## 1idnea2021001

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### COVID-19 developments and immediate impacts
- Pre‑pandemic: stable growth of around 5 percent, low inflation of around 3 percent, low budget deficits, low public debt ratio; banking system well‑capitalized and liquid; regulatory framework broadly in line with Basel III; structural constraint: low revenue intake and high share of nonresident holdings of public debt.
- Health and vaccination:
  - Virus infections accelerated in the second half of 2020; test positivity rates remained high.
  - Vaccination program began in January 2021 with the goal of inoculating about two thirds of the population (or about 182 million people) by March 2022; free vaccines phased starting with health workers and public service workers.
- Economic activity:
  - Real GDP contracted by 3.5 percent in the first half of 2020 (H/H, s.a.).
  - Real GDP increased by 3.2 percent in 2020:Q3 (q/q, s.a.); broadly similar increase anticipated in 2020:Q4.
  - Overall economy estimated to have contracted by 1.9 percent in 2020; elsewhere reported GDP growth in 2020: -2.07 percent and 2020 budget deficit 6.1 percent of GDP.
  - Nationwide poverty rate increased to 9.8 percent in March 2020, up from 9.4 percent a year earlier.
- Inflation and external:
  - Headline inflation 1.7 percent at end‑2020 (below BI’s target range).
  - Current account narrowed to 0.5 percent of GDP in 2020.
  - BI foreign exchange reserves increased by US$7 billion to US$136 billion by year‑end 2020; reserve adequacy metric about 121 percent.

### Policy response summary
- Fiscal:
  - Four successive fiscal packages; total PEN allocation under six subprograms amounted to 4.4 percent of GDP in 2020 (reported elsewhere as Rp. 695.2 trillion or 4.2 percent of GDP).
  - 2020 fiscal deficit projected to widen to 6.3 percent of GDP in revised final budget from 1.8 percent initial; staff projection (cash basis) for 2021 budget deficit: 5.9 percent of GDP; authorities’ 2021 budget targets deficit of 5.7 percent of GDP; plan to return to 3 percent of GDP ceiling by 2023.
  - Estimated fiscal impulse (net of budget reallocation) of 3½ percent of GDP.
- Monetary and financial:
  - BI cut policy rate five times by a cumulative 125 bps in 2020 (BI7DRR lowered by 125 bps to 3.75 percent).
  - BI used a “triple‑intervention” strategy in spot, DNDF FX markets, and local currency government bond markets; reduced statutory reserve requirement by 300 bps and an additional targeted 50 bps for certain lending.
  - BI conducted bond purchases under a burden sharing agreement in 2020 (one‑off) and will use a market‑mechanism approach in 2021 (first joint agreement: Rp. 75.86 trillion; second joint agreement (one‑off, 2020): Rp. 397.56 trillion; BI‑borne interest for non‑public goods: Rp. 177 trillion).
- Regulatory and banking support:
  - Ceiling on budget deficit of 3 percent suspended through 2022; ban on BI purchases of longer‑term government bonds in the primary market removed.
  - Banks allowed to run down capital conservation buffers; loan classification and restructuring policies partially relaxed (restructured credit reached Rp. 971 trillion, 18 percent of total credit as of December 2020).
  - OJK extended partial relaxation of loan reclassification standards until March 2022.

### Nascent recovery, projections, and medium‑term outlook
- Near term:
  - Recovery expected to be sustained by macroeconomic policy support and improving pandemic conditions.
  - Real GDP projected to grow at 4.8 percent in 2021 (staff projection); authorities’ forecast range for 2021: 4.8 – 5.8 percent.
  - Inflation projected to rise from 1.7 percent at end‑2020 to 3 percent at end‑2021.
  - Credit growth expected to pick up in 2021 but remain below nominal GDP growth; elsewhere projected to accelerate to 7.0–9.0 percent.
- Medium term:
  - In 2025, real GDP projected to be 5 percent below the January 2020 WEO trajectory reflecting persistent output losses from COVID‑19.
  - Medium-term growth projection: 5.5 – 6.1 percent in 2025.

### Risks, vulnerabilities, and scenarios
- Key vulnerabilities:
  - Increased FX debt share for nonfinancial firms, especially in industries with low foreign sales.
  - Loans at risk have increased; underlying asset quality deteriorated; partial relaxation of loan classification could mask true NPLs.
  - High share of nonresident holdings of rupiah government bonds increases sensitivity to global financial volatility.
  - Climate change exposure and transition risks due to coal significance.
- Risk scenarios and recommended policy responses (selected from RAM):
  - Prolonged pandemic — Likelihood: Medium; Expected impact: High.
    - Recommendation: Loosen fiscal stance further in 2021; loosen monetary and macroprudential policies; keep exchange rate flexible and market driven.
  - Faster containment — Likelihood: Medium; Expected impact: Medium‑High.
    - Recommendation: Accelerate MTRS implementation; increase infrastructure and social spending; monetary policy on hold or gradually tightened; let regulatory relief expire.
  - Sharp rise in global risk premia — Likelihood: Medium; Expected impact: High.
    - Recommendation: Loosen fiscal stance further in 2021; loosen monetary and macroprudential policies; keep exchange rate flexible and market driven.

### External sector assessment and debt sustainability
- External position:
  - Preliminary assessment: external position in 2020 broadly in line with medium‑term fundamentals after adjusting for transitory factors.
  - NIIP and external position (2020:Q3, % GDP): NIIP –23.7; Gross Assets 34.5; Res. Assets 12.1; Gross Liab. 58.2; Debt Liab. 34.3.
  - Gross external debt 38 percent of GDP at end‑September 2020; 84 percent maturing after one year.
  - Share of nonresident holdings of rupiah government bonds declined from 38 percent at end‑2019 to 27 percent (or 5.6 percent of GDP) at end‑September 2020.
- Current account:
  - 2019 CA deficit: 2.7 percent of GDP.
  - CA narrowed to 0.5 percent of GDP in 2020; staff estimates CA gap for 2020 of 0.9 percent with a range −0.6 percent to 2.4 percent.
  - Projected CA to increase to 1.5 percent of GDP in 2021 as economy recovers and imports rise (mentioned elsewhere).
- Reserves and FX:
  - End‑2019 international reserves US$129.2 billion; US$136 billion in December 2020 (increase of US$7 billion).
  - Reserves equal 12.5 percent of GDP, about 121 percent of IMF reserve adequacy metric, and about 8 months of prospective imports.
- Debt sustainability:
  - External debt estimated at 38.3 percent of GDP by end‑2020; baseline projects external debt to reach 35 percent of GDP in 2025.
  - Public sector debt projected to stabilize around 41 percent of GDP over the medium term; public debt would rise from 35.7 percent in 2020 to around 41.3 percent of GDP in 2025.
  - Gross financing needs: peak 8.3 percent of GDP in 2020, falling to around 4.8 percent in 2025.
  - Stress tests: severe combined macro‑fiscal shock could stabilize total government debt around 48.4 percent of GDP by 2025.

### Fiscal strategy, MTRS, and revenue reform priorities
- Fiscal stance and planning:
  - 2021 budget reduces deficit target to 5.7 percent of GDP (from 6.3 percent in 2020 revised); authorities plan larger deficit reductions of around 1½ percent of GDP in each of 2022 and 2023 to meet the 3 percent ceiling when reinstated.
  - Staff recommends a detailed medium‑term fiscal strategy backed by revenue measures (MTRS) to restore fiscal rules credibly.
- MTRS rationale and design priorities:
  - Current tax revenue around 11 percent of GDP; longstanding low revenue and narrow base.
  - A well‑designed MTRS could increase revenue by to 5 percent of GDP over a period of 5 years (baseline simulations).
  - Priority tax policy measures (staff‑identified) include:
    - Broadening the personal income tax base.
    - Eliminating special corporate income tax regimes and applying a single CIT regime.
    - Introducing excise taxes on fuels and broadening excise base beyond tobacco.
    - Eliminating distortionary VAT exemptions and reducing VAT registration threshold.
    - Enhancing compliance of professional services providers and high‑wealth individuals.
- Tax administration and institutional reforms:
  - Launch a Compliance Improvement Program (CIP) targeting VAT, employer withholding, ultra‑high wealth individuals, and professionals.
  - Modernize DGT autonomy, HR, ICT, and legal frameworks (RUU KUP, VAT Law, Income Tax Law) to support MTRS implementation.
- Timing and sequencing:
  - Design and preparatory work should begin now, but major tax policy implementation should wait until recovery is firmly underway.

### Financial sector policies, safeguards, and structural reforms
- Banking system health:
  - Capital adequacy ratio of commercial banks remained well above 20 percent.
  - Loan loss allowances as a share of NPLs were 160 percent on average as of 2020:Q3.
  - Credit gap widened from −1.6 percent in 2019:Q4 to −3.6 percent in 2020:Q3; overall bank credit growth turned negative in 2020.
- Regulatory relief and recommended safeguards:
  - OJK and BI eased prudential regulations; BI injected liquidity; LCR and NSFR obligations relaxed; Capital Conservation Buffer use allowed.
  - Recommendation: tie regulatory relief to provisioning requirements and incentives for banks to use capital buffers; OJK should provide guidance for appropriate provisioning during partial relaxation until March 2022.
  - Priority upgrades: strengthen crisis management and resolution frameworks; consider consolidation or resolution for small banks; minimum capital standards to increase to IDR 2 trillion by end‑2021 and IDR 3 trillion by end‑2022.
- Market development and deepening:
  - Accelerate payment system and money market blueprints for 2025; consider establishing a central clearing counterparty (CCP).
  - Financial sector omnibus bill presents opportunity to advance crisis management, resolution frameworks, and fintech accommodation.
- BI bond purchases and monetary budget financing:
  - Market‑mechanism bond purchase approach in 2021 favored over pre‑defined burden sharing; recommended safeguards include last‑resort criteria based on bond market conditions, explicit objectives aligned with monetary policy, and temporary use only.
  - Risks of monetary budget financing: potential fiscal dominance, impaired BI operational independence, inflation or balance of payments pressures; need for criteria‑based, market‑mechanism approach going forward.

### Key statistics and selected figures (as reported)
- Real GDP contraction first half 2020: 3.5 percent (H/H, s.a.).
- Real GDP increase 2020:Q3 (q/q, s.a.): 3.2 percent.
- Estimated overall economy contraction 2020: 1.9 percent (alternative: GDP growth 2020: -2.07 percent).
- Nationwide poverty rate March 2020: 9.8 percent (up from 9.4 percent a year earlier).
- Headline inflation at end‑2020: 1.7 percent.
- BI policy rate cuts in 2020: cumulative 125 bps; BI7DRR lowered to 3.75 percent.
- Statutory reserve requirement reduction: 300 bps (plus an additional 50 bps targeted reduction).
- PEN 2020 total allocation: 4.4 percent of GDP (reported elsewhere as Rp. 695.2 trillion or 4.2 percent of GDP).
- PEN implementation: 38.2 percent at end‑September rising to 62.1 percent as of November 25, 2020.
- Restructured credit as of December 2020: Rp. 971 trillion (18 percent of total credit).
- BI foreign exchange reserves: US$136 billion by December 2020 (up US$7 billion).
- Reserve adequacy metric: 121 percent.
- NIIP 2020:Q3: –23.7 percent of GDP; Gross Assets 34.5 percent of GDP; Gross Liab. 58.2 percent of GDP.
- Gross external debt end‑September 2020: 38 percent of GDP; 84 percent maturing after one year.
- Public debt projections: rise from 35.7 percent in 2020 to around 41.3 percent of GDP in 2025.
- Gross financing needs peak: 8.3 percent of GDP in 2020; around 4.8 percent in 2025.
- INA initial capital: Rp. 15 trillion (or around US$ 1 billion).
- SiLPA from 2020 State Budget: Rp. 234.7 trillion; part carried over to 2021: Rp. 50.9 trillion.
- Vaccine procurement: more than 300 million doses; inoculation goal about 182 million people by March 2022.

_Italic: IMF staff report content (selected extracts)._

### 1. COVID-19 Developments ______________________________________________________________________ 26

### 1. COVID-19 Developments

### Pre‑COVID-19 landscape
- Stable growth of around 5 percent pre‑pandemic, with favorable macroeconomic indicators: low inflation of around 3 percent, low budget deficits, and a low public debt ratio.
- Banking system described as well‑capitalized and liquid; regulatory framework broadly in line with Basel III.
- Structural challenges: low revenue intake limiting development spending; rising net external portfolio liabilities and one of the highest shares of nonresident holdings of public debt across EMs, increasing sensitivity of rupiah assets to global risk aversion.

### The COVID‑19 crisis and the policy response
- Pandemic trajectory and health response:
  - Virus infections accelerated in the second half of 2020 after limited transmission earlier in the year; daily new cases later increased again and test positivity rates remained high.
  - Vaccination program began in January 2021 with the goal of inoculating about two thirds of the population (or about 182 million people) by March 2022; free vaccines to be made available in phases starting with health workers and public service workers.
- Economic impact and activity:
  - Real GDP contracted by 3.5 percent in the first half of 2020 (H/H, s.a.).
  - Real GDP increased by 3.2 percent in 2020:Q3 (q/q, s.a.); a broadly similar increase anticipated in 2020:Q4.
  - Overall, the economy is estimated to have contracted by 1.9 percent in 2020.
  - Nationwide poverty rate increased to 9.8 percent in March 2020, up from 9.4 percent a year earlier.
- Inflation:
  - Headline inflation fell below the lower bound of BI’s target range, driven partly by a positive food supply shock; headline inflation was 1.7 percent at end‑2020.
- Financial markets and external accounts:
  - Major portfolio outflows during global market turmoil in early 2020 were more than offset by subsequent inflows; net portfolio flows positive cumulatively as of September 2020.
  - Much of the rebound reflected net purchases of foreign currency‑denominated government and corporate securities by nonresidents; rebound in local currency debt and equity flows was modest.
  - BI’s foreign exchange reserves increased by US$7 billion to US$136 billion by year‑end 2020; reserve adequacy metric remained broadly unchanged at 121 percent.
  - Current account narrowed to 0.5 percent of GDP in 2020, driven by imports contracting more than exports.
- Policy measures:
  - Fiscal: Four successive fiscal packages; total allocation for the COVID‑19 response under the six subprograms of the National Economic Recovery Program (PEN) amounted to 4.4 percent of GDP in 2020.
    - 2020 fiscal deficit projected to widen to 6.3 percent of GDP in the revised final budget, from 1.8 percent in the initial budget.
    - Estimated fiscal impulse (net of budget reallocation) of 3½ percent of GDP.
  - Monetary and financial: BI cut its policy rate by 125 bps and increased liquidity support to banks; employed a “triple‑intervention” strategy in spot, DNDF FX markets, and local currency government bond markets.
  - Regulatory: Ceiling on budget deficit of 3 percent of GDP suspended through 2022; ban on BI purchases of longer‑term government bonds in the primary market removed.
  - Banking sector support: Banks allowed to run down capital conservation buffers; loan classification and restructuring policies partially relaxed.
- Banking and credit conditions:
  - Credit to the private sector declined by 0.5 percent (y/y) by end‑October 2020.
  - Banks restructured about one‑fifth of their loans by end‑October 2020 (reflecting partial relaxation of loan classification standards); NPL ratios deteriorated only marginally.
  - Bank funding conditions improved, with increased deposits (notably demand deposits) and higher holdings of liquid assets, particularly government bonds.
- Fiscal execution:
  - PEN implementation rose from 38.2 percent at end‑September to 62.1 percent as of November 25, 2020, with uneven execution across subprograms.
  - More than 80 percent of allocations on social safety nets and MSME incentives disbursed; around half of budget transfers to subnational governments disbursed.
  - Regular budget spending execution rate reached around 93 percent by end‑2020.

### The nascent recovery, prospects, and risks — Outlook
- Near term:
  - Macroeconomic policy support and improving pandemic conditions expected to sustain recovery.
  - Real GDP projected to grow at 4.8 percent in 2021.
  - Inflation projected to rise from 1.7 percent at end‑2020 to 3 percent at end‑2021.
  - Credit growth expected to pick up in 2021 but remain below nominal GDP growth as banks remain cautious.
- Medium term:
  - In 2025, the level of real GDP is projected to be 5 percent below the level envisaged in the January 2020 WEO trajectory, reflecting persistent output losses from COVID‑19 (labor‑ and firm‑related scarring and sectoral impacts).
  - Some sectoral reallocation noted: positive growth in information and communication, real estate, and agriculture despite the pandemic.

### Risks and vulnerabilities
- Vaccine and pandemic risks:
  - Upside: wide vaccine distribution in early 2021 could accelerate recovery.
  - Downside: protracted outbreak or vaccination delays could increase economic scarring and weaken balance sheets.
- Banking and corporate sector risks:
  - Underlying asset quality has deteriorated; loans at risk have increased.
  - Fallout on reported bank asset quality could be larger once partial relaxation of loan classification rules and other policy support expire.
  - Credit conditions may be slow to improve depending on non‑provisioned losses and global market conditions.
  - Nonfinancial corporates are vulnerable and banks have large exposure to them; bank deleveraging to rebuild capital could worsen credit conditions.
- External risks:
  - Tighter external financial conditions could induce domestic financial stress via balance sheet exposures to global conditions, affecting banks indirectly through FX linkages and sovereign exposure.
- Climate change and transition risks:
  - Indonesia is highly susceptible to climate‑related natural hazards with potential for greater economic disruption and fiscal pressures over time.
  - Transition risks arise from the significance of coal in the economy as the world transitions to a greener economy.

### External sector assessment
- Preliminary assessment: external position in 2020 broadly in line with medium‑term fundamentals after adjusting for transitory factors, though assessment is highly uncertain given incomplete 2020 data and the COVID‑19 crisis.
- Current account:
  - Narrowed to 0.5 percent of GDP in 2020 (mostly due to stronger contraction of imports).
  - Projected to increase to 1.5 percent of GDP in 2021 as the economy recovers and imports rise.
- Implications:
  - Reduced external financing needs in 2020–21 provide a cushion against capital flow volatility and offset some negative exchange rate‑related valuation effects on external debt and stock vulnerability indicators.
  - Reserve position remains adequate under the baseline outlook.
  - Omnibus law on job creation and implementation of the Regional Comprehensive Economic Partnership expected to boost export competitiveness and attract more FDI over the medium term.

### Authorities’ views
- Authorities broadly agreed with the macroeconomic outlook and risks while noting large uncertainty.
- They expect a positive growth outlook for 2021 led by targeted vaccine deployment and a coordinated policy strategy encompassing:
  - (1) reopening of priority sectors based on their contribution to growth and employment;
  - (2) front‑loading of government spending;
  - (3) tackling the credit crunch;
  - (4) maintaining an accommodative monetary and macro‑prudential policy stance;
  - (5) fostering digitalization.
- Improvements in mobility, global growth, and benign global financial conditions are also expected to support growth in 2021.

*Source: 1. COVID-19 Developments (Indonesia), IMF.*

### 17. The authorities shared staff’s assessment that Indonesia’s external position is in line

### 17. The authorities shared staff’s assessment that Indonesia’s external position is in line

### External position and near-term outlook
- Authorities and staff assess that Indonesia’s external position is in line with the level implied by medium-term fundamentals and desirable policies.
- The current account deficit will likely widen in 2021 with the expected economic recovery, although it will remain below recent pre-pandemic levels.
- Portfolio inflows are expected to continue to pick up in 2021, supported by projected domestic and global economic recovery.
- Ongoing and planned reforms (including the omnibus bill on job creation and the implementation of the Regional Comprehensive Economic Partnership) are expected to promote export competitiveness and help attract more FDI.

### Policies to secure the recovery and bolster medium-term prospects — overview
- Main policy focus: how to unwind exceptional, pandemic-related policy support in a balanced manner.
- Key discussion areas:
  - A fiscal and monetary policy mix to nurture the recovery, with fiscal support in 2021 targeted to affected sectors and households and accommodative monetary policy facilitating fiscal response through monetary budget financing as a backstop.
  - A medium-term fiscal strategy to unwind exceptional fiscal support amid uncertainty; explicit medium-term strategy, backed by revenue measures, would strengthen credibility and restore fiscal rules after their temporary suspension.
  - Preparing for financial sector stresses while maintaining credit flows; potential need for temporary intervention and stronger frameworks for distressed institutions.
  - Reinforcing structural reform momentum, including financial sector reform and broad-based government revenue reform.

### Fiscal policy — 2021 budget and near-term stance
- 2021 budget: reduction in deficit target from 6.3 percent of GDP in the final revised 2020 budget to 5.7 percent in the 2021 budget, reflecting partial unwinding of exceptional spending under the PEN program.
- All six subprogram areas under PEN, including health and social protection, will continue to be funded in the budget.
- Other spending, including public investment, will increase relative to the revised 2020 budget and the 2019 budget outcome, with a focus on longstanding infrastructure needs.
- Government plans larger deficit reductions of around 1½ percent of GDP in each of 2022 and 2023 to meet the deficit ceiling of 3 percent of GDP when it is reinstated in 2023.
- Staff projection (cash basis) for 2021 budget deficit: 5.9 percent of GDP.
- Tentative actual figures for 2020 suggest realized budget deficit will be around 5.7 percent of GDP due to underspending.
- Public investment increase will focus on labor-intensive projects to reinforce the modest positive fiscal impulse.
- Authorities retain the flexibility to reallocate budget resources in 2021; in 2021 and, most likely, in 2022, the government still has exceptional authority to reallocate budgetary resources without parliamentary approval under the emergency law for PEN.

### Fiscal space, risks, and medium-term strategy
- Public debt ratio is projected to remain below the 60 percent threshold under the baseline and in DSA risk scenarios despite temporarily higher budget deficits.
- Vulnerabilities: high share of public debt held by nonresidents constrains fiscal space; fiscal space depends on ability to secure orderly market debt financing.
- Staff recommendation: use fiscal space if downside risks materialize and budgetary reallocation proves insufficient.
- Concerns about current medium-term fiscal plans:
  - Under current policies, reducing the budget deficit below 3 percent of GDP by 2023 will rely heavily on expenditure consolidation.
  - Cyclical recovery in tax revenue will be small and partly offset by the impact of the gradual, permanent reduction in corporate income tax (CIT) rates initiated in 2020 and new tax facilities from the omnibus bill on job creation.
  - Envisaged annual consolidation in both 2022 and 2023 will be sizeable at around 1½ percent of GDP.
  - Risk that consolidation could prevent warranted increases in development spending (infrastructure, education, social safety nets).
- Recommendation: a more detailed medium-term fiscal strategy to underpin the plan to return to the deficit ceiling, including revenue measures as part of a medium-term revenue strategy (MTRS).
- Priority revenue measures that could compensate for some omnibus bill revenue loss (staff-identified):
  - Broadening the personal income tax base.
  - Eliminating the special corporate income tax regimes now that the standard CIT rate has been lowered.
  - Introducing excise taxes on fuels.
  - Enhancing the compliance of professional services providers and high-wealth individuals.
  - Eliminating distortionary VAT exemptions.
- Timing of return to the deficit ceiling should depend on the state of the economy; credibility risks from delay could be reduced with a well-articulated escape clause or regular progress reviews.

### Fiscal transparency and accountability for COVID-19 measures
- Three-pronged approach adopted to foster transparency and safeguard accountability:
  - Early consultation between the Ministry of Finance (MOF) and the Audit Board of Indonesia at the design stage of PEN programs.
  - Monthly reporting requirements on COVID-19-related programs to assess use, traction, and effectiveness relative to objectives.
  - Plans for an ex-post evaluation of the effectiveness of incentives.
- Tax expenditure under the PEN program will be part of the MOF’s 2020 Tax Expenditure Report, to be published in 2021.
- Tax expenditure reports have been published since 2018, increasing fiscal transparency.

### Authorities’ fiscal views
- Authorities agree that premature withdrawal of fiscal support could jeopardize the recovery and will continue expansionary policies to support recovery.
- Fiscal policy objectives: encourage effective COVID-19 handling and accelerate economic recovery, balance unwinding support with avoiding crowding out private recovery via fiscal deficits.
- Use flexibility in 2020 budget law to carry over unspent 2020 PEN allocations to 2021; closely monitor PEN execution and reallocate spending to most affected sectors and high-impact areas if needed.
- State budget will gradually be less expansive and focus more on consolidation between 2021 and 2023.
- Confirmed commitment to return to the 3 percent of GDP budget deficit rule by 2023 through higher spending efficiency, revenue optimization reforms, and encouraging innovative financing (e.g., digital platforms to facilitate sales of government bonds to retail investors).
- Authorities concur on importance of further revenue mobilization and coherent tax reform to fund the state budget despite COVID-19 disruptions.
- Recent and ongoing revenue reforms focus on tax administration (risk-based audits, IT development, use of taxpayer bank data) and tax policy (extension of excise taxes, imposition of VAT on cross-border electronic transactions, reductions in CIT rate).
- Authorities appreciate IMF readiness to provide CD support on these issues.

### Monetary policy and the policy mix
- BI’s timely adjustment of policy mix eased monetary conditions and supported orderly financial market functioning amid large capital flow volatility.
  - BI cut the policy rate, enhanced liquidity provision to banks and key markets, and allowed greater exchange rate flexibility during global market turmoil in March 2020.
  - BI relied more on interventions in the domestic non-deliverable forward (DNDF) FX market, preserving FX reserves for prolonged stress scenarios.
- BI’s quantitative easing strategy included purchases of rupiah-denominated government bonds under two programs: one based on a last-resort “market mechanism” and one based on a burden sharing agreement.
- BI emphasized that monetary budget financing is supporting the fiscal response and the recovery.
  - BI cut the policy interest rate less aggressively than many other EM central banks in 2020 due to perceived risks of excessive currency volatility.
  - Government bond purchases by BI helped avoid bond market disruptions after large capital outflows in March and early April 2020, improved banks’ liquidity conditions and lending capacity, and supported injections of funds via public expenditure that contributed to increased private deposits in banks.

### Role, design, and risks of monetary budget financing
- Monetary budget financing as a backstop is appropriate in current exceptional circumstances; using bond purchases alongside policy rate tools is more likely to achieve accommodative financial conditions along the rupiah yield curve than relying on policy rates only.
- Risks identified:
  - Higher yields have increased given higher budget deficits and associated financing needs in a relatively shallow domestic bond market and volatile demand from nonresident investors.
  - Higher domestic yields would constrain fiscal response and weigh on domestic credit despite weak monetary policy transmission.
  - Risks to central bank operational independence, balance of payments pressures, or crowding out private credit as recovery advances.
- Recommended framework elements for monetary budget financing:
  - Clear delineation of temporary use of the tool in the recovery from the pandemic.
  - Bond purchases triggered by well-defined last resort criteria based on bond market conditions, not pre-defined amounts based primarily on fiscal considerations.
  - An explicit objective for purchases to align with monetary policy framework and objectives.
- The plan to use only bond purchases under the market-mechanism approach in 2021 will help balance benefits and risks:
  - The 2020 burden sharing agreement was complex with pre-defined amounts irrespective of market conditions.
  - The market-mechanism approach (put forward in April 2020) involves no pre-defined amounts; BI acts as a backstop in primary bond market auctions using noncompetitive bidding if market demand falls short.
  - BI could adopt more specific criteria for last resort conditions and increasingly rely on conventional secondary market operations as the track record builds.

### Monetary policy stance and institutional considerations
- Monetary policy stance is appropriately accommodative; BI should stand ready to respond to downside risks.
  - If downside risks materialize, BI has room to cut the policy rate and expand liquidity provision; the exchange rate should continue to be an important shock absorber.
  - If the exchange rate acts as a shock amplifier, foreign exchange interventions could be used to counter disorderly market conditions and mitigate balance sheet impacts from currency mismatches.
- Possible changes to the BI Law should avoid limiting BI’s operational independence or setting unrealistic monetary policy objectives.
  - BI’s financial stability mandate central to reforms; staff view that BI’s operational independence has served Indonesia well and has not impeded policy coordination in exceptional times.
  - Any additional growth or employment objective for BI should recognize that monetary policy can address cyclical fluctuations, not longer-term trends.

### Authorities’ monetary views
- Authorities intend to maintain an accommodative monetary policy stance until early signs of inflation pressures emerge.
- Inflation is below BI’s target range of 3±1 percent, supporting continued accommodation.
- Given ample banking system liquidity, authorities see limited near-term demand-boosting effects from further policy rate cuts or liquidity provision; fiscal policy is viewed as a better instrument to boost demand in the current context.
- The burden sharing agreement defined in July 2020 was a one-off arrangement for 2020 and will not be continued; monetary budget financing in 2021 will follow a market mechanism arrangement.

*Source: IMF staff and Indonesian authorities discussions as contained in the chapter text.*

### Chapter 4 of the Selected Issues shows that Indonesian nonfinancial firms have recently increased the share of FX

### Chapter 4 — Financial Sector Policies, Structural Reforms, and Staff Appraisal

### FX exposure of nonfinancial firms
- Indonesian nonfinancial firms have recently increased the share of FX debt on their balance sheets, especially in industries with low foreign sales (e.g., utilities, discretionary consumer items, and real estate).

### Monetary and FX policy stance
- BI will purchase government bonds in the primary market as a stand-by buyer, on a last-resort basis, with the maximum amounts per auction capped at prudent levels. (April 2020)
- Authorities reiterated commitment to exchange rate flexibility and development of payment systems and money markets; FX interventions would be used to counter disorderly FX market conditions if the exchange rate acted as a shock amplifier rather than a shock absorber.
- Authorities will accelerate implementation of the Indonesian Payment System Blueprint 2025 and the Money Market Deepening Blueprint 2025.

### Banking system health and risks
- Capital adequacy ratio of commercial banks has remained well above 20 percent.
- Loan loss allowances as a share of NPLs were 160 percent on average as of 2020:Q3.
- NPL ratios have remained stable so far, but loans at risk have increased sharply.
- Overall bank credit growth has continued to slow, with the year-on-year rate being in negative territory since September.
- Relaxation of loan classification requirements could bias key bank ratios, increasing risks of a deterioration in asset quality; eventual outcomes depend on viability of restructured loans and pace of recovery.

### Regulatory relief, liquidity, and credit supply measures
- Easing measures included simplified assessments of credit quality and allowing banks to classify debtors who receive the restructuring scheme to remain as Stage 1 borrowers, without additional provisions.
- BI injected liquidity into the banking system; Financial Services Authority (OJK) eased prudential regulations, including relaxing the obligation to fulfill the Liquidity Coverage Ratio and Net Stable Funding Ratio requirements and allowing the use of the Capital Conservation Buffer.
- Authorities established programs supporting credit to corporates and MSMEs, including interest subsidies and credit guarantees.

### Policy recommendations to support credit and prepare for banking problems
- Supplement general regulatory relief measures for borrowers with provisioning requirements and incentives for banks to use their capital buffers.
  - OJK extended partial relaxation of loan reclassification standards until March 2022; while helpful, the extension raises risks to bank balance sheets.
  - Banks should provision for credit losses early and continue to properly classify and monitor loans, including restructured loans, with guidance from OJK.
  - As pandemic uncertainty subsides, loan restructuring should be tied increasingly to businesses with a high likelihood of post-pandemic viability.
  - General distribution restrictions (e.g., on dividends) and greater supervisory clarity and flexibility for rebuilding prudential buffers could help incentivize banks to draw on buffers to lend.
- If aggregate credit does not recover, consider additional government support measures to viable firms, including through credit guarantees.
  - An upgrade of the loan guarantee program (e.g., a longer time horizon for such guarantees) or other targeted support measures could be effective for larger corporates that do not qualify for current MSME support and are not part of a conglomerate structure.
- Prioritize changes to crisis management and resolution frameworks.
  - Some smaller banks faced significant deposit outflows; minimum capital standards will increase to IDR 2 trillion (about US$143 million) by end-2021 and IDR 3 trillion (about US$220 million) by end-2022.
  - OJK has used consolidation to address failing small banks but resolution frameworks may also be needed where consolidation is not feasible or is too slow.
  - PEN program alleviated some impediments to emergency liquidity framework effectiveness identified in the 2017 FSAP, but other strengthening steps remain under consideration.

### Financial deepening, market infrastructure, and regulatory reform
- BI’s blueprint on payment systems supports digital economic and financial integration to improve monetary policy transmission and inclusion.
- Broader financial market development (new products, broader participation by institutional investors) would help mobilize long-term savings and reduce reliance on volatile foreign funding.
- The financial sector omnibus bill is an opportunity to:
  - Lay legal foundation for further financial deepening.
  - Tackle regulatory reforms, including steps for stronger crisis management and resolution frameworks and updates to accommodate fintech.
- Authorities see establishment of a central clearing counterparty (CCP) as urgently needed to reduce counterparty risks and market segmentation and to help anchor the short-term end of the yield curve and deepen repo and FX derivatives markets.

### Structural reforms and other policy priorities
- Passing the omnibus bill on job creation aims to lower obstacles to job-creating investment and boost productivity by easing regulatory burdens in one sweep.
- Nusantara Investment Authority (NIA) is designed to channel institutional and corporate investment toward infrastructure, starting with low-risk mature infrastructure investments and later moving to higher risk green- and brownfield investments; strong governance and focus on areas less competitive for other financing are important given quasi-fiscal risks.
- A medium-term revenue strategy (MTRS) centered on revenue-raising tax policy reform should be a macro-structural reform priority to increase government spending on development and meet Sustainable Development Goals.
  - The return to the budget deficit ceiling by 2023 will require substantial expenditure consolidation of around 1½ percent of GDP in both 2022 and 2023 unless revenue measures are implemented.
- Digitalization should be harnessed to mitigate the pandemic’s economic impact; challenges remain in digital infrastructure, worker skills, regulations (with regard to financial stability, integrity, and consumer protection).
- Further reforms toward a greener economy could include reforestation incentives, support for renewable energy generation capacity and reduced reliance on coal, and reform of energy subsidy schemes; better monitoring and execution of adaptation plans is desirable given high exposure to natural hazards.

### Authorities’ views
- Authorities agreed systemic risk in the financial sector had remained contained so far but vulnerabilities remain; they will continue to monitor loans and provision for credit loss from restructured loans.
- Authorities did not see notable financial strain for nonfinancial firms in the formal sector but are monitoring small- and medium-sized firms in labor-intensive industries.
- Authorities emphasize reducing asymmetric information between banks and borrowers to facilitate credit expansion and noted prudential relaxations could be gradually withdrawn as the economy recovers, though normalization may take longer than expected.
- Authorities consider broad reforms to strengthen financial oversight, crisis management, and interagency cooperation, while safeguarding the operational independence of BI.
- Authorities reiterated commitment to financial deepening, closing financial market infrastructure gaps, and transitioning to a greener economy consistent with Indonesia’s NDC.

### Staff appraisal and outlook
- The policy response to COVID-19 has been bold and comprehensive and helped preserve macro-financial and external stability.
- Indonesia is positioned for recovery under currently appropriate accommodative monetary and fiscal policy settings; near-term drivers include policy support, wider COVID-19 vaccine distribution, increased mobility, and improved global conditions.
- Economic outlook subject to larger-than-usual uncertainty: early vaccine distribution is an upside risk; delays and a protracted pandemic are downside risks.
- Underlying asset quality in the banking system has deteriorated, but systemic risks are unlikely to be materially affected given the sector’s sound initial position; however, credit conditions could remain slow to improve depending on non-provisioned losses.
- External position in 2020 was broadly in line with level implied by medium-term fundamentals after adjusting for transitory factors, but large share of portfolio investment in external liabilities exposes economy to global financial condition fluctuations.
- Fiscal settings planned for 2021 are moderately expansionary and the flexibility to reallocate budget resources provides a basis to respond to shifting needs amid high uncertainty.
- Returning to the budget deficit ceiling by 2023 should be backed by a detailed medium-term fiscal strategy, preferably integrated with an MTRS.

*Source: Chapter 4, Selected Issues (Indonesia), as provided.*

### 53. The plan for BI to conduct bond purchases under the market mechanism in 2021 will

### 1idnea2021001 - 53. The plan for BI to conduct bond purchases under the market mechanism in 2021 will

### Monetary policy, BI bond purchases, and safeguards
- BI’s plan to conduct bond purchases under the market mechanism in 2021 aims to balance the benefits and risks of monetary budget financing.
- Under current exceptional circumstances, pursuing accommodative conditions along the broader rupiah yield curve through BI bond purchases could be appropriate, provided adequate safeguards are in place.
- The market mechanism framework would reaffirm a monetary policy framework in which such purchases would be used only temporarily and on a last-resort basis in exceptional circumstances, thereby containing risks to monetary policy credibility.
- BI could consider enhancing the framework by clarifying the last resort criteria, based on bond market conditions.
- Key related monetary actions and indicators from the document:
  - BI has reduced its policy rate five times by a cumulative 125 bps in 2020.
  - BI purchased government bonds to support the national economic recovery program.

### Banking sector resilience, credit risks, and policy support
- Proactive management of credit risks is essential to ensure banks can support the recovery.
- Credit restructuring has helped adjustment to pandemic-related disruptions but cannot by itself resolve underlying vulnerabilities.
- With the partial relaxation of loan classification rules until March 2022, OJK should provide guidance for appropriate provisioning.
- Additional, targeted policy steps to revive credit might be needed if banks maintain tighter credit standards.
- If credit continues to slump, policy options include an upgrade to the loan guarantee program or other targeted measures.
- Relevant macrofinancial indicators:
  - The credit gap widened from −1.6 percent in 2019:Q4 to −3.6 percent in 2020:Q3.
  - Credit growth fell sharply in 2020.
  - The banking system as a whole has ample liquidity, although small banks continue to experience deposit outflows.

### Financial deepening, regulatory reform, and BI independence
- Accelerated efforts at promoting financial deepening are welcomed; the financial sector omnibus bill represents an opportunity to advance these efforts.
- Financial deepening would help mobilize long-term savings and reduce reliance on volatile foreign funding.
- The digital revolution in the financial sector calls for an upgrade of the regulatory framework.
- Regulatory issues related to crisis management, resolution, and the financial safety net should be addressed.
- Possible changes to the BI Law under the omnibus law should not limit BI’s operational independence or set unrealistic monetary policy objectives.

### Fiscal policy, investment, and governance
- The passing of the omnibus bill on job creation could be important for boosting investment, but high-quality governance standards will be required for success.
- The Nusantara Investment Authority being set up could be a useful conduit for infrastructure investment; however, it entails quasi-fiscal risks and requires strong governance settings for effective, transparent use of public resources.
- A medium-term government revenue strategy is a macro-structural reform priority; preparations should begin without delay.
  - A coherent strategy addressing root causes of weak revenue performance is essential to secure higher government revenue needed for sustained increases in spending on development.

### Climate policy and resilience
- Indonesia’s proactive policies tackling climate change could put further emphasis on a greener economy.
- A comprehensive transition plan would contribute to the economic recovery.
- Further progress in monitoring and execution of adaptation plans would increase resilience to climate change, given Indonesia’s high exposure to related natural hazards.

### Risk scenarios and policy recommendations (selected from RAM)
- Prolonged pandemic
  - Likelihood: Medium
  - Expected impact: High. Larger economic scarring; decline in capital inflows; currency depreciation; tighter domestic credit conditions; higher poverty rate.
  - Policy recommendation: Fiscal stance should be loosened further in 2021. Monetary and macroprudential policies should be loosened further. The exchange rate should remain flexible and market driven.
- Faster containment
  - Likelihood: Medium
  - Expected impact: Medium-High. Investment and employment recover; capital inflows resume; currency appreciation; easier domestic credit conditions.
  - Policy recommendation: Accelerate implementation of the MTRS. Increase infrastructure investment and social spending. Monetary policy should be on hold or gradually tightened in line with the inflation outlook. Regulatory relief measures should be let expire.
- Sharp rise in global risk premia
  - Likelihood: Medium
  - Expected impact: High. Lower GDP growth; larger economic scarring; decline in capital inflows; currency depreciation; tighter domestic credit conditions.
  - Policy recommendation: Fiscal stance should be loosened further in 2021. Monetary and macroprudential policies should be loosened further. The exchange rate should remain flexible and market driven.

### External sector and balance-sheet indicators (selected figures)
- At end-September 2020, Indonesia’s net international investment position (NIIP) was −24 percent of GDP, improving from −30 percent at the end of 2019.
- The current account balance turned to surplus in 2020:Q3, driven by an increase in the non-oil and gas trade surplus.
- External financing needs are projected to increase in 2021 mainly due to a widening of the current account deficit.
- The share of foreign investors’ holdings of rupiah government bonds has yet to recover its pre-pandemic levels.

### Operational recommendation on Article IV consultations
- It is recommended that the next Article IV consultation take place on a standard 12-month cycle.

*International Monetary Fund — Indonesia: selected sections (content unit 1idnea2021001).*

### 4.5 percentage points of GDP in portfolio equity liabilities. In September 2020, gross external assets reached 34.5 perc

### Indonesia: External Position, Debt Sustainability, and Medium-Term Revenue Strategy

### External Position and Net International Investment Position (NIIP)
- 2020:Q3 (% GDP)
  - NIIP: –23.7
  - Gross Assets: 34.5
  - Res. Assets: 12.1
  - Gross Liab.: 58.2
  - Debt Liab.: 34.3
- In September 2020, gross external assets reached 34.5 percent of GDP (of which, 35 percent were reserve assets) and gross external liabilities, 58 percent of GDP.
- Indonesia’s gross external debt was 38 percent of GDP at end-September 2020 and 84 percent was maturing after one year.
- The share of nonresident holdings of rupiah denominated government bonds declined from 38 percent of the total stock at the end of 2019 to 27 percent (or 5.6 percent of GDP) at end-September 2020.
- Assessment:
  - The level and composition of the NIIP and gross external debt indicate that Indonesia’s external position is sustainable and subject to limited roll-over risk.
  - The sizable nonresident holdings of rupiah government bonds make Indonesia vulnerable to global financial volatility, higher U.S. interest rates, and a stronger U.S. dollar.
  - Staff projections for the current account suggest that the NIIP as a percent of GDP will continue to strengthen over the medium term.

### Current Account
- Background and recent developments:
  - 2019 current account deficit: 2.7 percent of GDP (narrowed from 2.9 percent in 2018).
  - On a cumulative basis as of Q3 2020, the current account deficit narrowed compared to 2019 due to import contraction outpacing export declines.
  - The current account (CA) deficit is projected to narrow to 0.5 percent in 2020, driven by a contraction in domestic demand and imports, partly compensated by the negative impact on tourism of the COVID-19 pandemic.
- Assessment and gaps:
  - Staff estimates a CA gap of 0.9 percent for 2020, consistent with an estimated cyclically adjusted CA deficit of −0.7 percent of GDP and a staff-assessed norm of −0.5 percent of GDP.
  - Considering uncertainties, the CA gap for 2020 is in the range of −0.6 percent to 2.4 percent of GDP.
- 2020 (% GDP) figures:
  - Actual (Proj.) CA: –0.5
  - Cycl. Adj. CA: –0.7
  - EBA CA Norm: –0.5
  - EBA CA Gap: -0.2
  - Staff Adj.: 1.06
  - Staff CA Gap: 0.9
- Policy implications:
  - Maintaining external balance will require structural reforms to strengthen health, education, infrastructure, and increase labor market flexibility.

### Real Exchange Rate (REER)
- Background:
  - 2019 average REER appreciated by 4.3 percent relative to the 2018 average.
  - With the COVID-19 shock, the REER depreciated by about 10 percent between February and April 2020 before recovering; as of October 2020, the REER had depreciated by 1.3 percent compared to the 2019 average.
- Assessment:
  - REER index and level REER models point to 2020 REER gaps of about 4.9 percent to −6.8 percent respectively, with an upward shift in the range of estimated gaps compared to 2019.
  - The staff CA gap estimate of 0.9 percent of GDP implies an REER gap of −4.8 percent with standard elasticities.
  - Considering all inputs and the REER moderate depreciation in 2020, staff assesses the REER gap in the −4.9 to 5.1 percent range, with a midpoint of -0.3 percent.
- Technical notes:
  - The semi-elasticity of CA/GDP with respect to REER, based on trade adjustment, is estimated to be −0.18 for Indonesia.
  - The mid-point calculation and range width are defined by averaging models and applying a standard +/-5 percent interval.

### Capital and Financial Accounts: Flows and Policy Measures
- Background (2019):
  - Net capital and financial account inflows: 3.3 percent of GDP.
  - Components: net FDI inflows 1.8 percent of GDP, net portfolio inflows 1.9 percent of GDP, net other investment inflows of -0.5 percent of GDP.
- 2020 developments:
  - Starting in March 2020, large capital outflows occurred from sales of rupiah denominated securities by nonresident investors; these outflows were largely offset by inflows from issuance of foreign currency denominated government bonds.
- Assessment:
  - Net and gross financial flows remain prone to periods of volatility.
  - The broadly contained current account deficit and strengthened policy frameworks, including exchange rate flexibility since mid-2013, have helped reduce capital flow volatility.
  - Continued strong policies—safeguarding the fiscal position, keeping inflation in check, advancing financial deepening, and easing supply bottlenecks—would help sustain capital inflows in the medium term.

### FX Intervention and Reserves Level
- Background:
  - End-2019 international reserves: US$129.2 billion (compared with US$120.7 billion at end-2018).
  - Contingencies and swap lines amount to about US$95 billion.
  - Bank of Indonesia intervened in the non-spot and spot FX markets in March and April 2020 and introduced daily FX swap auctions. International reserves recovered from April 2020 and reached US$136 billion in December 2020.
- Assessment:
  - Current level of reserves equals 12.5 percent of GDP, about 121 percent of the IMF’s reserve adequacy metric, and about 8 months of prospective imports of goods and services.
  - Reserves should provide sufficient buffer against a wide range of possible external shocks; exchange rate flexibility should continue to act as a shock absorber.
  - If external pressures result in disorderly market conditions, the use of FX intervention (FXI) can be appropriate to mitigate negative balance sheet impacts.

### External Debt Sustainability
- Recent status:
  - External debt reached 36.1 percent of GDP in 2019 (36.0 percent in 2018).
  - External debt is estimated to have increased to 38.3 percent of GDP by end-2020, driven mainly by increased government borrowing.
- Projections:
  - Baseline: external debt would reach 35 percent of GDP in 2025, reflecting lower financing needs as current account and fiscal deficits decline.
- Sensitivities and shocks:
  - External debt is robust to interest rate and GDP shocks but more sensitive to current account and exchange rate shocks.
  - A one standard deviation widening of the current account deficit would increase external debt to 38 percent of GDP by 2025.
  - A 30 percent exchange rate depreciation in 2021 would raise external debt to 53.6 percent of GDP in 2021 and keep it above 49 percent of GDP until 2025.
- Authorities:
  - The authorities agreed with the external and public debt sustainability analysis.

### Public Debt Sustainability
- Status and composition:
  - General government debt declined from 87 percent of GDP in 2000 to 30.6 percent in 2019.
  - Foreign-currency denominated debt is about 38 percent of general government debt.
  - Nonresidents hold around 58 percent of general government debt.
- Projections:
  - Public sector debt is projected to stabilize at around 41 percent of GDP over the medium term.
  - The fiscal rule is suspended for 2020−22.
  - Baseline: general government deficit increases up to 5.9 percent in 2021 before declining to 2.3 percent of GDP over the medium term.
  - Primary deficit estimated to reach 4.0 percent of GDP in 2021, thereafter converging to 0.5 percent over the medium term.
  - Public debt would rise from 35.7 percent in 2020 to around 41.3 percent of GDP in 2025.
  - Gross financing needs: peak of 8.3 percent of GDP in 2020, falling to around 4.8 percent of GDP in 2025.
- Stress tests:
  - Under the most severe scenario with a combined macro-fiscal shock, total government debt would stabilize at around 48.4 percent of GDP or 359.7 percent of revenue by 2025, while gross financing needs would decline to around 6.1 percent of GDP.
- Risks:
  - Fiscal risks from potentially weaker-than-expected revenue, contingent liabilities from SOEs, and PPPs should be carefully monitored.

### Appendix IV — Designing a Medium-Term Revenue Strategy (MTRS)
- Rationale:
  - Indonesia faces large spending needs in human capital, infrastructure and social safety nets that require a substantial and sustainable increase in revenue mobilization.
  - The pandemic increases these needs and provides an opportunity to prepare an MTRS to be implemented once recovery is underway.
- Current revenue performance:
  - General government tax revenue to GDP ratio averages around 11 percent of GDP and has been low and relatively flat over two decades; it has been declining since 2014.
  - Oil and gas tax revenue declined from an average of around 0.9 percent of GDP in 2010−2014 to 0.4 percent in 2015−2019.
  - Indonesia levies only 1.2 percent of GDP in excise revenue, mainly on tobacco, versus close to 2 percent of GDP in other ASEAN countries.
  - Indonesia’s water and sanitation SDG index is 66.4 versus 72.8 (ASEAN average) and 77.2 (EM median).
- Causes of low revenue:
  - Narrow tax base, inefficient collection, weak compliance, and tax system complexity.
  - Examples: myriad sector-based special regimes and multiple discretionary incentives in the corporate income tax (CIT) system; high basic exemption threshold for personal income tax (PIT); numerous VAT-exempt activities and exceptionally high registration threshold.
- Consequences:
  - Low revenue leads to underinvestment: public investment averaged around 3.6 percent of GDP over the last two decades and has been low relative to ASEAN peers.
  - Spending gaps to achieve SDGs as of 2018 estimated additional government spending needs of up to 5½ percent of GDP per year, with health and road infrastructure accounting for two-thirds.
- Current reform status:
  - Ongoing reform since 2017 has focused on tax administration, reducing the CIT rate, increasing excise on tobacco, extending VAT to imports of digital goods and services, and imposing an excise on plastic bags.
  - The reform has remained incomplete and lacks overarching coherence and sufficient tax policy measures to lift sustained revenue performance.
- MTRS potential and design priorities:
  - A well-designed MTRS could increase revenue by to 5 percent of GDP over a period of 5 years (baseline simulations).
  - Priority tax policy measures suggested:
    - Reduce VAT exemptions for standard services like education and healthcare, lower the registration threshold, and later gradually increase the rate.
    - Apply a uniform CIT rate to all corporations, eliminate discretionary incentives, and abolish preferential treatment; use revenue gains to reduce the CIT rate.
    - Shift the PIT structure to an individual base (rather than family base), lower the base exemption threshold to broaden the PIT base, and re-calibrate brackets to strengthen progressivity.
    - Broaden the excise tax base beyond tobacco; replace the sales tax on luxury goods with a specific price-independent vehicle excise tax based on engine size; levy a net tax on gasoline; bring the diesel excise rate to the ASEAN average.
  - Tax administration measures:
    - Ensure businesses withhold and remit tax on wage payments; enhance compliance of professional services providers and high-wealth individuals.
    - Foster and enforce VAT registration, filing, correct reporting, and payment.
  - Institutional reforms:
    - Provide additional flexibilities to the Directorate General of Taxes (DGT) to manage its budget and workforce; enhance organizational structure, office network and information systems.

_Italic: IMF staff report content (selected extracts)._

### 7.      Beyond the revenue goal, an MTRS could also reduce other distortions that have held

### 1idnea2021001 - 7.      Beyond the revenue goal, an MTRS could also reduce other distortions that have held

### Rationale and expected benefits of a Medium-Term Revenue Strategy (MTRS)
- Streamlining the business income tax structure, reducing special regimes and discretionary exemptions in the VAT system would help to improve the allocation of capital and labor for increased productivity.
- Leveling the playing field among businesses would improve the investment climate, foster competition, and increase the attractiveness of Indonesia as destination of FDI.
- Increasing the progressivity of the PIT and an annual publication of tax expenditure assessments could increase the perceived fairness of the tax system and foster self-compliance.

### Timing and sequencing of reform
- The government should design and endorse an MTRS now, but implementation of tax policy reforms should wait until the recovery is firmly underway.
- The crisis has highlighted the importance of increasing public expenditures on infrastructure, health care, and other social services and the criticality of increasing revenue mobilization.
- Work on MTRS design can begin immediately because:
  - Design requires significant preparatory work, including drafting tax policy and administration regulations.
  - Design and legislative/implementation stages will take time and involve several stakeholders, including government, parliament, civil society, businesses, and other stakeholders.
- The MTRS would not hurt the recovery because the legislative and implementation stages are protracted; preparatory design work can be started without immediate policy implementation.

### Short-term fiscal strategy during the recovery
- Short-term strategy should encompass revenue measures to avoid pressure for premature withdrawal of fiscal support measures.
- Near-term priority: safeguard tax revenues to avoid a precipitate unwinding of support measures that could fragilize the recovery.
- Key short-term actions:
  - Ensure regulations implementing the job creation omnibus law are carefully designed to avoid abuse of new tax facilities and mitigate negative revenue effects.
  - Design a formal business continuity plan if Indonesia faces subsequent COVID-19 waves.
  - Assist taxpayers and facilitate compliance burdens.
  - Swiftly implement fiscal packages while ensuring support measures are not abused.
  - Redirect revenue administration efforts from arrears collection to focus on emerging compliance risks and industries less affected by the crisis.
  - Customs administration should maintain a minimum of risk-based inspections to monitor and enforce anti-smuggling while easing the flow of essential goods.
  - As the pandemic abates, adjust strategy to ensure effective collection of tax arrears that might have built up during the crisis.

### Proposed Indonesia’s Medium-Term Revenue Strategy (high-level measures)
- Value-Added Tax (VAT) policy reforms:
  - Remove several exemptions.
  - Reduce the registration threshold.
  - Removal of the sales tax on luxury goods.
  - Increase (gradually) the standard rate by 2 percentage points.
- Excise taxes:
  - New excises on vehicles.
  - New excises on fuel.
- Corporate Income Tax:
  - Replace the myriad of special regimes for corporate businesses by one single CIT regime.
  - Introduce alternative minimum tax.
- Personal Income Tax:
  - Broaden PIT base by including the middle class.
  - Strengthen the progressivity of PIT.
  - Reduce the threshold of the SME regime.
- Property Tax:
  - Allow higher rate, while reducing local transfers.

### Tax administration and legal framework reforms
- Taxpayers’ Compliance Management: Launch a Compliance Improvement Program (CIP) with targeted, well-resourced, and supervised plans for:
  - Value-added tax.
  - Employer withholding obligations.
  - Ultra-high wealth individuals.
  - Wealthy Indonesians—High-income earners and high-wealth individuals, and professionals.
- CIP supporting initiatives:
  - Strengthening audit.
  - Building a powerful data matching capability.
  - National deployment of compliance risk management (CRM).
  - Increasing efficiency of support and supervision.
  - Leveraging the tax amnesty and AEOI intelligence.
- Institutional reforms in tax administration:
  - Grant greater autonomy within the auspices of the Ministry of Finance.
  - Modernize HR management (gradually), prioritizing policies in operational areas to support the CIP.
  - Revamp and relaunch the code of conduct.
  - Streamline organization following international trends.
  - Deploy a program of ICT improvements to support CIP, in anticipation of the full ICT redevelopment.
- KUP Changes (legal procedural reforms):
  - Modernize General Provisions Procedures law (RUU KUP) to improve its structure by simplifying and clarifying provisions and procedures to ensure a proper balance between revenue collection and the rights of taxpayers.
  - Substantially relax the requirement for auditing all or most refund audits in favor of a more risk-based approach.
- Substantive law changes:
  - VAT Law (RUU PPN) to strengthen revenue performance through measures that improve VAT system design.
  - Income Tax Law to simplify the law and eliminate distortions; and broaden the base to include the middle class while improving progressivity.
  - Eliminate the requirement to file a tax return for employees whose only source of income is from a single job.
  - Excise Laws for revenue mobilization and addressing environmental externalities.
  - Property tax changes to boost local revenue—enabling the central government to reduce its transfers.
- Decrees and Regulations:
  - Strengthen the governance framework for tax system reform to ensure effective implementation of the MTRS.
  - Provide authority to MOF to change internal structure, allocate staff, and re-grade positions.

### Institutional, political, and external support for MTRS
- Institutional reforms in tax policy:
  - Strengthen capacity for revenue analysis in the Tax Policy Unit of the BKF.
- Political and implementation support:
  - Strengthen reform governance and management.
  - Commit to multi-year budgets to secure reform implementation.
  - Ensure government-led effort based on a whole-of-government approach.
  - Involve a wide base of stakeholders to achieve a country-owned effort.
  - Launch an ‘Amnesty-like’ socialization campaign for the MTRS.
  - Identify capacity requirements to reform development and implementation.
  - Identify available external support from CD partners to fill capacity constraints.
  - Formalize an agreement with CD partners to support the government-led MTRS.

### Appendix V — COVID-19, Exceptional Policies, and Monetary Budget Financing (key points)
- Context:
  - Indonesia faces higher budget deficits in the next few years because of policy responses to COVID-19.
  - Domestic bond issuance will be higher given constraints and risks on external foreign currency financing.
  - BI provided direct budget financing; initially on a last-resort basis in primary markets in end-March, with BI as a non-competitive bidder.
  - The arrangement was subsequently changed to a three-tranche “burden sharing” arrangement (BSA) for 2020, with pre-defined amounts of BI bond purchases by tranche and seignorage transfers designed to lower effective interest cost to the budget, depending on the tranche.
- Achievements of BI bond purchases:
  - Helped avoid bond market uncertainty and contributed to a normalization of local currency bond yields after the spike in March.
  - Broad financial conditions eased, lowering credit costs, notably also for the government, while the rupiah has remained broadly stable.
  - Lower interest costs for the additional financing needs allow for even higher primary expenditure by the government for a given deficit target.
  - As funds injected through monetary budget financing work through the economy, deposits in banks increased, boosting bank liquidity and, in principle, supporting a recovery in bank lending.
- Risks from direct budget financing:
  - Large expansion of the monetary base could be inconsistent with price and currency stability objectives, depending on money demand.
  - If fiscal policy considerations have priority over monetary policy objectives (“fiscal dominance”), BI’s operational independence could be impaired, damaging credibility and leading to higher inflation expectations and nominal interest rates.
- Assessment:
  - There is a case for BI bond purchases on a last-resort basis.
  - Nonresident investors hold a substantial share of rupiah-denominated government bonds, especially at the longer maturity spectrum, but have not been willing to further increase their exposure.
  - Domestic bond demand is more inelastic and limited in size for longer durations given few institutional investors.
  - Domestic banks nearly doubled their holdings of government bonds in 2020, but scope for further increases seems limited.
  - Indonesia’s public debt ratio is relatively low, and the change in budgetary interest cost from the higher budget deficits is small, around 0.1 percent of GDP.
  - The pre-defined tranche-based design of the BSA centers around budget considerations, while monetary policy considerations seem less prominent.
  - Pre-defined amounts of BI purchases in the BSA are relatively large compared to base money, suggesting a possible need for sterilization by BI to meet price and external stability objectives; if sterilization is needed, BI seignorage would be smaller.
  - The BSA only covers 2020, creating uncertainty about modalities and time horizon of exceptional monetary policy going forward.
- Recommendation:
  - Going forward, the monetary budget financing scheme should not be pre-defined and should be guided by well-defined last resort criteria, based on bond market and broader financial conditions.
  - Such an approach could be integrated into the established monetary policy framework to reduce risks from these exceptional policies.

*Source: 1idnea2021001 — excerpt from IMF material on Indonesia.*

### Chapter 3 in Global Financial Stability Report, April (Washington).

### Chapter 3 — Indonesia: Staff Report for the 2020 Article IV Consultation — Informational Annex

### Fund relations (As of December 31, 2020)
- Membership Status: Joined February 21, 1967; Article VIII.
- General Resources Account:
  - Quota: 4,648.40 SDR Millions; 100.00 percent of Quota
  - IMF’s holdings of currency (holding rate): 3,860.13 SDR Millions; 83.04 percent of Quota
  - Reserve tranche position: 788.27 SDR Millions; 16.96 percent of Quota
- SDR Department:
  - Net cumulative allocation: 1,980.44 SDR Millions; 100.00 percent of Allocation
  - Holdings: 1,114.59 SDR Millions; 56.28 percent of Allocation
- Outstanding Purchases and Loans: None
- Financial Arrangements (selected):
  - EFF approved 02/04/00 — Expiration 12/31/03 — Amount Approved 3,638.00 SDR Millions — Amount Drawn 3,638.00 SDR Millions
  - EFF approved 08/25/98 — Expiration 02/03/00 — Amount Approved 5,383.10 SDR Millions — Amount Drawn 3,797.70 SDR Millions
  - Stand by approved 11/05/97 — Expiration 08/25/98 — Amount Approved 8,338.24 SDR Millions — Amount Drawn 3,669.12 SDR Millions
- Projected Payments to Fund (SDR millions; based on existing use of resources and present holdings of SDRs):
  - Charges/Interest: 2021: 0.75; 2022: 0.72; 2023: 0.72; 2024: 0.72; 2025: 0.72
  - Total: 2021: 0.75; 2022: 0.72; 2023: 0.72; 2024: 0.72; 2025: 0.72
- Exchange Arrangements:
  - De jure free floating exchange arrangement since August 14, 1997; de facto arrangement is floating.
  - Market exchange rate: Rp 14,050 per U.S. dollar as of December 31, 2020.
  - 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. 19/250) discussed by the Executive Board on July 3, 2019.
- Resident Representative:
  - Mr. James Walsh replaced Mr. John Nelmes as the Senior Resident Representative in August 2020.

### Relations with other international financial institutions
- World Bank: https://financesapp.worldbank.org/en/countries/Indonesia/
- Asian Development Bank: https://www.adb.org/countries/indonesia/main

### Statistical issues — Assessment of Data Adequacy for Surveillance
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 regularly.
- GDP estimates follow the System of National Accounts 2008.
- QGDP estimates are based on a limited set of indirect indicators.
- Some sectors are strongly seasonal; seasonally adjusted data are prepared but not published.
- A TA mission to evaluate the methods used to compile quarterly volume measures of household consumption and taxes on products is planned for 2021.
- BPS and BI, with STA TA, expect to finalize provisional sectoral accounts and balance sheets for 2010–2019 at the end of January 2021.
- BPS expects to finalize the 2015 supply and use tables in 2021.

Price statistics:
- Updated CPI with weight and index reference periods of 2018 introduced in January 2020; improved representativeness and imputation methods; expanded coverage of ecommerce transactions.
- PPI is released quarterly with an index and weight reference period for PPI of 2010; weights should be updated to reflect current production.
- BPS expanded PPI coverage to include some services activities, including passenger transport and hotel and restaurants.
- A July 2020 mission supported BPS in creating a workplan to expand PPI coverage to freight transportation and telecommunications.
- In 2019, STA assisted Bank Indonesia with the development of an enhanced Residential Property Price Index (RPPI) using Internet property listings datasets.

Government finance statistics (GFS):
- MOF committed to improving fiscal statistics; authorities continuing efforts to adopt GFSM 2001/2014 standards with STA assistance.
- Indonesia reports to STA annual general government data (including balance sheet data) covering 2008 onwards.
- Annual general government GFS available within 12 months after the end of the reference period and published on the GFS website.
- Aggregated monthly central government budget data available with a one-month lag.
- Quarterly general government data compilation started in late 2015 based on estimates of local government data.
  - Quarterly general government GFS (operations statement) are available 6 months after the end of the reference quarter.
  - Quarterly general government data are yet to be published on the GFS website while coverage and timeliness are improved via a new regional financial information system.
  - Limited quarterly general government GFS data are published in IFS.
- Coverage and timeliness of public debt statistics are generally adequate with quarterly data published in the World Bank’s Quarterly Public Sector Debt Database.

Monetary and financial statistics (MFS) and financial soundness indicators (FSIs):
- BI compiles good quality monetary statistics on a timely basis using Standardized Report Forms (SRFs).
- Challenges include timely revisions of published banking sector data after supervisory verification.
- BI reports the OFCs survey, which since January 2015 includes finance companies, insurance companies, pension funds, PT Pegadaian, and Eximbank.
- MFS data are reported monthly.
- Fund TA in October 2014 assisted BI in advancing flow-based monetary statistics and quarterly financial accounts.
- BI compiles and reports to the Fund all (12) core and 12 encouraged FSIs for deposit takers; all (two) encouraged FSIs for OFCs; two encouraged FSIs for nonfinancial corporations; one encouraged FSI for households; two encouraged FSIs for market liquidity; and four encouraged FSIs for the real estate sector — published quarterly on the Fund’s FSI website.
- Indonesia reports data on some key series and indicators of the Financial Access Survey (FAS), including mobile money and the two indicators adopted by the UN to monitor Target 8.10 of the SDGs.

External sector statistics (ESS):
- Trade data have improved; import and export transactions of free trade zones and bonded warehouses are captured in BOP goods data.
- Financial account: methodological basis for direct investment (DI) compilation needs substantial improvement.
  - Inflows currently calculated based on loan disbursements to companies with foreign equity using a fixed ratio to estimate equity inflows.
- Errors and omissions in BOP have been large and predominantly negative; could be related to undercoverage of imports in current account or assets in the financial account.
- Financial transactions data are reconciled with changes in the international investment position (IIP), except DI data.
- IIP data compiled and published annually and quarterly.
- External debt statistics improved with EDIS introduced in 2002 and publication of monthly indicators.
- Ongoing reconciliation by BI has made the IIP and external debt data fully consistent.
- Improvements still needed in private corporate sector components: distinguishing scheduled vs actual debt service; estimating accumulation/reduction of private sector payment arrears; estimating reschedulings/debt reductions received by the private sector from external creditors.

II. Data Standards and Quality:
- Indonesia has subscribed to the Special Data Dissemination Standard (SDDS) since September 1996.
- Indonesia uses SDDS flexibility options for the timeliness of labor market categories (employment, unemployment, and wages/earnings) and general government operations.

### Table of Common Indicators Required for Surveillance (As of January 5, 2021) — selected items and data quality assessments
- Exchange rates:
  - Date of Latest Observation: 1/5/2020
  - Date Received: 1/5/2021
  - Frequency of Data: D
  - Frequency of Reporting: D
  - Frequency of Publication: D
- International reserve assets and reserve liabilities of the monetary authorities:
  - Date of Latest Observation: 11/2020
  - Date Received: 12/2020
  - Frequency: M; Reporting: M; Publication: M
- Reserve/base money:
  - Date of Latest Observation: 10/2020
  - Date Received: 12/2020
  - Frequency: W/M; Reporting: W/M; Publication: W/M
  - Data Quality—Methodological Soundness: O, LO, O, O
  - Data Quality—Accuracy and Reliability: LO, O, O, LO, O
- Broad money:
  - Date of Latest Observation: 10/2020
  - Date Received: 12/2020
  - Frequency: M; Reporting: M; Publication: M
- Central bank balance sheet:
  - Date of Latest Observation: 10/2020
  - Date Received: 12/2020
  - Frequency: M; Reporting: M; Publication: M
- Consolidated balance sheet of the banking system:
  - Date of Latest Observation: 10/2020
  - Date Received: 12/2020
  - Frequency: M; Reporting: M; Publication: M
- Interest rates:
  - Date of Latest Observation: 1/5/2021
  - Date Received: 1/5/2021
  - Frequency: D; Reporting: D; Publication: D
- Consumer price index:
  - Date of Latest Observation: 12/2020
  - Date Received: 1/2021
  - Frequency: M; Reporting: M; Publication: M
- Revenue, expenditure, balance and composition of financing — central government:
  - Date of Latest Observation: 11/20
  - Date Received: 12/20
  - Frequency of Data: M; Frequency of Reporting: 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:
  - Date of Latest Observation: 11/20
  - Date Received: 12/20
  - Frequency: Q; Reporting: Q; Publication: Q
- External current account balance:
  - Date of Latest Observation: Q3/2020
  - Date Received: 11/2020
  - Frequency: Q; Reporting: Q; Publication: 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:
  - Date of Latest Observation: Q3/2020
  - Date Received: 11/2020
  - Frequency: Q; Reporting: Q; Publication: Q
- GDP/GNP:
  - Date of Latest Observation: Q3/2020
  - Date Received: 11/2020
  - Frequency: Q; Reporting: Q; Publication: Q
  - Data Quality—Methodological Soundness: LO, LO, O, LO
  - Data Quality—Accuracy and Reliability: LO, LO, LO, LO, LNO
- Gross external debt:
  - Date of Latest Observation: 10/20
  - Date Received: 12/20
  - Frequency: M; Reporting: M; Publication: M
- International investment position:
  - Date of Latest Observation: Q3/2020
  - Date Received: 12/2020
  - Frequency: Q; Reporting: Q; Publication: Q

### Statement by Indonesian authorities (February 12, 2021) — Recent Economic Development and Outlook
- Authorities’ assessment of the COVID-19 shock and policy response:
  - COVID-19 generated unprecedented pressures on health and socio-economic conditions; prompt and bold policy responses successfully mitigated fallouts.
  - GDP growth in 2020: -2.07 percent, better than the estimated regional average of -3.7 percent.
  - Economic contraction occurred in Q2 2020, followed by a rebound in Q3 2020 owing to gradual reopening and policy supports.
- External sector and reserves:
  - External sector exhibited resilience supported by higher capital inflows and lower current account deficit (CAD), resulting in the balance of payment recording a surplus in 2020 and a strong international reserves position.
  - Exchange rate remained flexible and continued to act as a shock absorber.
- Inflation:
  - Consumer Price Index (CPI) inflation: 1.68 percent at the end of 2020, below the target range of 3.0±1.0 percent.
  - Low inflation driven mainly by a positive food supply shock reflecting a strong harvest and weak demand.
- Financial system stability:
  - Stability maintained backed by adequate buffers built prior to the pandemic and ongoing liquidity support by Bank Indonesia (BI).
  - Stress-test results indicated that the capital adequacy ratio (CAR) of the banking industry and finance companies remains sufficient to offset higher credit and financing risk, even under severe macroeconomic conditions.
  - Waning domestic demand and increasing risk perception of banks amid the pandemic have become a challenge to spur credit growth.
- Outlook and projections:
  - Staff’s GDP projection for 2021: 4.8 percent.
  - Authorities’ forecast range for 2021: 4.8 – 5.8 percent.
  - Recovery drivers: global economic recovery, accelerated vaccines rollout, and continued strong policy stimulus packages.
  - Inflation expected to be well-contained within the target band of 3.0±1.0 percent.
  - CAD is predicted to be within 1.0- [text truncated in source]

*Source: Indonesia — Staff Report for the 2020 Article IV Consultation — Informational Annex (Chapter 3, Global Financial Stability Report, April).*

### 2.0 percent of GDP in 2021, a slight increase compared to 2020 in line with the expected

### 1idnea2021001 - 2.0 percent of GDP in 2021, a slight increase compared to 2020 in line with the expected

### Economic outlook and financial system stability
- Economic growth: medium-term recovery projected in the range of 5.5 –   6.1 percent in 2025, consistent with improved productivity and ongoing structural reforms.
- 2021 headline: 2.0 percent of GDP in 2021, a slight increase compared to 2020 in line with the expected economic recovery.
- Credit growth: projected to accelerate to 7.0–9.0 percent.
- Non-financial corporate (NFC) sector: risk viewed as manageable; corporate sales started to pick up in Q3 2020 and corporate buffers improved as reflected in accelerated deposit growth in banks. Many corporates are conglomerate firms able to receive intra-group financing supports.
- Corporate FX risk: corporates’ balance sheet FX risk has declined significantly following a prudential regulation imposing hedging requirement on corporate FX loans; recent data showed that more than 90 percent of corporates complied with this regulation.

### Pandemic response and vaccination
- Two-stage free vaccination program:
  - First stage (Jan-April 2021): targeted for health workers and public service officers.
  - Second stage (April 2021- March 2022): delivered to the rest of population.
- Vaccine procurement: secured more than 300 million doses from various producers and closely monitoring distribution nationwide.
- Authorities remain vigilant amid pandemic uncertainties and stand ready to undertake necessary policy actions as needed to preserve macroeconomic stability.

### Policy responses — overview
- Legal and institutional: Enacted Law No. 2 of 2020 providing temporary relaxation of the budget deficit ceiling beyond 3 percent of GDP until 2022 and permitting BI to purchase government bonds (SBN) in the primary market in accordance with prudential principles; law also includes financial system stability policies enhancing OJK and LPS roles.
- Five coordinated near-term policy strategies:
  - (i) reopening of productive and safe sectors;
  - (ii) expediting fiscal stimuli;
  - (iii) stimulating bank lending on the supply and demand sides;
  - (iv) maintaining monetary and macroprudential stimuli;
  - (v) accelerating economic and financial digitalization.
- Structural reforms will be tied to these policies to boost long-term growth.

### Fiscal policy
- 2020 fiscal response: Program Pemulihan Ekonomi Nasional (PEN) amounting to Rp. 695.2 trillion (4.2 percent of GDP) for public goods and non-public goods.
- Budget deficit moved to 6.1 percent of GDP in 2020 from 2.2 percent of GDP in 2019.
- Accountability measures: early consultation with the Audit Board of Indonesia, monthly reporting requirements on COVID-19-related programs, and planned ex-post evaluation of incentives.
- 2021 stance: countercyclical fiscal policy with overall budget deficit expected to be around 5.7 percent of GDP in 2021; authorities commit to gradually bringing the budget deficit back below 3 percent of GDP in 2023.
- Revenue mobilization: Medium-term Revenue Strategy (MTRS) in a 2020-2024 strategic plan (PMK number 77/PMK.01/2020). Initiatives include:
  - (i) improving tax compliance, in particular taxation (VAT) of e-commerce transaction;
  - (ii) developing digital-based tax and other revenue services;
  - (iii) expanding tax-base and non-tax base;
  - (iv) modernizing revenue administration.
- Expenditure priorities: health, education, infrastructure, food security, social safety net, tourism, and MSMEs.
- Excess financing (SiLPA) from the 2020 State Budget: Rp. 234.7 trillion; part (Rp. 50.9 trillion) carried over to 2021 for vaccination program and support to SMEs and corporate sectors; the rest remains in the cumulative financing surplus (SAL).

### Monetary and exchange rate policy
- BI policy easing in 2020:
  - BI7DRR lowered five times by 125 bps to 3.75 percent in 2020.
  - 300 bps reduction in the statutory reserve requirement.
  - Monetary expansion by buying government bonds in the secondary market.
- Exchange rate stabilization: ‘triple intervention’ via outright buying and selling in the spot market, Domestic Non-Deliverable Forward (DNDF), and purchases of SBN from the secondary market.
- SBN purchases under Law No.2 of 2020:
  - First joint agreement (April 16, 2020): BI purchased SBN in the primary market amounting to Rp. 75.86 trillion following four principles (market mechanism; considering impact on inflation; purchasing only tradable and marketable SBN; BI as last-resort purchaser).
  - Second joint agreement (July 7, 2020): BI purchased SBN directly from the Government for public goods financing amounting to Rp. 397.56 trillion, with the interest to be borne by BI; BI also bore a portion of the interest burden to finance non-public goods related to MSMEs and corporate incentives, amounting to Rp. 177 trillion. The authorities confirmed this second joint agreement is a one-off policy applicable only in 2020.
- 2021 approach: maintain low interest rates and ample liquidity while monitoring inflation; liquidity to remain loose to support bank lending and financial system stability; Rupiah stability maintained according to fundamentals and market mechanism; FXI adopted as needed to address disorderly market conditions. First joint agreement extended until December 31, 2021; direct purchase under the second joint agreement will not be continued in the 2021 State Budget.

### Macroprudential and financial sector measures
- BI measures:
  - Lowered reserve requirement ratio by 50 bps since April 1, 2020 (in addition to 300 bps reduction) for banks’ lending to export-oriented businesses, SMEs, or priority sectors; extended until June 2021.
  - Countercyclical Capital Buffer kept at 0 percent.
  - Relaxed the Macroprudential Intermediation Ratio.
  - Strengthened banking liquidity via Macroprudential Liquidity Support regulation.
  - Relaxed Loan to Value ratio for environmentally friendly motor vehicle loans to 0 percent.
- OJK measures:
  - Policy package relaxing certain regulatory provisions in the banking sector (reporting, credit treatment, governance of restructured credit) and postponement of Basel III reforms.
  - As of December 2020, restructured credit reached Rp. 971 trillion (18 % of total credit).
  - Partial relaxation of loan classification rules extended until March 2022; banks required to ensure debtors’ viability and build provisions accordingly.
- LPS measures: relaxed penalty for late premium payments to ease liquidity pressures.
- Forward guidance: financial sector policy to remain accommodative to boost credit growth while preserving stability; BI to assess further easing of macroprudential instruments; policies to promote MSMEs-based growth include expanding inclusive financing coverage, incentives for banks encouraging corporatization of MSMEs, and promoting securitization of MSMEs loans.
- Coordination: strengthen Financial System Stability Committee and enhance crisis management protocol; crisis management and resolution frameworks prioritized.

### Structural reforms and medium-term growth policies
- Financial sector reforms: 2025 Money Market Deepening Blueprint and 2025 Indonesian Payment System Blueprint to strengthen monetary policy transmission and speed up digitalization of payment system.
- Payment system regulatory reforms to establish an end-to-end digital economy and finance ecosystem linking digital banking, FinTech, e-commerce, merchants and consumers.
- Omnibus Law on Job Creation (enacted November 2, 2020) to simplify regulations, revise 80 laws and 1.200 articles, streamline business permits, improve ease of doing business, create employment, protect employees, and include tax incentives and potential corporate income tax rate adjustment. Implementation together with RCEP expected to benefit the economy.
- Omnibus bill to develop and strengthen the financial sector still under discussion; authorities underscore it will secure the central bank’s independence.
- Sovereign Wealth Fund (Indonesia Investment Authority, INA) established with initial capital under Government Regulation No. 72 of 2020 amounting to Rp. 15 trillion (or around US$ 1 billion) to boost investment and accelerate infrastructure and priority sector projects.
- Green economy commitments: Environmental Fund Management Agency (BPLDH) established in 2019; Medium-Term Development Plan 2020- 2024 includes renewable energy and energy efficient development, forest conservation and reforestation, waste management, land intensification; development of green bond market through Green Sukuk issuance since 2018.

### Key statistics and fiscal/financial figures (as reported)
- 2.0 percent of GDP in 2021.
- Credit growth projected to accelerate to 7.0–9.0 percent.
- Medium-term growth projection: 5.5 –   6.1 percent in 2025.
- Vaccine procurement: more than 300 million doses.
- Program Pemulihan Ekonomi Nasional (PEN) 2020: Rp. 695.2 trillion (4.2 percent of GDP).
- Budget deficit: 6.1 percent of GDP in 2020; 2.2 percent of GDP in 2019.
- Overall budget deficit expected around 5.7 percent of GDP in 2021.
- SiLPA from 2020 State Budget: Rp. 234.7 trillion; part carried over to 2021: Rp. 50.9 trillion.
- BI7DRR lowered by 125 bps to 3.75 percent in 2020 (five rate cuts totaling 125 bps).
- Statutory reserve requirement reduction: 300 bps (plus an additional 50 bps targeted reduction for certain lending).
- SBN purchases in primary market under first joint agreement: Rp. 75.86 trillion.
- SBN purchases under second joint agreement (one-off, 2020): Rp. 397.56 trillion; BI-borne interest for non-public goods: Rp. 177 trillion.
- Restructured credit as of December 2020: Rp. 971 trillion (18 % of total credit).
- INA initial capital: Rp. 15 trillion (or around US$ 1 billion).

*Source: 1idnea2021001 - 2.0 percent of GDP in 2021, a slight increase compared to 2020 in line with the expected*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1idnea2021001.pdf_