1.0 — Introduce fuel excise tax and convert luxury goods sales tax on vehicles to a vehicle excise tax.
  - Corporate income tax: 0.5 — Remove exemptions and unify tax rates, impose alternative minimum tax.
  - Personal income tax: 0.3 — Lower threshold for the top rate.
  - Property tax: 0.2 — Increase rate and gradually replace transaction tax with recurrent property tax.
- Expenditure-side measures (total estimated impact by 2022 = 2.7 percent of GDP):
  - Infrastructure: 1.3 — Increase investment expenditure toward 5 percent of GDP while improving efficiency.
  - Education: 0.8 — Increase education expenditure toward EM average (4.8 percent of GDP) while improving efficiency.
  - Health: 0.6 — Implement universal health coverage while improving efficiency.
  - Social Assistance: 0.1 — Consolidate poorly-targeted programs.
  - Other expenditure: −0.1 — Cut nonpriority expenditure.
- Distributional considerations:
  - MTRS should aim to lower poverty and inequality; some tax measures could be regressive but adverse effects expected to be modest and offset by increased social services and targeted social spending.
- Short-term (subset of MTRS) measures to arrest fall in tax-to-GDP ratio:
  - Introduce excises on fuel, vehicles, sugary drinks, and plastic bags.
  - Reduce VAT threshold, streamline tax administration, lower compliance costs.
  - Shift tax incentives to new firms rather than existing firms to encourage innovation.
- Implementation timeline and related actions:
  - Authorities developing a MTRS proposal expected to be finalized by March 2018.
  - Asset repatriation during 2016–17 tax amnesty: 1.2 percent of GDP; assets declared totaled 40 percent of GDP.
  - A law passed will give tax officials direct access to bank accounts owned by Indonesian citizens and foreigners starting in 2018.
  - Authorities examining higher excises on sugary drinks and plastic bags as part of comprehensive tax reform.

### Public infrastructure investment, financing, and institutional actions (Box 2)
- Infrastructure spending and projects:
  - Public infrastructure spending increased by 1 percent of GDP between 2014 and 2017.
  - 247 priority projects selected, total cost US$323 billion (32 percent of GDP), to be implemented between 2015 and 2022.
- Expected financing shares:
  - Private sector: 18 percent of GDP.
  - SOEs: 10 percent of GDP.
- Government guarantees for infrastructure development: 2.8 percent of GDP in March 2017 (maximum limit 6 percent of GDP for 2017-20).
- Institutional actions:
  - Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) established.
  - Land acquisition procedures expedited: maximum time shortened to 400 days from 518 days.
  - State Asset Management Agency unified land acquisitions for National Strategic Projects.
- Project status (of 247 National Strategic Projects):
  - Four completed.
  - 131 under construction.
  - 112 under preparation.
- Selected notable PPPs and projects:
  - Umbulan Water (US$0.3 million) supported by Viability Funding Gap.
  - Palapa fiber-optic (US$0.6 million) supported by Availability Payment scheme.
  - Central Java Power Plant (US$3.0 billion).
  - Three toll roads (US$2.2 billion).
- FDI liberalization measures in Negative Investment List:
  - Foreign ownership limit for toll road operators, telecommunications, testing companies increased to 100 percent from 95 percent.
  - Foreign ownership limit for distribution and warehousing raised to 87 percent from 33 percent.
- Recommendations to manage macrofinancial risks while developing infrastructure:
  - Pace infrastructure spending in line with available financing and absorptive capacity.
  - Prioritize financing with additional revenues from the MTRS.
  - Encourage private sector participation and FDI through transparent bidding, expedited concessions for brownfield projects, and regulatory certainty.
  - Explore asset backed securities (e.g., toll roads and power plants).
  - Carefully design and monitor government guarantees to avoid potential increase in contingent liabilities.

### State-owned enterprises (SOEs): role, risks, and recommendations
- SOE stock and flows (2016 figures):
  - Number of SOEs: 118 across 13 sectors.
  - Total SOE assets: 51 percent of GDP.
  - Total SOE liabilities: 33 percent of GDP.
- Recommendations:
  - Limit SOE role to strategically relevant and commercially viable areas.
  - Rationalize energy sector SOEs.
  - Ensure cost recovery in Pertamina and PLN by adjusting regulated fuel and electricity prices with an automatic formula.
  - Reduce entry barriers, improve SOE governance, and carefully review plans to create SOE holding companies.

### Deregulation, business environment, and structural reforms
- Economic packages:
  - 16 economic packages adopted since 2015 to streamline regulations and strengthen productivity and competitiveness.
  - Outcomes: Doing Business ranking rose from 106th in 2016 to 72nd in 2018 (also reported improvement from 114th in 2015 to 72nd in 2017 in Appendix IV).
- Trade and FDI:
  - Partial liberalization of FDI in logistics, tourism, and agriculture.
  - Planning to streamline non-tariff measures (NTMs) and shift control from border to post-border.
- Business registration and trade facilitation:
  - Single submission system being introduced.
  - National single window in more than 21 ports.
  - One-stop 3-hour licensing service launched for nine types of licenses; 130 projects used the service in 2017.
- Remaining constraints:
  - Large infrastructure gap, low institutional quality, inadequate human capital, shallow financial markets.
  - Coordination challenges between central and local governments.
  - Large state control through SOEs and entry barriers discourage private investment and competition.

### Labor market and education policies
- Labor market indicators:
  - Youth unemployment: 30 percent.
  - Informal employment: 58 percent.
  - Female labor participation: 55 percent.
- Labor market recommendations:
  - Streamline job protection (administrative dismissal procedures and severance payments).
  - Improve vocational training and job placement services.
  - Implement active labor market policies targeted at identified market failures with ex-post evaluations.
  - Adopt more open immigration policy for skilled labor and improve domestic education quality.
  - Enhance female labor force participation via flexible work arrangements and subsidized childcare subject to careful cost-benefit analysis.
- Education recommendations:
  - Strengthen link between compensation and performance in education.
  - Reallocate savings and additional resources to ensure more equitable access to quality education, especially in rural areas.
  - Improve access to student loans to increase higher education enrollment.
  - Improve monitoring framework on local government budget spending and schools’ performance.

### Financial sector development and policy reforms
- Financial deepening and inclusion:
  - High-level joint forum for financial deepening and National Council for financial inclusion created.
  - Preparing national strategy for financial market development with detailed multi-year strategic initiatives.
  - BI measures: reserve requirement averaging, adoption of the Global Master Repurchase Agreement, introduction of a credit registry, and licensing of private credit bureaus.
  - Increasing use of digital financial services (DFS).
- Monetary policy and operations:
  - BI cut policy rate by 50 basis points to 4.25 percent in August-September 2017 (after 150 basis points cut in 2016).
  - Real policy rate: 1 percent; estimated neutral real rate: 1¾ percent.
  - Staff view: stance broadly appropriate; recommend BI stay on hold in immediate future while assessing pass-through.
  - Monetary operations reforms: 7-day reverse repo rate adoption, interest rate corridor narrowed, RR averaging (1.5 percent out of 6.5 percent primary RR), move to variable-rate auctions, increased T-bill issuance.
- Exchange rate policy:
  - Recommendation: allow exchange rate flexibility; FX intervention limited to preventing disorderly market conditions.
  - Rupiah: depreciated by 0.3 percent against the U.S. dollar in first 11 months of 2017.
  - Market exchange rate: Rp 13,560 per U.S. dollar as of October 31, 2017.
- Transmission weaknesses and reforms:
  - Market lending rates slow to adapt due to limited bank competition, interest rate caps, weak credit culture, and low banking efficiency.
  - Policy priorities: eliminate interest rate caps; limit BI short-end securities issuance overlap with MOF; improve banks’ asset quality via faster restructuring.
- Crisis preparedness and oversight:
  - Progress on Basel III adoption and new insurance law.
  - Recovery plans, resolution frameworks, joint stress tests and data sharing established.
  - Recommended actions: tackle OJK silo structure via law amendment; strengthen enforcement of prudential regulations; monitor restructured loans to avoid evergreening; accelerate restructuring of commodity-related legacy NPLs; consider ELA eligibility criteria and safeguards; adopt liquidity coverage ratio by significant currencies; periodically review corporate prudential FX regulation.

### Illustrative reform scenario and macroeconomic projections (staff reform scenario)
- Reform scenario assumptions:
  - MTRS raising additional revenue by 3 percent of GDP used to expand public spending in infrastructure, education, and health.
  - Structural reforms to product and labor markets, reduced trade and FDI restrictions, and lower state control.
- Projected outcomes by 2022 under reform scenario:
  - Potential growth rises to 6.5 percent in the medium term.
  - Initial near-term inflation increases due to demand stimulus and higher taxes, moderating later.
  - Current account deficit widens due to higher investment-related imports, partly offset by higher exports from enhanced competitiveness.
- Selected projections (Reform Scenario / 2018–2022):
  - General government revenue: 14.5, 15.1, 15.6, 16.2, 16.9.
  - Central government revenues and grants: 12.7, 13.2, 13.7, 14.3, 14.9.
  - Tax revenues: 10.5, 11.0, 11.6, 12.2, 12.8.
  - Infrastructure expenditure: 2.9, 3.2, 3.4, 3.6, 3.8.
  - Real GDP growth: 5.4, 5.7, 5.9, 6.2, 6.5.
  - Inflation: 3.8, 4.1, 4.0, 3.7, 3.8.
  - Current account deficit/GDP: -2.0, -2.0, -2.2, -2.3, -2.3.
  - General government deficit: -2.5, -2.4, -2.3, -2.2, -2.2.
  - General government debt: 29.6, 30.1, 30.0, 29.9, 29.7.

### Near-term policy mix and market confidence
- Fiscal guidance for 2018:
  - 2018 budget targets fiscal deficit reduction to 2.2 percent of GDP; total revenues projected at 12.8 percent of GDP.
  - Staff recommendation: adopt more gradual fiscal adjustment with a deficit target of up to 2.5 percent of GDP in 2018 to protect growth while gradually lowering the primary deficit and rebuilding fiscal buffers.
  - Deficit should not exceed 2.5 percent of GDP to preserve market confidence in the fiscal rule.
  - Limit issuance of FX-denominated government bonds and lower primary deficit as revenues increase with MTRS to moderate reliance on nonresident financing.
- Public debt and financing risks:
  - Public debt: 29 percent of GDP.
  - Share of public debt held by nonresidents: 61 percent in September 2017.
  - Example bond yield movements: 10-year yields increased from 7.2 percent to 7.9 percent between October and December 2016, and declined to 6.5 percent in November 2017.
- Authorities’ stance:
  - Broad agreement that fiscal adjustment should be gradual in 2018 and infrastructure development paced to absorptive capacity.
  - Exploring alternative financing instruments to mitigate risks, including enhancing equity instead of debt financing; monitor SOEs and PPPs closely to mitigate contingent liabilities.

### Risk assessment (selected RAM entries)
- Global risks:
  - Tighter global financial conditions — Relative Likelihood: High.
  - Significant China slowdown — Relative Likelihood: Medium; Expected Impacts: High.
  - Retreat from cross-border integration — Relative Likelihood: Medium; Expected Impacts: Low-Medium.
  - Stronger global growth and commodity prices — Relative Likelihood: Low; Expected Impacts: Medium.
- Domestic risks:
  - Revenue shortfalls or larger financing needs — Relative Likelihood: Medium; Expected Impacts: Medium.
  - Natural disasters — Relative Likelihood: Medium; Expected Impacts: Low.
- Recommended policy responses across risks include maintaining exchange rate flexibility, preserving sound fiscal position while allowing automatic stabilizers, implementing growth-friendly revenue reforms, accelerating structural reforms, and accessing contingent external financing if needed.

### Fund relations and multilateral engagement (as of November 30, 2017)
- Membership: Joined February 21, 1967; Article VIII.
- Quota and SDR holdings:
  - Quota: 4,648.40 SDR Millions (100.00 percent of Quota).
  - Fund holdings of currency: 3,860.56 SDR Millions (83.05 percent of Quota).
  - Reserve tranche position: 787.86 SDR Millions (16.95 percent of Quota).
- SDR Department:
  - Net cumulative allocation: 1,980.44 SDR Millions (100.00 percent of Allocation).
  - Holdings: 1,117.86 SDR Millions (56.44 percent of Allocation).
- Outstanding Purchases and Loans: None.
- Exchange arrangements:
  - De jure free floating since August 14, 1997; current de facto arrangement: floating.
  - Market exchange rate: Rp 13,560 per U.S. dollar as of October 31, 2017.
- Resident Representative: Mr. John Nelmes (Senior Resident Representative since September 2016).

### Collaboration with World Bank, ADB, and technical assistance
- Strong IMF–World Bank coordination on budget reforms, tax policy and administration support, asset-liability management, crisis preparedness, financial sector stability, statistics, and macroeconomic monitoring.
- ADB support highlights and lending pipeline (2018–2020) and cumulative assistance by sector documented; indicative lending total: $7.45 billion (2018–2020 anticipated).
- Data adequacy: broadly adequate for surveillance with shortcomings in fiscal and external sector statistics; ongoing TA missions and improvements noted.

### Concluding policy stance and priorities
- Policy priorities summarized:
  - Implement a self-reinforcing fiscal-structural reform package (MTRS) to mobilize revenues for infrastructure, education, health, and targeted transfers.
  - Pace infrastructure development in line with financing and absorptive capacity; prioritize MTRS revenues and encourage private participation including FDI.
  - Streamline regulations, reduce state control and barriers in network sectors, rationalize NTMs and FDI restrictions.
  - Improve education quality and ease labor market regulations; improve vocational training and job placement services; consider immigration policy for skilled labor and flexible work arrangements.
  - Financial deepening with appropriate prudential standards; improve insolvency and creditor rights regimes.
  - Near-term: monetary policy to focus on price stability and supporting growth; BI to stay on hold and allow exchange rate flexibility; fiscal adjustment to be gradual in 2018.
- Institutional recommendations:
  - Strengthen financial oversight and crisis management; implement FSAP recommendations; clarify institutional mandates; improve supervision of financial institutions and conglomerates; adopt more rigorous credit risk approaches; reconsider some elements of crisis management framework including ELA framework.
- Procedural note:
  - Recommendation that next Article IV consultation take place on the standard 12-month cycle.

*Source: cr1832 - 1. Indonesia’s Demographic Dividend: Opportunities and Challenges (IMF).*

### 1. Indonesia’s Demographic Dividend: Opportunities and Challenges __________________________ 22

### 1. Indonesia’s Demographic Dividend: Opportunities and Challenges

### Context and demographic challenge
- Indonesia’s working age population is growing at 1.6 percent or 2.5 million people per year (Box 1).
- Youth unemployment was 19.4 percent in 2016.
- Reaping the demographic dividend requires:
  - Diversifying the economy away from agriculture and towards industry and services.
  - Creating jobs through higher sustainable and inclusive growth.
- Policy focus: mobilize revenues to finance development spending (infrastructure, education, health, and targeted transfers) and support structural reforms to product, labor, and financial markets.

### Recent macroeconomic developments (selected)
- Real GDP growth:
  - 5.0 percent in 2016 and H1:2017; picked up to 5.1 percent (y/y) in Q3:2017.
  - Projected at 5.1 percent in 2017 and 5.3 percent in 2018.
  - Medium-term projection: 5.6 percent.
- Output gap:
  - Estimated around –0.5 percent of GDP (late 2017).
  - Expected to close in 2020.
- Credit:
  - Credit growth slowed to 7.7 percent (y/y) in September 2017.
  - Credit gap negative; projected to pick up to 12 percent by 2020.
- Inflation:
  - Fell to 3.3 percent (y/y) in November 2017.
  - Core inflation around 3 percent.
  - Inflation projections: 3.3 percent in 2017 and 3.6 percent in 2018.
  - Official target bands: 4±1 percent in 2017 and 3.5±1 percent in 2018.
- Fiscal:
  - Fiscal deficit projected to increase in 2017 near the statutory ceiling of 3 percent of GDP.
  - Revised budget: fiscal deficit of 2.9 percent of GDP (original budget: 2.4 percent).
  - Expenditure restraint in H2:2017 contained the fiscal deficit to around 2.7 percent of GDP, despite revenue shortages of 0.8 percent of GDP.
  - Total revenue grew by 4.4 percent (y/y) through October 2017 versus original budget assumption of 16.7 percent (y/y).
- External sector and reserves:
  - Current account deficit: 1.5 percent of GDP in Q1–Q3:2017 (down from 1.8 percent in 2016).
  - CA projected at 1.7 percent of GDP in 2017 and 1.9 percent in 2018.
  - International reserves: US$126 billion (8 months of imports) in November 2017; projected US$127.6 billion or 134 percent of the IMF’s reserve adequacy metric at end-2017.
  - External debt: 34.4 percent of GDP in September 2017.
  - Nonresident financing exposure: fiscal sector 61 percent of total debt; corporate sector 33 percent of total debt.
- Exchange rate:
  - Rupiah depreciated by 0.1 percent in nominal effective terms in first 10 months of 2017; appreciated by 2.1 percent in real effective terms.

### Financial sector soundness
- Banking system:
  - High capital, ample liquidity, and strong profitability.
  - Problem loans (NPLs, special mention and restructured loans) remain elevated at over 10 percent of total loans.
  - FSAP stress tests find banks broadly resilient to severe external shocks.
- Systemic vulnerabilities:
  - Corporate sector vulnerable to FX and external rollover risks.
  - Reliance on external financing amplifies exposure to reversals in capital inflows.

### Outlook and risks
- Near-term outlook: improvement led by pickup in investment and credit, and higher commodity prices; infrastructure investment to increase but less than authorities’ plans.
- Medium-term outlook: favorable with output gap closing by 2020 and credit growth recovering.
- Downside risks (mainly external):
  - Reversal in capital inflows (global financial volatility, U.S. monetary and fiscal policy uncertainty).
  - Lower growth in China.
  - Geopolitical tensions.
  - Domestic risks: tax revenue shortfalls, larger fiscal financing needs due to higher interest rates, political uncertainty ahead of 2019 presidential elections, natural disasters.
- CA norm and assessment:
  - IMF EBA model CA norm estimated at –1.3 percent of GDP in 2017 (authorities express concerns about methodology).
  - CA gap for 2017 estimated between −1.1 percent and 0.9 percent of GDP, consistent with a REER gap between –4.5 percent and 5.5 percent.

### Authorities’ views (summarized)
- Broad agreement with macro outlook and risks; committed to maintaining macrofinancial stability.
- Growth projection: strengthen in 2018 led by strong investment growth and higher commodity prices; medium-term growth above 5.5 percent with accelerated structural reforms.
- External position: considered resilient but authorities question the EBA-based CA norm and urge country-specific considerations when estimating the norm.

### Policy implications and priorities
- Near-term policy mix:
  - Protect growth while preserving stability, given slightly negative output gap, slow credit growth, and downside risks.
  - Monetary easing in 2017 was appropriate given cyclical considerations and moderate inflation.
- Structural-reform emphasis:
  - Prioritize structural reforms with low fiscal costs: product market reform, easing complex regulations, fostering financial deepening and inclusion.
  - Complementarities between reforms should be exploited.
- Fiscal strategy and medium-term revenue strategy (MTRS):
  - Indonesia has constrained fiscal space due to weak revenues, fiscal deficit near statutory ceiling, and reliance on external financing.
  - Adhering to statutory 3 percent of GDP deficit ceiling is critical.
  - Staff recommends early implementation of a MTRS to raise revenue by at least 3 percentage points of GDP in the medium term.
  - MTRS instruments (staff-recommended mix to raise 3.0 percent of GDP by 2022):
    - Value-added tax: 1.0 — Remove exemptions, lower VAT registration threshold, and increase rate from 10 percent to 12 percent.
    - Excise taxes: 1.0 — Introduce fuel excise tax and convert luxury goods sales tax on vehicles to a vehicle excise tax.
    - Corporate income tax: 0.5 — Remove exemptions and unify tax rates, impose alternative minimum tax.
    - Personal income tax: 0.3 — Lower threshold for the top rate.
    - Property tax: 0.2 — Increase rate and gradually replace transaction tax with recurrent property tax.
  - Expenditure-side measures (total expenditure measures estimated impact by 2022 = 2.7 percent of GDP):
    - Infrastructure: 1.3 — Increase investment expenditure toward 5 percent of GDP while improving efficiency.
    - Education: 0.8 — Increase education expenditure toward EM average (4.8 percent of GDP) while improving efficiency.
    - Health: 0.6 — Implement universal health coverage while improving efficiency.
    - Social Assistance: 0.1 — Consolidate poorly-targeted programs.
    - Other expenditure: −0.1 — Cut nonpriority expenditure.
  - The MTRS should aim to lower poverty and inequality; although some tax measures could be regressive, their adverse effects are expected to be modest and offset by increased provision of social services and targeted social spending.
- Short-term actions (subset of MTRS) to arrest fall in tax-to-GDP ratio:
  - Introduce excises on fuel, vehicles, sugary drinks, and plastic bags.
  - Reduce VAT threshold, streamline tax administration, lower compliance costs.
  - Shift tax incentives to new firms rather than existing firms to encourage innovation.
- Implementation timeline and authorities’ plans:
  - Authorities are developing a MTRS proposal expected to be finalized by March 2018.
  - Asset repatriation during the 2016–17 tax amnesty amounted to 1.2 percent of GDP; assets declared totaled 40 percent of GDP.
  - A law passed will give tax officials direct access to bank accounts owned by Indonesian citizens and foreigners starting in 2018.
  - Authorities examining higher excises on sugary drinks and plastic bags as part of comprehensive tax reform.

*Source: cr1832 - 1. Indonesia’s Demographic Dividend: Opportunities and Challenges (IMF).*

### 24.      Public infrastructure investment has grown (Box 2). The authorities have increased public

### Public infrastructure investment has grown (Box 2)

### Infrastructure spending and financing
- The authorities increased public infrastructure spending by 1 percent of GDP between 2014 and 2017.
- The authorities selected 247 priority projects, with a total cost of US$323 billion (32 percent of GDP), to be implemented between 2015 and 2022.
- Expected financing shares:
  - Private sector: 18 percent of GDP.
  - SOEs: 10 percent of GDP.
- The government is piloting financing instruments including banks loans to and bond issuances by SOEs and project securitization.
- Government guarantees for infrastructure development were 2.8 percent of GDP in March 2017.

### Institutional and regulatory actions to accelerate delivery
- Established the Committee for Acceleration of Priority Infrastructure Delivery (KPPIP).
- Expedited land acquisition procedures.
- Piloting various forms of financing (SOE bank loans, SOE bond issuances, project securitization).

### Business environment and structural reforms
- Adopted 16 economic packages since 2015 to streamline regulations and strengthen productivity and competitiveness.
- Partial liberalization of the FDI regime in logistics, tourism, and agriculture.
- Clarified the setting of the minimum wage.
- Introducing a single submission system to simplify business registration for central and local government licenses.
- A national single window system to automate export and import permits has been introduced in more than 21 ports.
- Planning to streamline non-tariff measures (NTMs), gradually shifting control from border to post border, and open to trade through bilateral and regional trade agreements.
- Outcome: Indonesia’s World Bank Doing Business ranking rose from the 106th position in 2016 to the 72nd position in 2018.

### Financial development and inclusion
- Created a high-level joint forum for financial deepening and the National Council for financial inclusion.
- Preparing a national strategy for financial market development with detailed multi-year strategic initiatives.
- BI measures to develop money and FX markets include the reserve requirement averaging and the adoption of the Global Master Repurchase Agreement.
- Introduction of a credit registry and licensing of private credit bureaus.
- Increasing use of digital financial services (DFS) to help overcome geographical barriers to financial inclusion.

### Remaining challenges
- Growth constrained by:
  - Large infrastructure gap.
  - Low institutional quality.
  - Inadequate human capital.
  - Shallow financial markets.
- Coordination challenges persist between central and local governments.
- Large state control through SOEs and entry barriers have discouraged private investment and undermined competition.
- Trade barriers and FDI restrictions contributed to low integration with global value chains compared to ASEAN peers.
- Weak credit culture hampering financial deepening.

### Staff recommendations to manage macrofinancial risks while developing infrastructure
- Pace infrastructure spending in line with available financing and the economy’s absorptive capacity, given shallow domestic financial markets and constrained fiscal space.
- Prioritize financing infrastructure development with additional revenues from the MTRS.
- Encourage private sector participation, including FDI, through:
  - Transparent, competitive bidding processes.
  - Expedited concessions for brownfield projects.
  - Regulatory certainty.
- Explore financing through asset backed securities (e.g., toll roads and power plants).
- Carefully design and monitor government guarantees for infrastructure development to avoid a potential increase in future contingent liabilities.

### SOEs: role, risks, and recommendations
- Indonesia has 118 SOEs across 13 sectors.
- 2016 figures:
  - Total SOE assets amounted to 51 percent of GDP.
  - Total SOE liabilities amounted to 33 percent of GDP.
- Recommendations:
  - Limit role of SOEs to strategically relevant and commercially viable areas to lower fiscal support needs, strengthen financial oversight, and attract private investment including FDI.
  - Begin rationalization in the energy sector.
  - Ensure cost recovery in Pertamina and PLN by adjusting regulated fuel and electricity prices with an automatic formula.
  - Reduce barriers to entry to foster market-based incentives and improve SOE governance and efficiency.
  - Carefully review the plan to create holding companies of SOEs because it may enhance efficiency but could increase monopolistic power.

### Deregulation and coordination priorities
- Target deregulation where economic gains are greatest:
  - Ease regulations on state control, antitrust exemptions, and barriers in the network sector (electricity and transport).
  - Streamline NTMs and ease FDI restrictions.
  - Strengthen ministerial coordination to avoid conflicting regulations; recent presidential decree to strengthen coordination through coordinating ministries noted.
- Create a regional government coordination forum anchored by national policy direction.
- Introduce merits and competition factors into fiscal transfers to local governments and provide capacity building to enhance accountability and coordination.

### Labor market and education policies
- Labor market indicators:
  - Youth unemployment: 30 percent.
  - Informal employment: 58 percent.
  - Female labor participation: 55 percent.
- Labor market recommendations:
  - Streamline stringent job protection (administrative dismissal procedures and severance payments).
  - Improve vocational training and job placement services.
  - Implement active labor market policies targeted at identified market failures and subject to careful ex-post evaluations.
  - Adopt a more open immigration policy for skilled labor and improve domestic education quality.
  - Enhance female labor force participation via flexible work arrangements and subsidized childcare subject to careful cost-benefit analysis.
- Education recommendations:
  - Strengthen link between compensation and performance in education.
  - Reallocate savings and additional resources to ensure more equitable access to quality education, especially in rural areas.
  - Improve access to student loans to increase higher education enrollment.
  - Improve monitoring framework on local government budget spending and schools’ performance.

### Financial sector reforms to support deepening and infrastructure
- Continue building a liquid yield curve and introduce new interest rate and FX hedging instruments.
- Evolve supervisory and regulatory framework with market development.
- Review portfolio exposure targets, including minimum MSME exposure targets and the minimum investment requirement on government bonds and infrastructure-related SOE bonds for nonbank financial institutions.
- Improve insolvency and creditor rights regimes to raise participation in the corporate bond market and financial access for MSMEs.
- Review the effectiveness and fiscal costs of the People’s Business Loan (KUR) program and whether it achieved its objective.

### Illustrative reform scenario and macroeconomic projections
- Staff’s reform scenario assumptions include:
  - A MTRS that raises additional revenue by 3 percent of GDP, used to expand public spending in infrastructure, education, and health.
  - Structural reforms to product and labor markets, reduced trade and FDI restrictions, and lower state control in the economy.
- Projected outcomes by 2022 under the reform scenario:
  - Potential growth rises to 6.5 percent in the medium term.
  - Initial near-term inflation increases due to demand stimulus and higher taxes, moderating later with tighter monetary stance and stronger productivity growth.
  - Current account deficit widens due to higher investment-related imports, partly offset by higher exports from enhanced competitiveness.
- Selected table projections (Reform Scenario / Baseline as shown):
  - General government revenue 2018–2022 (Reform Scenario): 14.5, 15.1, 15.6, 16.2, 16.9.
  - Central government revenues and grants 2018–2022 (Reform Scenario): 12.7, 13.2, 13.7, 14.3, 14.9.
  - Tax revenues 2018–2022 (Reform Scenario): 10.5, 11.0, 11.6, 12.2, 12.8.
  - Infrastructure expenditure 2018–2022 (Reform Scenario): 2.9, 3.2, 3.4, 3.6, 3.8.
  - Real GDP growth 2018–2022 (Reform Scenario): 5.4, 5.7, 5.9, 6.2, 6.5.
  - Inflation 2018–2022 (Reform Scenario): 3.8, 4.1, 4.0, 3.7, 3.8.
  - Current account deficit/GDP 2018–2022 (Reform Scenario): -2.0, -2.0, -2.2, -2.3, -2.3.
  - General government deficit 2018–2022 (Reform Scenario): -2.5, -2.4, -2.3, -2.2, -2.2.
  - General government debt 2018–2022 (Reform Scenario): 29.6, 30.1, 30.0, 29.9, 29.7.

### Near-term policy mix: supporting growth while preserving stability
- Fiscal policy guidance:
  - 2018 budget targets a fiscal deficit reduction to 2.2 percent of GDP; total revenues projected at 12.8 percent of GDP.
  - Staff recommendation: adopt a more gradual fiscal adjustment with a deficit target of up to 2.5 percent of GDP in 2018 to protect growth while gradually lowering the primary deficit and rebuilding fiscal buffers.
  - The deficit should not exceed 2.5 percent of GDP to preserve market confidence in the fiscal rule.
  - Limit issuance of FX-denominated government bonds and lower the primary deficit as revenues increase with a MTRS to moderate reliance on nonresident financing.
- Public debt and financing risks:
  - Public debt was 29 percent of GDP; share of public debt held by nonresidents was 61 percent in September 2017.
  - Example of bond yield resilience: 10-year bond yields increased from 7.2 percent to 7.9 percent between October and December 2016, and declined to 6.5 percent in November 2017.
- Authorities’ stance:
  - Broad agreement that fiscal adjustment should be gradual in 2018 and that infrastructure development should be paced in line with available financing and the economy’s absorptive capacity.
  - Authorities exploring alternative financing instruments that could mitigate risks, including by enhancing equity instead of debt financing, and concur with closely monitoring SOEs and PPPs to mitigate fiscal risks from contingent liabilities.

*Source: IMF staff report excerpt provided.*

### 41.      Bank Indonesia (BI) recently eased monetary policy. BI cut the policy rate by 50 basis

### Bank Indonesia (BI) recently eased monetary policy. BI cut the policy rate by 50 basis

### Monetary policy actions and assessment
- BI cut the policy rate by 50 basis points to 4.25 percent in August-September 2017, after cutting it by 150 basis points in 2016 and then holding it unchanged for 10 months.
- Motivations for easing:
  - moderate inflation outlook
  - slightly negative output gap
  - slow credit growth
  - lower external pressures
- Exchange rate and reserves:
  - The rupiah has depreciated by 0.3 percent against the U.S. dollar in the first 11 months of 2017.
  - International reserves have risen by US$9.6 billion, due to higher foreign currency proceeds from international bond issuances, tax revenues, and oil and gas export receipts, and BI’s FX intervention aimed at stabilizing the rupiah in line with its fundamental value.
- Staff position on stance:
  - The current stance of monetary policy is broadly appropriate.
  - Real policy rate (1 percent) is below estimated neutral real rate (1¾ percent), implying policy is sufficiently accommodative to support growth while maintaining price stability.
  - Given external uncertainty, monetary policy should stay on hold in the immediate future, while BI assesses the pass-through of its recent actions.

### Monetary operations reforms and transmission
- Reforms implemented:
  - Since August 2016 the policy rate was changed to the 7-day reverse repo rate and the interest rate corridor was narrowed; interbank rate has moved closer to the policy rate.
  - In July 2017, BI launched a partial reserve requirement (RR) averaging of 1.5 percent, out of the 6.5 percent current primary RR ratio, over a two-week period, allowing the floor of the RR ratio to be at 5 percent on any given day.
  - BI moved to a variable-rate auction for its securities to encourage price discovery in the money markets.
  - Issuance of T-bills has risen, providing more instruments at the short end of the yield curve.
- Effects:
  - RR averaging has benefited small banks with potential shortage of liquidity; large banks with ample liquidity have not made use of the extra degree of flexibility.
- Remaining transmission weaknesses:
  - Market interest rates, particularly lending rates, have been slow to adapt.
  - Structural factors: limited bank competition; distortionary interest rate caps; weak credit culture; low efficiency in the banking sector.
- Policy priorities to strengthen transmission:
  - eliminating interest rate caps;
  - limiting issuances of BI securities at the short end and minimizing overlap with MOF instruments;
  - improving banks’ asset quality through faster restructuring.

### Exchange rate policy
- Recommendation:
  - Exchange rate flexibility is critical to adjust to shocks.
  - BI should allow the exchange rate to move freely in line with market forces, with FX intervention limited to preventing disorderly market conditions.
- Authorities’ stance:
  - Authorities reiterated commitment to exchange rate flexibility.
  - BI will intervene in the FX market in the case of excessive volatility or misalignment that may induce risks to attainment of the inflation target.

### Financial and corporate sector conditions
- Banking sector health:
  - Capital adequacy ratio: 23.2 percent.
  - NPLs have stabilized at slightly below 3 percent.
  - System-wide liquidity remains ample; profitability is strong.
  - Vulnerabilities: exposure to corporate sector, variation in financial soundness across banks, many smaller banks vulnerable to liquidity shocks including FX liquidity shortfalls due to reliance on short-term deposits and limited access to money market.
- FSAP stress test outcomes:
  - Under the most severe stress scenario banks experience credit losses particularly from corporate exposures, but high capital buffers and strong profitability help absorb most losses.
  - BI’s simulations suggest that the impact of the recent expiration of OJK’s relaxation on loan restructuring criteria would be limited: the system-wide capital adequacy ratio would fall by less than ½ percentage points under the worst-case scenario.
- Corporate sector risks:
  - Corporate FX debt accounts for 45 percent of total corporate debt.
  - 71 percent of bank loans are extended to the corporate sector.
  - NPLs in commodity-related corporates remain high (e.g. 8 percent in the mining sector).
  - Corporate foreign debt has stabilized since adoption of prudential FX regulation in 2015.

### Regulatory, oversight, and crisis management reforms
- Progress made:
  - Basel III standards and a new insurance law have been adopted.
  - Supervisory practices improving; macroprudential tools actively used; countercyclical capital buffer currently set at zero.
  - Implementing regulations for crisis management law issued, including recovery plans for domestic SIBs, resolution framework for both systemic and non-systemic banks, and rules for write-off and haircut of remaining assets from the Bank Restructuring Program (levy for the Bank Restructuring Program still under discussion).
  - BI and OJK improving stress test framework and established joint stress test and data sharing; conducted joint crisis simulation exercises; issued regulations to implement risk-based AML/CFT supervision.
- Authorities’ legal reform agenda:
  - Draft bill amendment of the BI law includes a financial stability and macroprudential mandate.
  - An amendment to the OJK law is included in the 2015-2019 National Legislation Program.

### Staff recommendations to strengthen oversight and crisis preparedness
- Key recommended actions:
  - OJK should tackle its silo structure in its law amendment and strengthen enforcement of prudential regulations, including on credit risk management and supervision on financial conglomerates.
  - Continue monitoring restructured and special mention loans, and enforce proper loan classification to avoid evergreening.
  - Accelerate restructuring of commodity-related legacy NPLs, taking advantage of improved credit information.
  - Enhance legal protection of supervisors and officials of all agencies involved in financial oversight and crisis management to ensure timely actions.
  - Consider ELA eligibility criteria to allow emergency lending to banks assessed by OJK as viable even if capital is temporarily below minimum requirements.
  - ELA framework should enable BI, where not satisfied with solvency/viability or collaterals, to request an indemnity from the government subject to appropriate safeguards.
  - Authorities need to consider allowing the use of public funding in limited circumstances justified by systemic preconditions and processes for recovery from the banking industry.
  - Adopt a liquidity coverage ratio requirement by significant currencies to contain FX liquidity risks.
  - Periodically review the corporate prudential FX regulation and consider extending its coverage to all corporate FX liabilities.

### Authorities’ views on corporate FX regulation and reforms
- Authorities broadly agreed with reform priorities on supervision and risk management and committed to further strengthening the financial sector, including:
  - Strengthening and clarifying roles and objectives of statutory authorities by amending laws of BI, OJK, and LPS.
  - Advancing financial market deepening and promoting financial inclusion.
- On corporate prudential FX regulation:
  - Authorities view the regulation as aimed at ensuring macrofinancial stability through prudential principles on corporate foreign borrowing and not as a capital flow management (CFM) measure.
  - Authorities plan to do a cost-benefit analysis of extending its coverage.

### Staff appraisal and macro policy guidance
- Macroeconomic snapshot and outlook:
  - Economic growth has stabilized at near 5 percent.
  - Inflation has moderated.
  - Current account deficit remains manageable.
  - Systemic risks are contained.
  - External risks are the main downside risks; public and corporate sectors continue to rely heavily on external financing.
  - Indonesia’s external position in 2017 assessed as broadly consistent with fundamentals and desirable policies.
- Policy priorities:
  - Implement a self-reinforcing fiscal-structural reform package (MTRS) to mobilize revenues for infrastructure, education, health, and targeted transfers, and support structural reforms to product, labor, and financial markets.
  - Pace infrastructure development in line with available financing and absorptive capacity; prioritize financing via MTRS revenues and encourage private sector participation including FDI to limit buildup of corporate external debt.
  - Streamline regulations to reduce state control, antitrust exemptions, and barriers in network sectors; rationalize non-tariff measures and FDI restrictions.
  - Improve education quality and ease labor market regulations to support employment; improve vocational training and job placement services; consider more open immigration policy for skilled labor and flexible work arrangements.
  - Financial deepening with appropriate prudential standards; improve insolvency and creditor rights regimes to raise corporate bond market participation and MSME access.
- Near-term policy mix:
  - Monetary policy should continue focusing on price stability and supporting growth; BI should stay on hold in the immediate future and assess pass-through of recent actions.
  - BI should allow exchange rate to move freely with FX intervention limited to preventing disorderly conditions.
  - Fiscal adjustment should be gradual in 2018 to protect growth and rebuild fiscal buffers.
- Institutional recommendations:
  - Continue to strengthen financial oversight and crisis management and implement FSAP recommendations, including clarification of institutional mandates, improving supervision of financial institutions and conglomerates, adopting a more rigorous approach to credit risk, and reconsidering some elements of the new crisis management framework including the ELA framework.
- Procedural note:
  - It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

*Source: IMF staff report excerpt.*

### Box 2. Strengthening Institutions and Funding for Infrastructure

### Box 2. Strengthening Institutions and Funding for Infrastructure

### Priority, scope, and coordination
- The authorities have made infrastructure development a priority.
- 247 National Strategic Projects selected with a cost of 32 percent of GDP to be implemented during 2015-22.
- KPPIP (Committee for Acceleration of Priority Infrastructure Delivery) coordinates 37 of these projects, including:
  - 12 oil refineries
  - one electricity program
  - 74 roads
  - 23 rail roads

### Public and SOE financing progress
- Government and SOE infrastructure spending has increased.
- Central government capital spending and transfers to local governments for infrastructure rose by 1 percent of GDP between 2014 and 2017.
- The government injected capital to SOEs by 0.6 percent of GDP in 2015-16 to support their infrastructure investment.
- SOEs are slowly leveraging to finance infrastructure projects, including by issuing domestic and external bonds.
- The government has committed guarantees for infrastructure investment (credit, business viability, and PPP guarantees), which reached 2.8 percent of GDP in March 2017, below the maximum limit of 6 percent of GDP for 2017-20.

### Institutional reforms and land acquisition
- The institutional framework has improved with the creation of KPPIP to accelerate and coordinate priority projects.
- The land acquisition process has been streamlined:
  - Maximum time needed to acquire land shortened to 400 days from 518 days.
  - The State Asset Management Agency has made the process more flexible by unifying land acquisitions for the National Strategic Projects under one agency.
- Example of accelerated land acquisition: land acquisition for the Java North Line Double Track Rail project took less than 2 years to complete.

### Attracting private participation and new financing instruments
- The authorities are making efforts to attract private sector participation through guarantees and financing mechanisms:
  - Viability Gap Fund covering up to 49 percent of the construction cost.
  - Availability Payment (annuity payment scheme during the concession period).
- The authorities aim to mobilize debt and equity financing and develop the regulatory framework for new financing instruments, including structured products (e.g. asset backed securities) and infrastructure bonds.

### FDI liberalization measures
- The Negative Investment List has been revised to attract FDI to infrastructure development:
  - Foreign ownership limit for toll road operators, telecommunications, and testing companies increased to 100 percent from 95 percent.
  - Foreign ownership limit for distribution and warehousing raised to 87 percent from 33 percent.

### Project status and notable PPPs
- Out of 247 National Strategic Projects:
  - four have been completed
  - 131 are under construction
  - 112 are under preparation
- The construction of the light rail transit in Jakarta has been fast-tracked, and land acquisition has been accelerated.
- Several PPP projects are under way:
  - Umbulan Water (US$0.3 million) supported by the Viability Funding Gap
  - Palapa fiber-optic supported by the Availability Payment scheme (US$0.6 million)
  - Central Java Power Plant (US$3.0 billion)
  - three toll roads (US$2.2 billion)

*International Monetary Fund, Box 2. Strengthening Institutions and Funding for Infrastructure*

### Box 3. Implementation of the 2017 FSAP Key Recommendations

### Box 3. Implementation of the 2017 FSAP Key Recommendations

### Progress achieved (early steps)
- The authorities are taking early steps to implement some of the key FSAP recommendations, although others, such as changes to laws, will take time to implement. Progress has been achieved in the following areas:

### Legislative and institutional developments
- A draft bill amending the BI law is now under preparation and is included in the 2015-19 National Legislation Program. It will set out a financial stability and macroprudential mandate for BI.
- The legislation program also includes an initiative to amend the OJK law, regarding the primacy of objectives and authority over non-operating financial holding companies.
- The authorities acknowledge the importance of insurance policyholder protection and plan to propose, after consultations with Parliament, an amendment of the Insurance Law to specify policyholder protection as principal objective of OJK.

### Supervisory frameworks and coordination
- BI and OJK are improving their stress test frameworks and have established a framework for a joint stress test and data sharing.
- To advance on the recommendation to reduce silos in financial oversight, which ultimately requires changes to the OJK law, OJK has established a new Integrated Supervisory and Regulatory Department which brings internal coordination directly under the authority of the Chairman as an interim solution.
- OJK has started an initiative to strengthen its banking supervision by re-evaluating data quality, methodology, and business process used in on-site and off-site supervision, and optimize the IT system to support the integrated supervision.
- OJK has issued a new regulation in 2017 related to the imposition of administrative sanctions in the form of revocation of business licenses to insurance companies in specific circumstances, such as drastic deterioration of financial condition.

### Crisis management, resolution, and financial integrity
- In the area of crisis management and resolution, the authorities have focused on the promulgation of several regulations under the PPKSK Law, including regulations regarding recovery planning for domestic systemically important banks, resolution framework for both systemic and non-systemic banks, and write-off and haircut of remaining assets from the Bank Restructuring Program.
- The authorities have also conducted a series of join crisis simulation exercises.
- BI and OJK have issued regulations to implement risk-based AML/CFT supervision.

*Box 3. Implementation of the 2017 FSAP Key Recommendations*

### Appendix I. Risk Assessment Matrix 1/

### Appendix I. Risk Assessment Matrix 1/

### Global risks
- Tighter global financial conditions. Fed normalization and tapering by ECB increase global rates and term premia, strengthen the U.S. dollar and the euro vis-à-vis the other currencies, and correct market valuations. Adjustments could be disruptive if there are policy surprises. Higher debt service and refinancing risks could stress leveraged firms, households, and vulnerable sovereigns, including through capital account pressures.
  - Relative Likelihood: High
  - Expected Impacts:
    - Capital inflows decline due to weaker investor appetite for emerging market (EM) assets, creating funding pressures for the current account (CA) deficit.
    - Tighter external financial conditions put pressure on the balance sheets of the public, financial, and corporate sectors.
    - Bank funding becomes constrained, leading to a crunch in domestic credit growth and higher domestic borrowing costs.
    - Rollover risks rise for the public, financial, and corporate sectors, and the balance sheet of households (including property) weaken.
    - Economic growth falls, reinforced by asset price corrections and lower confidence.
    - The rupiah depreciates and imports decline, reducing the CA deficit.
  - Recommended Policy Responses:
    - Maintain exchange rate flexibility and market-determined bond yields.
    - Preserve a sound fiscal position, while allowing automatic stabilizers to work.
    - Tighten monetary policy and support banks facing funding pressures to preserve financial stability and avoid negative feedback loops with capital outflows.
    - Closely monitor corporate sector vulnerabilities.
    - Maintain vigilance on exchange rate pass-through to inflation.
    - Access contingent external financing if needed.

- Significant China slowdown. Efforts to rein in financial risks expose vulnerabilities and reduce near-term growth. Over the medium term, ambitious growth targets lead to unsustainable policies and higher financial imbalances. A sharp slowdown leads to lower commodity prices, global financial market volatility, and lower global growth.
  - Relative Likelihood: Medium
  - Expected Impacts: High
    - Lower export volume and prices (particularly those of commodities) could widen the current account deficit, putting pressure on FX reserves and the exchange rate.
    - The fiscal balance would deteriorate on weaker oil and gas revenues and knock-on effects to domestic demand, with the financial sector exposed to losses from loans to the commodity sector and a broader economic slowdown.
    - Corporate profits would decline from weak commodity related activities.
  - Recommended Policy Responses:
    - Maintain exchange rate flexibility to help reduce the current account deficit and limit FX reserve losses.
    - More stringent fiscal measures to contain the budget deficit might be necessary if the slowdown in EMs were accompanied by protracted financial market volatility that restricts funding.
    - Accelerate infrastructure spending and structural reforms to boost productivity and employment in non-resource sectors, and export diversification.

- Retreat from cross-border integration leading to reduced global and regional policy collaboration with negative effects on trade, capital and labor flows, and growth.
  - Relative Likelihood: Medium
  - Expected Impacts: Low-Medium
    - Exports and capital inflows decline, putting pressure on the exchange rate and foreign reserves.
    - The balance sheets of the public, financial, and corporate sectors weaken, and domestic financial conditions tighten.
    - Domestic credit growth slows and borrowing costs rise.
  - Recommended Policy Responses:
    - Resist protectionism and deepen regional trade integration.
    - Seek new opportunities to enhance position in global value chains.
    - Strengthen domestic drivers of growth by enhancing infrastructure and implementing structural reforms.

- Stronger global growth and commodity prices. The global recovery strengthens more than expected, leading to higher commodity prices due to robust demand.
  - Relative Likelihood: Low
  - Expected Impacts: Medium
    - The fiscal position strengthens due to higher oil and gas revenues, increasing the fiscal space for public investment and other expenditure, with positive spillovers to growth.
    - Private investment and exports also pick up, especially in commodity-related sectors, boosting growth.
  - Recommended Policy Responses:
    - In addition to increasing public investment and other priority spending, use the extra fiscal space to rebuild fiscal buffers and support costly structural reforms.
    - Remain vigilant to overheating risks, and adjust policies as needed.

### Domestic risks
- Revenue shortfalls or larger financing needs due to higher interest rates, constrain fiscal space, with adverse spillovers to growth. Large ad-hoc cuts in public spending are taken to keep the budget deficit below the statutory ceiling.
  - Relative Likelihood: Medium
  - Expected Impacts: Medium
    - The fiscal impulse becomes negative, resulting in a growth slowdown that can damage investor confidence, curb capital inflows, raise bank NPLs, increase the country risk premium, and raise costs for corporate external borrowing.
    - Corporates are forced to reduce costs by laying off workers, which further weakens domestic demand.
  - Recommended Policy Responses:
    - Implement growth-friendly revenue reforms to raise collections, and prioritize spending in growth-critical areas.
    - Accelerate structural reforms to the trade and investment regime to boost productivity, private investment, and exports.
    - Ease monetary policy if necessary, provide support to banks in need to preserve financial stability, and monitor corporate borrowers at risk.

- Natural disasters disrupt economic activity and affect sentiment, resulting in higher fiscal expenditure.
  - Relative Likelihood: Medium
  - Expected Impacts: Low
    - Economic activity in the affected regions is disrupted and business sentiment suffers.
    - Economic growth slows leading to a decline in portfolio inflows.
    - Fiscal expenditure increases to provide disaster relief and for reconstruction.
  - Recommended Policy Responses:
    - Implement revenue enhancing reforms and prioritize expenditure to the affected region.
    - If the economy slows significantly, ease monetary policy, provide support to banks, and monitor corporate borrowers at risk.

### Technical notes on the Risk Assessment Matrix
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff).
- The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline:
  - “low” is meant to indicate a probability below 10 percent,
  - “medium” a probability between 10 percent and 30 percent,
  - and “high” a probability between 30 percent and 50 percent.
- The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities.
- Non-mutually exclusive risks may interact and materialize jointly.
- “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.
- A range of +/- 1 percent is added to reflect the fact that the EBA-regression estimates are subject to normal uncertainty.

*Source: Appendix I. Risk Assessment Matrix 1/*

### Appendix IV. The Authorities’ Economic Policy Packages

### Appendix IV. The Authorities’ Economic Policy Packages

### Overview and objectives
- The authorities have issued 16 economic policy packages since September 2015.
- Objectives: improve competitiveness and boost exports and investment by harmonizing regulations, simplifying bureaucratic processes, and ensuring law enforceability.
- Reported progress: about 215 regulations revised; a transparent minimum wage formula adopted; land acquisition process simplified; a 3-hour one-stop service launched; a single submission system being introduced.
- Outcomes cited: Indonesia’s ranking in the World Bank’s Doing Business improved from the 114th position in 2015 to the 72nd position in 2017.
- Recent approach: more strategic, thematic, and holistic packages with clearer communication and stronger coordination with local governments.

### Deregulation and FDI regime
- 215 regulations revised: 50 at the Presidential Level and 165 at the Ministerial/Institutional level.
- Focus areas: reducing administrative burdens for corporates, lowering barriers to trade, easing legal barriers that protect existing businesses.
- FDI regime changes:
  - Foreign ownership limit for toll road operators, telecommunications, and testing companies increased to 100 percent from 95 percent.
  - Foreign ownership limit for distribution and warehousing increased to 87 percent from 33 percent.
  - Other measures: allowing partnerships with SMEs; introducing a grandfathering clause protecting existing foreign investors from potentially tighter protection in the future; strengthening coordination with ministries, agencies, and regional governments.

### Investment certainty and land acquisition
- Minimum wage policy:
  - Since 2016, increases in the minimum wage set by a formula that aligns with inflation and real GDP growth.
  - The formula already applied in major provinces to improve investor certainty.
  - Historical example: the minimum wage rose by 40 percent in Jakarta in 2013, which significantly undermined business confidence.
- Land acquisition:
  - New regulation allows investors to pay for land in advance and be reimbursed after, aimed at avoiding delays due to unallocated budget or late budget disbursements.
  - Examples of application: Palembang-Indralaya section of the Trans-Sumatera toll road project and Java North Line Double track rail project completed land acquisition after years of delay using the new regulation.

### Business permit procedures and one-stop services
- One-stop 3-hour licensing service:
  - Launched for nine types of licenses including investment license, tax registration number, certificate of incorporation, company registration, import identification, customs registration, employment plan, working permit, and letter of land availability.
  - Target: lower waiting time, especially for the energy and mineral resources sector which had to wait up to 40 days to obtain each license.
  - Usage in 2017: 130 projects used the service, including 40 projects in the energy and mineral resources sector.
- Single submission system:
  - An online single submission system is being created to centralize all required licenses, including those of regional governments.
  - Task forces being formed in ministries, agencies, and regional governments to implement and oversee the improved business licensing process.
- Construction permits:
  - Direct Construction Permit adopted to attract investment in 32 industrial estates, allowing investors to start construction before obtaining construction permits and obtain permits in parallel.
  - Through August 2017, 91 projects had used the Direct Construction Permit.

### Logistics, customs, and trade facilitation
- Measures to reduce logistics costs:
  - Reduce operational costs of transportation services; eliminate requirement for goods transport permits; reduce port business investment cost; standardize documents on domestic goods flow; develop regional distribution centers.
  - Reduce number of prohibited and restricted goods; strengthen the Indonesia National Single Window (INSW) authority; enhance role of transportation insurance.
- Export and import procedure streamlining:
  - Customs inspection at ports harmonized to curtail dwell time.
  - Export and import permits simplified through single licensing at the border.
  - Permits and document settlement automated through the National Single Window in over 21 ports.
  - Risk management at customs implemented, moving control from border to post-border.
  - Target inspection rate once fully implemented: only 19 percent of products inspected at the border, compared with the current 49 percent.
- Bonded logistics:
  - A Bonded Logistics Center initiative launched.
  - Around 30 bonded logistics centers introduced to support industries including food and beverage, textiles, automotive, oil and gas, and mining.

### Implementation, coordination, and next steps
- Earlier packages were more ad-hoc and general; recent packages are sector-targeted (examples in packages: e-commerce roadmap, logistics improvement, single submission system).
- Communication improvements: diagnostics of critical constraints in selected sectors and clarified policy objectives and targets.
- Strengthened coordination with local governments to address earlier limitations caused by regional revenue concerns or capacity constraints.
- Authorities committed to continue improving the business climate by:
  - Conducting a comprehensive review of key issues in major sectors.
  - Addressing underlying bottlenecks.
  - Continuing to strengthen coordination with regional governments.

*Appendix IV. The Authorities’ Economic Policy Packages*

### 2.3 percent of GDP due to higher public and private investment-related imports (or a lower saving-

### cr1832 - 2.3 percent of GDP due to higher public and private investment-related imports (or a lower saving-

### Summary of key point
- The document notes an external adjustment component equivalent to "2.3 percent of GDP due to higher public and private investment-related imports (or a lower saving-investment gap in the private sector), which would be partly offset by higher exports due to enhanced competitiveness."

### Fund relations (as of November 30, 2017)
- Membership Status: Joined February 21, 1967; Article VIII
- Quota and SDR holdings:
  - Quota: 4,648.40 SDR Millions (100.00 percent of Quota)
  - Fund holdings of currency: 3,860.56 SDR Millions (83.05 percent of Quota)
  - Reserve tranche position in Fund: 787.86 SDR Millions (16.95 percent of Quota)
- SDR Department:
  - Net cumulative allocation: 1,980.44 SDR Millions (100.00 percent of Allocation)
  - Holdings: 1,117.86 SDR Millions (56.44 percent of Allocation)
- Outstanding Purchases and Loans: None
- Financial Arrangements (type, approval date, expiration date, amount approved, amount drawn):
  - EFF; 02/04/00; 12/31/03; 3,638.00 SDR Millions approved; 3,638.00 SDR Millions drawn
  - EFF; 08/25/98; 02/03/00; 5,383.10 SDR Millions approved; 3,797.70 SDR Millions drawn
  - Stand by; 11/05/97; 08/25/98; 8,338.24 SDR Millions approved; 3,669.12 SDR Millions drawn
- Projected Payments to Fund (SDR millions; based on existing use of resources and present holdings of SDRs):
  - Charges/Interest: 2018: 6.33; 2019: 6.36; 2020: 6.36; 2021: 6.35
  - Total: 2018: 6.33; 2019: 6.36; 2020: 6.36; 2021: 6.35
- Exchange arrangements:
  - De jure free floating since August 14, 1997; current de facto arrangement is floating.
  - Market exchange rate: Rp 13,560 per U.S. dollar as of October 31, 2017.
  - Indonesia has accepted the obligations of Article VIII, Sections 2, 3, and 4, and maintains an exchange system free of restrictions on payments and transfers for current international transactions.
- Article IV Consultation:
  - Last Article IV consultation report (IMF Country Report No. 17/37) discussed by the Executive Board on January 25, 2017.
- Resident Representative:
  - Mr. John Nelmes has been the Senior Resident Representative since September 2016.

### World Bank–IMF collaboration: scope and activities
- Overall characterization:
  - Working relationship described as "very strong" with joint working programs and close coordination through frequent meetings between resident offices and missions from headquarters.
- Key areas with joint programs and notable items:
  - Budget reforms:
    - World Bank support via PFM-MDTF and SEMEFPA programs, and development policy loans (DPLs).
    - Objectives include: (a) promoting budget efficiency; (b) improving subnational transfers; (c) supporting more strategic management of PFM across units at MoF; (d) public expenditure reviews (a multi-phase PER ongoing); and (e) improved composition of spending, budget execution and efficiency of spending.
    - 2015: rollout completed of Sistem Perbendaharaan dan Anggaran Negara (SPAN), financed with a World Bank loan supported by the PFM-MDTF.
    - November 2017: PEFA assessment completed; documents overall improvement in core PFM system; identifies challenges such as management of contingent liabilities and reliability of budget projections.
    - Ongoing "Fiscal DPL series" supports reforms to enhance allocative efficiency and effectiveness of public spending.
    - IMF provided technical assistance on developing a medium-term expenditure strategy.
  - Taxation issues:
    - IMF and World Bank prioritize broadening the revenue base and increasing revenues.
    - Fund conducted a mission on tax policy and administration in September 2017 to develop a medium-term revenue strategy (MTRS).
    - Bank provides tax policy and administration support to Fiscal Policy Agency and DG Tax through trust funded TA and the Fiscal DPL series.
    - Next phase under a government-owned MTRS envisages changes to tax laws and improvements to tax administration to improve compliance.
  - Asset-Liability Management:
    - Joint efforts to improve asset-liability management at the Treasury, Debt Management Office, and Bank Indonesia.
    - Bank provides TA to DGBFRM middle-office under Government Debt and Risk Management (GDRM) program focused on cost-risk models, quantification of contingent liabilities, framework for government guarantees, and joint IMF-World Bank Sovereign Asset Liability Management (SALM) support.
  - Crisis Preparedness:
    - World Bank support includes analysis of financial sector stability framework through the 2017 FSAP and initial discussions on fiscal crisis monitoring protocol for MoF.
    - IMF provided past TA on legal framework for financial stability architecture and continues surveillance dialogue.
  - Financial Sector:
    - World Bank TA program covers Financial Sector Stability, Financial Inclusion and Long Term Finance and Risk Management.
    - 2017 FSAP completed; found banking system profitable, well capitalized and resilient to severe shocks.
    - Sector advisory activities consolidated under Indonesia Financial Sector Technical Assistance (IFSTA) to 2022; supports upcoming Development Policy Loan addressing financial stability reforms guided by FSAP.
  - Statistics:
    - Bank program of capacity building with statistics agency (2011–2016).
    - IMF focused recent training and TA on government finance statistics, monetary and financial statistics, sectoral accounts and balance sheets, and measuring natural resources.
  - Macroeconomics:
    - IMF leads on monetary and exchange rate policies through Article IV mission and staff visits, focusing on fiscal, monetary, and exchange rate policies; macro-financial linkages; financial sector reforms; crisis management; external position; and spillovers.
    - Fund updates Debt Sustainability Analysis at Article IV.
    - Bank increasing role on macroeconomic monitoring, policy dialogue, fiscal policy analysis and capacity building; assists MoF’s Fiscal Policy Office on macro monitoring and forecasting.
    - Issues addressed by IMF include domestic and external vulnerabilities, exchange rate management, medium-term external and fiscal sustainability, macro-financial linkages and financial stability risks.
    - Issues addressed by the Bank include link between macro-fiscal policy and real economic outcomes, resource-sector fiscal revenues, and implementation/effectiveness of government spending.

### Joint Managerial Action Plan, 2016–17 (selected items)
- Mutual information on work programs:
  - Bank products: Indonesia Economic Quarterly — Four issues a year; FY18: October, December (2017); March, June (2018)
  - Ongoing: Follow up to FSAP; Energy DPL; Fiscal reform DPL; Technical assistance related to developing and implementing Indonesia’s Medium-Term Revenue Strategy
  - IMF products: Macroeconomic surveillance; 2016 Article IV consultation November 2016 (Board discussion January 2017); 2017 staff visit July 2017; 2017 Article IV consultation November 2017 (Board discussion will take place in January 2018)
  - Technical assistance (IMF): Financial deepening and market development ongoing; Tax policy and revenue administration ongoing; Statistical policies ongoing; Consolidated supervision (resident advisor) ongoing
- Requests and information sharing:
  - Fund requests to Bank: Assessment of economic developments and structural policies; Information sharing — Ongoing
  - Bank requests to Fund: Assessment of macroeconomic developments and policies; Information sharing — Ongoing
- Joint products and missions:
  - Note on education for Article IV — December 2017

### Relations with the Asian Development Bank (ADB)
- Membership and financial figures:
  - Indonesia a founding member since 1966.
  - ADB approved $32.7 billion in sovereign and nonsovereign loans (excluding cofinancing), and $894.02 million in technical assistance and grants for Indonesia.
  - Cumulative disbursements for lending and grants: $26.11 billion.
  - Sectors with largest shares in cumulative ADB assistance:
    - Public sector management: 18.8 percent
    - Energy: 17.5 percent
    - Agriculture and natural resources: 13.2 percent
    - Finance: 13 percent
- Indicative lending program for sovereign operations, 2018–2020:
  - Total: $7.45 billion
  - Anticipated cofinancing: About $1.22 billion
  - Lending pipeline sector shares:
    - Energy: 42 percent of total lending
    - Public sector management: 18 percent
    - Agriculture, natural resource, and rural development: 15 percent
    - Education: 13 percent
    - Finance: 6 percent
    - Water and urban services: 6 percent
  - Nonlending program for 2018–2020: $43.55 million, consisting of a grant and 26 TA projects, including 12 TA projects with total value $7.55 million financed from ADB’s Technical Assistance Special Fund (TASF).
- Development Partnership Framework and CPS objectives:
  - Country Partnership Strategy (2016–2019) aligned with RPJMN and ADB’s Strategy 2020 Midterm Review.
  - CPS Aim: support higher, more inclusive, and environmentally sustainable growth.
  - CPS strategic thrusts: (i) improved infrastructure services; (ii) better economic governance; (iii) enhanced human resource development.
- ADB support highlights:
  - Infrastructure: support for rural electrification, renewable energy policy and finance, rural irrigation and water supply, value-chains, climate mitigation/adaptation integration, technology introduction.
  - Economic governance: fiscal reforms to protect critical public spending and boost revenue mobilization; strengthen medium-term expenditure framework; protect priority public expenditure on infrastructure, health, education, and social protection.
  - Finance sector deepening: improve market infrastructure, diversify bond market products, enhance financial inclusion, advisory and financial support to SMEs.
  - Human resources: improve education quality and skills development; support education policy reforms and sector management.
- Country Operations Business Plan (COBP) 2018–2020 priorities:
  - Focus on long-term engagement and programmatic approach in core sectors.
  - Incorporate knowledge, innovation, and high quality technology in projects.
  - Ensure project readiness and quality-at-entry to minimize implementation delays.
  - Deepen partnership with executing and implementing agencies.
  - Enhance capacity and flexibility to respond to government needs and priorities.
  - Apply balanced mix of ADB assistance modalities.
  - Maximize synergies between sovereign and nonsovereign operations and promote public-private partnerships.

### Key statistics and figure items
- Year of membership: 1966 (ADB)
- Country classification: Group C (Regular OCR-only country)
- Resource available for approval, 2017: $1,800 million (Regular OCR)
- Operational strategy approval date: Country Partnership Strategy 2016–2019 — October 2016
- Shareholding and voting power (as of 30 June 2017):
  - Number of shares held: 578,100 (5.446 percent of total shares)
  - Votes: 617,707 (4.655 percent of total membership)

*Prepared by Asia and Pacific Department; International Monetary Fund, December 21, 2017.*

### 7.145 percent of total regional membership)

### cr1832 - 7.145 percent of total regional membership)

### ADB Representation and Contributions
- Board of Governors: Sri Mulyani Indrawati (Governor); Bambang P.S. Brodjonegoro (Alternate Governor)
- Board of Directors (constituency of Armenia; Cook Islands; Fiji; Indonesia; Kyrgyz Republic; New Zealand; Samoa; Tonga): Syurkani Ishak Kasim (Executive Director); Mario Di Maio (Alternate Executive Director)
- ADB Resident Mission:
  - Name of Country Director: Winfried Wicklein
  - Year of Establishment of RM: 1987
  - No of staff (IS, NS, and AS): IS = 7, NS = 14 and AS = 15; Outposted IS: 5
- Contributions (As of 30 June 2017):
  - Contributions to the ADF (committed): $14.96 million
  - Contributions to the TASF (committed): $0.29 million
  - Contributions to the ADBI (committed): $0.50 million
- Other ADB figures cited:
  - $8.04 billion
  - $402.03 million
- Official cofinancing (As of 30 June 2017): None
- Source: Asian Development Bank.

### Sovereign Loan Approvals and Disbursements to Indonesia (Table 1)
- Loan approvals (In millions of U.S. dollars):
  - 2010: 785.0
  - 2011: 580.0
  - 2012: 1,232.8
  - 2013: 1,013.9
  - 2014: 554.4
  - 2015: 1,375.0
  - 2016: 1,256.9
- Loan disbursements (In millions of U.S. dollars):
  - 2010: 1,079.8
  - 2011: 631.9
  - 2012: 862.5
  - 2013: 588.1
  - 2014: 543.7
  - 2015: 1.401.8
  - 2016: 1,324.6
- Source: Asian Development Bank.

### Cumulative Lending, Grant and Technical Assistance to Indonesia (As of December 2016) — Loans by Sector (US$ millions and Percent)
- Agriculture, Natural resources and Rural development: 275 projects; 4,425.10; 13.20
- Education: 80 projects; 2,455.75; 7.33
- Energy: 90 projects; 5,864.89; 17.49
- Finance: 67 projects; 4,352.93; 12.98
- Health: 46 projects; 1,104.99; 3.30
- Industry and trade: 40 projects; 1,160.58; 3.46
- Public sector management: 111 projects; 6,302.69; 18.80
- Transport: 90 projects; 3,702.25; 11.04
- Water and other urban infrastructure and services: 93 projects; 2,358.25; 7.03
- Multisector: 28 projects; 1,797.20; 5.36
- Source: Asian Development Bank, Indonesia Fact Sheet 2016.
- Note: "Total may not add up because of rounding."

### Assessment of Data Adequacy for IMF Surveillance — Key Findings
- General: Data provision is broadly adequate for surveillance with some shortcomings in fiscal and external sector statistics.
- National accounts:
  - BPS disseminates annual and quarterly GDP (QGDP) by economic activity and expenditure components at current prices and in volume terms at 2010 prices.
  - GDP estimates follow System of National Accounts 2008.
  - QGDP estimates are based on a limited set of indirect indicators.
  - Seasonally adjusted data prepared but not published for strongly seasonal sectors.
  - BPS and BI expect to finalize provisional sectoral accounts data for 2010–2014 by the end of 2017.
  - Next TA mission on Sectoral Accounts: January 2018.
- Price statistics:
  - Base year for PPI is 2010. Base year for CPI is 2012.
  - In October 2013, BPS released new PPI covering agriculture, mining and quarrying, and manufacturing with 2010 base period; PPI published quarterly.
  - PPI mining sample expanded to include oil and natural gas extraction, coal, and gold.
  - Work started to expand PPI coverage to include 15 service industries; currently PPI for electricity, water and gas; passenger transport; hotel and restaurants are disseminated.
  - Need to increase dissemination frequency and update the weights.
  - BI and BPS jointly began work to expand RPPI to include resales (current RPPI includes only sales of newly constructed units).
- Government finance statistics (GFS):
  - MOF committed to adopting GFSM 2001/2014 standards with STA assistance.
  - In 2013 Indonesia reported general government data (including balance sheet data) covering 2008 onwards to STA.
  - Aggregated central government budget data available with a one-month lag.
  - Annual general government GFS available 12 months after reference period and published on the GFS website.
  - Quarterly general government GFS (operations statement) are available 6 months after the end of the reference quarter; quarterly data yet to be published on the GFS website pending coverage and timeliness improvements.
  - Coverage and timeliness of public debt statistics are generally adequate.
- Monetary and financial statistics (MFS) and FSIs:
  - BI compiles good quality monetary statistics on a timely basis using SRFs.
  - Challenges: timely revisions of published banking sector data after supervisory verification.
  - With Fund TA (October 2014), BI expanded OFCs survey (since January 2015 includes finance companies, insurance companies, pension funds, PT Pegadaian, Eximbank) achieving almost full sub-sector coverage; OFC data reported monthly.
  - Mission assisted BI in producing flow-based monetary statistics and quarterly financial accounts.
  - BI reports all (12) core and 12 encouraged FSIs for deposit takers; encouraged FSIs for OFCs, nonfinancial corporations, households, market liquidity, and real estate sector; published quarterly on Fund’s FSI website.
- External sector statistics (ESS):
  - Trade data improved; free trade zones and bonded warehouses transactions captured in BOP goods data.
  - Financial account DI methodology needs substantial improvement; inflows currently estimated using loan disbursements and a fixed ratio to estimate equity inflows.
  - Errors and omissions in BOP are large and predominantly negative; could relate to under coverage of imports in current account or assets in financial account.
  - IIP data compiled and published annually and quarterly; external debt statistics improved with External Debt Information System (EDIS) introduced in 2002 and initiative to publish monthly indicators.
  - Reconciliation by BI has made IIP and external debt data fully consistent.
  - Further improvements needed in private corporate sector data: distinguishing scheduled vs actual debt service; estimating accumulation/reduction of private sector payment arrears; estimating reschedulings/debt reductions received by private sector from external creditors.
- Data Standards and Quality:
  - Indonesia subscribed to the Special Data Dissemination Standard (SDDS) since September 1996, observing most SDDS requirements.
  - Uses SDDS flexibility options for timeliness of labor market categories and general government operations.
  - Data ROSC completed in 2005.

### Table of Common Indicators Required for Surveillance (As of December 8, 2017) — Selected Timeliness and Frequency Notes
- Exchange rates: Latest observation 12/8/17; Date received 12/8/17; Frequency: D; Data Quality—Methodological Soundness: (blank)
- International reserve assets and reserve liabilities of the monetary authorities: Latest observation 10/17; Date received 12/17; Frequency: M
- Reserve/base money: Latest observation 10/17; Date received 12/17; Frequency: W/M; Data Quality—Methodological Soundness: O, LO, O, O; Data Quality—Accuracy and Reliability: LO, O, O, LO, O
- Broad money: Latest observation 10/17; Date received 12/17; Frequency: M
- Central bank balance sheet: Latest observation 11/17; Date received 12/17; Frequency: M
- Consolidated balance sheet of the banking system: Latest observation 10/17; Date received 12/17; Frequency: M
- Interest rates: Latest observation 12/8/17; Date received 12/8/17; Frequency: D
- Consumer price index: Latest observation 11/17; Date received 12/17; Frequency: M
- Revenue, expenditure, balance and composition of financing — central government: Latest observation 9/17; Date received 11/17; Frequency: M; Frequency of publication: Mid-year; Data Quality—Methodological Soundness: LNO, LNO, LO, LNO; Data Quality—Accuracy and Reliability: LNO, LO, LO, LO, LNO
- Stocks of central government and central government–guaranteed debt: Latest observation 9/17; Date received 11/17; Frequency: Q
- External current account balance: Latest observation Q3/17; Date received 11/17; Frequency: Q; Data Quality—Methodological Soundness: LO, LO, LO, LO; Data Quality—Accuracy and Reliability: LO, O, LO, O, O
- Exports and imports of goods and services: Latest observation Q3/17; Date received 11/17; Frequency: Q
- GDP/GNP: Latest observation Q3/17; Date received 11/17; Frequency: Q; Data Quality—Methodological Soundness: LO, LO, O, LO; Data Quality—Accuracy and Reliability: LO, LO, LO, LO, LNO
- Gross external debt: Latest observation Q3/17; Date received 11/17; Frequency: Q
- International investment position: Latest observation Q3/17; Date received 11/17; Frequency: Q
- Notes explain frequency codes and ROSC-based quality assessments.

### Statement by Juda Agung, Executive Director for Indonesia and Arief Machmud, Senior Advisor to Executive Director (January 10, 2018) — Key Messages and Policy Positions
- General appreciation:
  - Authorities express appreciation for IMF mission and constructive dialogue during 2017 Article IV consultation.
  - Indonesian economy performed well with maintained macroeconomic and financial stability.
  - Authorities committed to macroeconomic and financial stability and broad based structural reform.
- Recent economic developments and outlook:
  - Economy expected to grow at 5.1% in 2017.
  - Growth in 2018 projected at 5.1-5.5% (yoy).
  - Growth drivers: domestic demand, particularly investment growth, and recovery of export growth.
- Fiscal and structural reform:
  - Fiscal realization improved in 2017: revenue collection increased by 6.4 percent.
  - Budget deficit realization around 2.6 percent of GDP in 2017; government debt ratio at 28.6 percent of GDP.
  - Share of capital expenditures to total expenditure: 18.7 percent.
  - 2018 budget deficit targeted to 2.2 percent of GDP.
  - Fiscal strategy: optimizing revenue, improving quality of public spending, ensuring sustainable budget financing.
  - Tax reform focus: expanding taxpayer database, improving human resources and business processes, strengthening IT support.
  - Spending improvements: enhance quality of capital expenditure, ensure efficient non-priority spending, refocus priority spending (infrastructure, education, and health), synergize social protection programs, improve quality of fiscal decentralization.
  - Structural reform sequencing: authorities emphasize sequential phasing and choosing appropriate reforms benefiting the country most; request IMF advice on optimal reform sequence.
  - Energy subsidy reform: move from product subsidy towards more targeted subsidy; limit volume and availability of gas stations providing subsidized fuel (RON 88) and limit vehicle types allowed to consume subsidized fuel; increase usage of market-based fuel types (RON 90 and RON 92); abolishment of fuel subsidy policy removed fuel subsidy fund from fiscal budget; small fixed subsidy remains on diesel and kerosene mostly consumed by low-income society.
  - Infrastructure: establishment of KPPIP for feasibility, monitoring, debottlenecking; establishment of LMAN to expedite land acquisition; SOEs played key role in advancing stalled projects; SOEs involved show strong profits and low leverage; authorities monitor fiscal risks and pace projects prudently.
- Monetary policy:
  - Current stance viewed as neutral; monetary policy geared to maintain macroeconomic and financial stability.
  - Authorities employ "the policy mix": monetary policy, exchange rate policy, macro-prudential policy, payment system policy, and coordination with government.
  - Authorities caution IMF against directive forward guidance for emerging markets; stress building credibility over forward guidance.
  - Exchange rate policy: committed to exchange rate flexibility; will intervene in event of excessive volatility or fundamental misalignment to prevent disorderly market conditions and mitigate inflation risks.
- External sector:
  - Authorities concur external position broadly consistent with fundamentals; external debt sustainable.
  - Current account deficit directed from peak of 3.2 percent of GDP in 2013 to forecasted 1.7 percent of GDP for 2017.
  - Concern about IMF EBA-derived CA norm: estimated CA norm (-1.3 percent of GDP) may not reflect Indonesia’s need for a higher CA deficit to finance investment in infrastructure and structural reforms; encourage IMF to consider country-specific factors.
  - External debt at 34.4 percent of GDP (September 2017).
  - Corporate external debt regulation (KPPK) requires hedging (at least 25 percent) of net FX liability of corporate with external debt maturing within six months (covers corporates with external debt maturing up to 3 month and maturing between 3 to 6 months); authorities view it as prudential, not a capital flow measure; open to cost-benefit analysis to extend coverage.
- Financial sector:
  - Banking system remains sound, liquid, and profitable; FSIs indicate high capital adequacy, strong profitability, improved banking efficiency, relatively stable NPLs, and sufficient liquidity.
  - High capital buffers and profitability helped absorb credit losses under severe FSAP stress tests.
  - Authorities strengthen financial oversight and crisis management in line with FSAP recommendations.
  - On IMF suggestion to extend emergency lending (ELA) to OJK-assessed viable banks even if capital temporary below minimum, authorities note parliamentary disapproval of public funding for insolvent banks; Indonesia deliberately limits ELA eligibility to solvent banks and requests IMF to respect this decision.

*Source: cr1832 - 7.145 percent of total regional membership)*

### Conclusion

### Conclusion

### Policy stance and reform priorities
- Indonesia has embarked in an integrated policy reform efforts to improve resilience and boost potential growth so as to achieve strong, sustainable, balanced and inclusive growth.
- Indonesia is ready to be part of the major players in the global economy.
- To that end, the authorities will maintain their unwavering commitment towards macroeconomic and financial stability as well as broad-based structural reforms.

### Collaboration, events, and invitations
- The authorities would like to appreciate the excellent collaboration between the Fund and the authorities in preparing the 2018 IMF-WB Annual Meetings.
- The authorities would also request IMF member’s support to ensure the success of the event.
- Soon, they will be arriving at another important milestone for Voyage to Indonesia (VTI), which is the High Level Conference on “New Growth Model in a Changing Global Landscape” in February.
- This conference will be held in Jakarta, Indonesia and in this occasion, the authorities would like to invite all IMF members to attend.

*Source: cr1832 - Conclusion*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1832.pdf_