## 1idnea2022001 - 6.0 percent in 2023, supported by favorable global commodity prices, easing restrictions on

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### Executive Board assessment and staff appraisal
- Directors agreed with the thrust of the staff appraisal and commended the authorities for maintaining macroeconomic and financial stability despite the severe impact of the COVID-19 pandemic.
- Balance of risks remains tilted to the downside even as the outlook improves.
- Policy guidance endorsed by Directors:
  - Gradually phase out exceptional policy support deployed during the pandemic.
  - Gradual withdrawal of fiscal policy support; restoring the pre-pandemic 3 percent of GDP budget deficit ceiling in 2023 to bolster credibility and sustainability.
  - Develop a medium-term revenue strategy to finance high priority spending.
  - Use savings from energy subsidy reforms to strengthen the social safety net.
  - Maintain an accommodative monetary stance to support recovery while:
    - closely monitoring developments to ensure inflation and inflation expectations remain well anchored;
    - ending central bank primary market purchases and allowing the policy rate to provide a clearer signal;
    - recognizing exchange rate flexibility as a shock absorber.
  - Intensive supervision while crisis-related regulatory relief is in place; promote financial deepening and inclusion (digitalization, credit information sharing).
  - Continue momentum on labor and financial market reforms, education improvements, women’s labor force participation, and governance frameworks.
  - Encourage further climate measures including energy subsidy reform, carbon pricing and an emission trading system, and fostering a green financial market.

### Key economic outlook and indicators (selected exact figures)
- Real GDP (percent change):
  - 2018: 5.2
  - 2019: 5.0
  - 2020: -2.1
  - 2021 Est.: 3.7
  - 2022 Proj.: 5.4
  - 2023 Proj.: 6.0
- Domestic demand:
  - 2018: 6.3
  - 2019: 4.0
  - 2020: -3.8
  - 2021 Est.: 2.9
  - 2022 Proj.: 4.7
  - 2023 Proj.: 6.1
- Private consumption:
  - 2018: 5.1
  - 2019: 5.2
  - 2020: -2.7
  - 2021 Est.: 2.0
  - 2022 Proj.: 4.9
  - 2023 Proj.: 5.9
- Gross fixed investment:
  - 2018: 7.9
  - 2019: 4.5
  - 2020: -5.0
  - 2021 Est.: 3.8
  - 2022 Proj.: 5.2
  - 2023 Proj.: 7.1
- Consumer prices (end period):
  - 2018: 3.2
  - 2019: 2.6
  - 2020: 1.7
  - 2021 Est.: 1.9
  - 2022 Proj.: 3.5
  - 2023 Proj.: 3.2
- General government balance (in percent of GDP):
  - 2018: -1.8
  - 2019: -2.2
  - 2020: -6.1
  - 2021 Est.: -4.6
  - 2022 Proj.: -4.0
  - 2023 Proj.: -3.0
- General government debt:
  - 2018: 30.4
  - 2019: 30.6
  - 2020: 39.8
  - 2021 Est.: 42.8
  - 2022 Proj.: 42.9
  - 2023 Proj.: 42.9
- Current account balance (in billions of U.S. dollars):
  - 2018: -30.6
  - 2019: -30.3
  - 2020: -4.5
  - 2021 Est.: 4.7
  - 2022 Proj.: -0.8
  - 2023 Proj.: -20.6
- Gross reserves (in billions of U.S. dollars, end period):
  - 2018: 120.7
  - 2019: 129.2
  - 2020: 135.9
  - 2021 Est.: 144.9
  - 2022 Proj.: 159.1
  - 2023 Proj.: 169.9
- Total external debt (in billions of U.S. dollars):
  - 2018: 375.4
  - 2019: 403.6
  - 2020: 417.0
  - 2021 Est.: 436.8
  - 2022 Proj.: 454.4
  - 2023 Proj.: 488.1
- Nominal GDP (in trillions of rupiah):
  - 2018: 14,839
  - 2019: 15,833
  - 2020: 15,438
  - 2021 Est.: 16,971
  - 2022 Proj.: 18,471
  - 2023 Proj.: 20,220

### Outlook, near-term risks, and policy guidance
- Outlook highlights:
  - Recovery to strengthen in 2022−23 supported by domestic demand and favorable global commodity prices.
  - Annual inflation in 2022−23 projected to rise close to the 3 percent midpoint of the target corridor.
  - Growth projections: 5.4 percent for 2022 and 6 percent in 2023.
  - Output gap: expected reduction from −4.9 percent of GDP in 2020 to −1.9 percent in 2023.
- Main downside risks:
  - Renewed infection surges including Omicron or more aggressive variants.
  - Tighter global financial conditions and earlier-than-expected monetary policy normalization in advanced economies.
  - Monetary policy surprises in advanced economies could lead to disruptive capital outflows, exchange rate depreciation, higher financing costs, and corporate solvency risks.
- Policy recommendations (summarized):
  - Fiscal:
    - Restore the 3 percent of GDP deficit ceiling by 2023; reconsider pace if severe downside risks materialize.
    - Develop a medium-term revenue strategy; use energy subsidy savings to strengthen social safety nets.
  - Monetary:
    - Maintain accommodative stance until recovery is entrenched while ensuring inflation expectations remain anchored.
    - End primary market purchases as intended in 2022; confine such purchases to severe market dysfunction.
    - Gradually reduce banking system liquidity and bring interbank rate toward corridor midpoint.
  - Financial sector:
    - Intensive supervision to mitigate risks from regulatory relief; promote financial deepening and inclusion.
  - Structural reforms and climate:
    - Advance reforms to reduce scarring; expand carbon pricing and ETS; reform energy subsidies and pricing.

### Fiscal performance, tax reform, and revenue mobilization
- 2021 preliminary budget outcome:
  - Budget deficit narrowed to 4.6 percent of GDP in 2021 (below target of 5.7 percent).
  - PEN program execution reached IDR 658.6 trillion, around 88.4 percent of budget allocations.
- 2022 budget and projections:
  - 2022 budget deficit target: 4.8 percent of GDP (IDR868 trillion).
  - Fund staff project a lower deficit of 4 percent of GDP in 2022.
  - Full unwinding of PEN expected to achieve much of the consolidation; flexibility to reallocate expenditure in 2022 without a supplementary budget retained.
- Tax reform (enacted October 29, 2021; main elements):
  - Increase standard VAT rate from 10 to 12 percent in two steps—to 11 percent in April 2022 and to 12 percent by 2025 at the latest; reduce list of exempted goods and services.
  - New personal income tax bracket: 35 percent on individuals earning above IDR 5 billion annually; increase upper bound of lowest bracket from IDR 50 million to IDR 60 million; include fringe benefits in PIT base.
  - Cancellation of reduction in corporate income tax rate from 22 to 20 percent.
  - Tax amnesty provisions with tax rates ranging from 6 to 18 percent of asset values.
- Revenue impact estimates:
  - Staff estimates the reform could raise revenue by at least one percentage point of GDP by 2026.
  - Without additional measures, tax revenue ratio will remain lower than emerging market peers in 2026.

### Monetary policy actions, BI purchases, and exit guidance
- 2021 monetary stance and actions:
  - BI kept policy rate on hold at 3.5 percent after a 25-basis point cut in February 2021.
  - BI’s holdings of government bonds rose by 40 percent from end-December 2020 to end-December 2021.
    - Primary market purchases under the market mechanism: about IDR 143 trillion (12 percent of the end-2020 monetary base).
    - Purchases under the BI-MOF agreement announced in August 2021: about IDR 215 trillion (18 percent of the end-2020 monetary base).
  - Monetary policy moderately accommodative with market rates below staff-estimated range for the neutral real policy rate (2 to 3 percent).
- Policy guidance and normalization:
  - BI expects accommodative stance through much of 2022, but should:
    - Gradually reduce excess banking system liquidity (RRR increases announced: cumulative 300 bps for conventional banks and 150 bps for sharia banks over March–September 2022).
    - End primary market purchases by end-2022; confine further purchases to last-resort interventions.
    - Revert to conventional policy tools in the medium term; use secondary market purchases for stabilization as needed.
  - Fund staff recommendation: do not extend monetary budget financing beyond 2022.

### External sector, capital flows, reserves, and exchange rate
- Capital flows and reserves:
  - Net financial inflows stabilized at 0.8 percent of GDP in 2021 after a decline to 0.7 percent in 2020.
  - Nonresident holdings of rupiah government securities declined to 19 percent at end-2021 (from 25 percent at end-2020).
  - Indonesia posted reserve accumulation of about US$9 billion in 2021, of which around US$6 billion was due to the SDR allocation authorities plan to keep as reserves.
  - Gross reserves: US$144.9 billion in 2021 (Adequate; equal to 12.2 percent of GDP; about 123 percent of IMF reserve adequacy metric; about 7.4 months of prospective imports).
  - Rupiah exchange rate remained stable; exchange rate flexibility recommended as shock absorber.
- Current account and external position:
  - Current account developments:
    - 2020: small deficit of 0.4 percent of GDP.
    - 2021: modest surplus of around 0.4 percent of GDP.
    - Projected deficits of 0.1 percent and 1.5 percent in 2022−23 as domestic demand strengthens.
  - Preliminary External Balance Assessment: current account balance and REER close to model norms after adjustments.
  - NIIP:
    - NIIP end-2020: −26.4 percent of GDP (improved from −30.2 percent at end-2019).
    - NIIP as of September 2021: −23.3 percent of GDP.
- FX intervention and adequacy:
  - BI has used spot, DNDFs, and SBN secondary market purchases as part of triple intervention.
  - Reserves provide buffer against a wide range of external shocks; FX intervention appropriate in disorderly conditions.

### Debt sustainability and stress tests
- External and public debt assessment:
  - External debt reached 39 percent of GDP in 2020; estimated to have edged down to 36.8 percent of GDP by end-2021.
  - General government debt estimated at 42.8 percent of GDP in 2021 (from 30.6 percent in 2019); projected to stabilize around 41 percent of GDP over the medium term.
  - Under severe combined macro-fiscal shock, total government debt would stabilize at around 51 percent of GDP by 2027 and around 364 percent of revenue by 2027.
  - Gross financing needs projected to decline gradually to around 5.4 percent of GDP under stress and to around 3.8 percent of GDP by 2027 under baseline.
- Key fiscal risks to monitor:
  - Weaker-than-expected revenue.
  - Expanding balance sheets of SOEs and PPPs.
  - Contingent liabilities and implementation challenges.

### Structural reforms, climate policy, and implementation priorities
- Structural reform complementarities and priorities:
  - Job omnibus law expected to increase investment and productivity; impact enhanced by complementary reforms in education, financial markets, infrastructure, governance.
  - Government infrastructure spending currently about 3 percent of GDP annually; ADB-estimated needs adjusted for climate change: 6.0 percent of GDP annually.
- Climate mitigation measures and gaps:
  - 2021 tax reform includes a carbon price of IDR 30,000 per ton of CO2e (about US$2) applied to coal-fired power plants, coming into effect in April 2022.
  - Authorities seek an ETS by 2024; voluntary pilot program in power sector with 32 coal-fired plants.
  - Moratorium on new coal-fired power plant plans (not applying to already approved plants).
  - PLN aims for about half of new generation capacity added in 2021−30 from renewables; coal share around 60 percent by 2030; renewables around 25 percent by 2030.
  - Indonesia Green Taxonomy version 1.0 launched on January 20, 2022.
- Fund staff estimates and recommendations:
  - Annual financing needed to achieve Indonesia’s NDC targets: 2.8 percent of GDP.
  - Key shortcomings: low carbon price, narrow coverage, end user prices not affected due to energy subsidies.
  - Recommendations:
    - Adopt a predictable and increasing carbon price path.
    - Use ETS to include largest CO2 emitters and set low free allowances.
    - Promptly reform energy subsidies and pricing.
    - Mobilize private investment via green financing market infrastructure.
    - Continue adaptation monitoring and execution given high exposure to natural hazards.

### Mobility-based growth nowcasting and pandemic monitoring
- Mobility as real-time indicator:
  - Residential mobility (“stay-at-home”) is the strongest single mobility predictor of quarterly real GDP growth.
  - Estimated residential mobility elasticity: −0.61 (interpretation: a 10 percentage point increase in residential mobility is associated with reduced growth of 6.1 percent q/q, s.a.).
  - Estimated elasticities for other mobility subcomponents range between 0.15 and 0.28.
- Modeling and out-of-sample implication:
  - Simple OLS model (2020Q1–2021Q3) using Google mobility data; X12 seasonal adjustment applied.
  - Model with residential mobility as predictor points to growth of about 15 percent q/q, s.a.a.r., in 2021Q4 reflecting normalization after Delta surge.
- Panel estimation (sector × province × time) confirms robustness of residential mobility predictive power even after controlling for sectoral employment shares, labor force participation, informal sector share, COVID-19 infections and deaths.

### Selected risk assessment matrix entries (likelihood, impact, policy recommendations)
- Global risk — outbreaks of lethal and highly contagious COVID-19 variants:
  - Likelihood: High
  - Expected impact: High
  - Policy recommendation: Increase health and social protection spending; loosen monetary and macroprudential policies; keep exchange rate flexible.
- Global risk — de-anchoring of inflation expectations in the U.S./advanced Europe:
  - Likelihood: Medium
  - Expected impact: Medium-High
  - Policy recommendation: Pace down fiscal consolidation if growth impact substantial; tighten monetary policy and intervene in FX if spillovers disruptive.
- Domestic risk — faster containment of COVID-19:
  - Likelihood: Low to Medium
  - Expected impact: Medium-High
  - Policy recommendation: Accelerate MTRS implementation; increase infrastructure and social spending; monetary policy on hold or gradually tightened; let regulatory relief expire.
- Domestic risk — sharper deterioration in banks' asset quality:
  - Likelihood: Medium to High
  - Expected impact: High
  - Policy recommendation: Address solvency and capital adequacy issues upfront; banks should actively provision even under relaxed loan standards.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 6.0 percent in 2023, supported by favorable global commodity prices, easing restrictions on

### 1idnea2022001 - 6.0 percent in 2023, supported by favorable global commodity prices, easing restrictions on

### Executive Board Assessment
- Directors agreed with the thrust of the staff appraisal and commended the authorities for maintaining macroeconomic and financial stability despite the severe impact of the COVID-19 pandemic, helped by substantial policy buffers accumulated over years of strong macroeconomic performance.
- While the outlook is improving, the balance of risks remains tilted to the downside.
- As the recovery takes hold, Directors considered that it would be appropriate to gradually phase out the exceptional policy support deployed during the pandemic and encouraged the authorities to press ahead with structural reforms.
- Directors agreed that the authorities’ gradual withdrawal of fiscal policy support would be appropriate and noted that restoring the pre-pandemic 3 percent of GDP budget deficit ceiling in 2023 will bolster the credibility and sustainability of the fiscal framework.
- Directors supported plans to develop a medium-term revenue strategy to finance high priority spending critical to achieving Indonesia’s development goals.
- Directors noted that savings from energy subsidy reforms could also be used to strengthen the social safety net.
- Directors welcomed the accommodative monetary stance to support the recovery and urged authorities to:
  - closely monitor developments to ensure that inflation and inflation expectations remain well anchored;
  - end central bank primary market purchases and allow the policy rate to provide a clearer signal of the monetary stance;
  - recognize the role of exchange rate flexibility in absorbing shocks.
- Directors noted the Indonesian financial sector remains stable, highlighted the need for intensive supervision while crisis-related regulatory relief is in place, and welcomed efforts to promote financial deepening and inclusion, including digitalization and credit information sharing.
- Directors commended the ambitious structural reform agenda and encouraged continued momentum on labor and financial market reforms, improvements to education, women’s labor force participation, and governance frameworks.
- Directors welcomed climate change mitigation measures and encouraged further reforms, including on energy subsidies, measures on carbon pricing and the emission trading system, and fostering a green financial market.

### Key economic outlook and indicators
- Real GDP (percent change):
  - 2018: 5.2
  - 2019: 5.0
  - 2020: -2.1
  - 2021 Est.: 3.7
  - 2022 Proj.: 5.4
  - 2023 Proj.: 6.0
- Domestic demand:
  - 2018: 6.3
  - 2019: 4.0
  - 2020: -3.8
  - 2021 Est.: 2.9
  - 2022 Proj.: 4.7
  - 2023 Proj.: 6.1
- Private consumption:
  - 2018: 5.1
  - 2019: 5.2
  - 2020: -2.7
  - 2021 Est.: 2.0
  - 2022 Proj.: 4.9
  - 2023 Proj.: 5.9
- Gross fixed investment:
  - 2018: 7.9
  - 2019: 4.5
  - 2020: -5.0
  - 2021 Est.: 3.8
  - 2022 Proj.: 5.2
  - 2023 Proj.: 7.1
- Consumer prices (end period):
  - 2018: 3.2
  - 2019: 2.6
  - 2020: 1.7
  - 2021 Est.: 1.9
  - 2022 Proj.: 3.5
  - 2023 Proj.: 3.2
- Consumer prices (period average):
  - 2018: 3.3
  - 2019: 2.8
  - 2020: 2.0
  - 2021 Est.: 1.6
  - 2022 Proj.: 2.9
  - 2023 Proj.: 3.3
- General government balance (in percent of GDP):
  - 2018: -1.8
  - 2019: -2.2
  - 2020: -6.1
  - 2021 Est.: -4.6
  - 2022 Proj.: -4.0
  - 2023 Proj.: -3.0
- General government debt:
  - 2018: 30.4
  - 2019: 30.6
  - 2020: 39.8
  - 2021 Est.: 42.8
  - 2022 Proj.: 42.9
  - 2023 Proj.: 42.9
- Claims on private sector (12-month percent change; end of period):
  - 2018: 10.3
  - 2019: 5.8
  - 2020: -0.4
  - 2021 Est.: 6.1
  - 2022 Proj.: 9.2
  - 2023 Proj.: 9.7
- Current account balance (in billions of U.S. dollars):
  - 2018: -30.6
  - 2019: -30.3
  - 2020: -4.5
  - 2021 Est.: 4.7
  - 2022 Proj.: -0.8
  - 2023 Proj.: -20.6
- Current account balance (percent of GDP):
  - 2018: -2.9
  - 2019: -2.7
  - 2020: -0.4
  - 2021 Est.: 0.4
  - 2022 Proj.: -0.1
  - 2023 Proj.: -1.5
- Gross reserves (in billions of U.S. dollars, end period):
  - 2018: 120.7
  - 2019: 129.2
  - 2020: 135.9
  - 2021 Est.: 144.9
  - 2022 Proj.: 159.1
  - 2023 Proj.: 169.9
- Total external debt (in billions of U.S. dollars):
  - 2018: 375.4
  - 2019: 403.6
  - 2020: 417.0
  - 2021 Est.: 436.8
  - 2022 Proj.: 454.4
  - 2023 Proj.: 488.1
- Nominal GDP (in trillions of rupiah):
  - 2018: 14,839
  - 2019: 15,833
  - 2020: 15,438
  - 2021 Est.: 16,971
  - 2022 Proj.: 18,471
  - 2023 Proj.: 20,220

### Context and pandemic response
- Context:
  - When the COVID-19 pandemic hit in 2020, Indonesia benefited from strong initial conditions and substantial policy space, with prudent policy conduct, price stability, low budget deficits, and low public debt ratios.
  - Banking regulations were in line with Basel III; the banking system was well capitalized and liquid.
  - The pandemic caused a recession in 2020, which was less severe than in most countries due to policy support and less stringent containment measures.
- Policy response:
  - Authorities implemented a bold, comprehensive policy package requiring temporary suspension of the budget deficit ceiling of 3 percent of GDP and the ban on direct budget financing by Bank Indonesia (BI).
  - Crisis measures included fiscal policy packages under the National Economic Recovery Program (PEN), monetary policy easing, and financial policy measures.
  - Structural reforms accelerated, including an omnibus bill on job creation passed in October 2020 and a tax reform in 2021 that introduced a carbon tax.
- Structural challenges:
  - Low government revenue intake limited scope for public spending on development and slowed the initial health policy response.
  - Progress in poverty reduction was partly reversed during the pandemic, and inequality likely increased.
  - Increased issuance of rupiah government bonds had to be absorbed by domestic markets with limited depth, reinforcing the need for structural reforms to mobilize private sector investment and boost productivity.

### The pandemic and recent developments (late 2021)
- Recovery drivers:
  - Economic recovery picked up, buoyed by increased mobility and global commodity markets.
  - Mid-2021 surge of the Delta variant prompted renewed restrictions but targeted health responses and doubling of the original 2021 PEN budget helped reverse the infection curve quickly and accelerated vaccination execution; mobility indicators returned to pre-pandemic levels in November.
  - Rising exports reflected higher commodity prices and export volumes, notably to China and other trading partners in Asia.
  - The current account balance moved from a deficit of 0.7 percent of GDP in 2021Q2 to a surplus of 1.5 percent in 2021Q3.
- Inflation and expectations:
  - Inflation remained below BI’s 3±1 percent target corridor in 2021; headline and core inflation fluctuated around 1½ percent.
  - Inflation expectations (one-year ahead consensus forecast) remained well anchored around the midpoint of BI’s inflation target range of 2−4 percent.
  - Inflation in Indonesia and ASEAN emerging market economies was more moderate and generally below central bank targets in 2021 compared to peers in other regions.
- Financial conditions and credit:
  - Financial conditions eased through much of 2021; bank credit to the private sector started to pick up in the second half of the year.
  - Deposit growth slowed to around 8 percent (y/y) in September 2021 after double-digit growth in 2020; funding growth remained strong.
  - Share of government bonds in banking system assets increased from 12.7 percent at end-2020 to 14.2 percent as of end-September 2021.
  - Credit growth rebounded in mid-2021 as BI relaxed monetary conditions; public banks led the credit recovery.
  - Median interest coverage ratio for the nonfinancial corporate sector remained low at about 2.

### Outlook, risks, and policy guidance
- Outlook:
  - The economic recovery is set to strengthen in 2022−23, supported by domestic demand and favorable global commodity prices.
  - Annual inflation in 2022−23 is projected to rise close to the 3 percent midpoint of the target corridor.
  - The outlook is improving but the balance of risks remains tilted to the downside with increasing risks relating to tighter global financial conditions and the spread of the Omicron variant.
- Main policy recommendations:
  - Fiscal:
    - Restoring the pre-pandemic budget deficit ceiling of 3 percent of GDP is appropriate; the stronger-than-expected growth outcome in 2021 and the passage of the tax reform bill have eased concerns about returning to the ceiling by 2023.
    - The pace of adjustment could be reconsidered if severe downside risks materialize.
    - Develop a medium-term revenue strategy to finance high priority spending critical to development goals.
    - Use savings from energy subsidy reforms to strengthen the social safety net.
  - Monetary:
    - An accommodative monetary policy stance should continue until the recovery is more firmly entrenched, as long as inflation and inflation expectations remain well anchored.
    - BI should stay nimble given heightened spillover risks while gradually reducing banking system liquidity.
    - BI primary market purchases should end as intended in 2022 and be confined to periods of severe market dysfunction.
  - Financial sector:
    - Risks to bank balance sheets from recent regulatory relief measures should be mitigated by intensive supervision to ensure prudent lending and proactive provisioning.
    - Continue efforts to promote financial deepening and inclusion.
  - Structural reforms and climate:
    - Advance broad structural reforms, supported by measures to raise additional fiscal revenues, to address scarring from the pandemic and support medium-term growth.
    - The introduction of a carbon tax is a welcome first step; reinforce climate action with further reforms, including of energy subsidies and pricing.

*Source: INDONESIA STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION (Mission dates: January 4−24, 2022; February 22, 2022).*

### 6.      Net capital inflows stabilized in 2021 after considerable volatility at the onset of the

### 6.      Net capital inflows stabilized in 2021 after considerable volatility at the onset of the

### Capital flows, reserves, and exchange rate
- Portfolio inflows into equity and corporate debt increased strongly in 2021 compared to 2020.
- Nonresident holdings of rupiah government securities declined to 19 percent.
- Foreign direct investment strengthened in 2021.
- Indonesia posted substantially higher overall balance and reserve accumulation of about US$9 billion, of which around US$6 billion was due to the SDR allocation that the authorities plan to keep as reserves.
- The foreign exchange reserves level remained adequate.
- The rupiah exchange rate remained stable.

### External position and current account
- Preliminary External Balance Assessment: after adjustments for transitory, structural, and demographic factors, the current account balance and real effective exchange rate were close to model norms.
- Current account developments:
  - 2020: small deficit of 0.4 percent of GDP.
  - 2021: modest surplus of around 0.4 percent of GDP (driven by higher commodity prices and exports).
  - Projected deficits of 0.1 percent and 1.5 percent, respectively, in 2022−23 as domestic demand strengthens.
- Near-balanced current account positions in 2020 and 2021 cushioned the impact of capital flows on the exchange rate and external vulnerabilities.

### Outlook and macroeconomic projections
- Pandemic trajectory: omicron spread will reduce growth somewhat in 2022Q1, but effect expected to be short-lived; activity to continue recovery in 2022Q2 supported by easing mobility restrictions, policy support, and favorable global commodity markets.
- Vaccination target: 77 percent of the population by midyear 2022.
- Real GDP growth projections:
  - 5.4 percent for 2022.
  - 6 percent in 2023.
- Output gap: expected reduction from −4.9 percent of GDP in 2020 to −1.9 percent in 2023 (economic slack reduced by two thirds).
- Annual inflation in 2022−23 projected to remain close to the 3 percent midpoint of the target corridor.
- Medium-term scarring: forecast implies a loss in output of about 6 percent in 2025 relative to the level envisaged in the January 2020 WEO; forecast assumes no persistent effects on potential output growth in the medium term.

### Risks and spillovers
- Balance of risks tilted to the downside; fluid with evolving external and pandemic risks.
- Downside risks:
  - Renewed infection surges, including Omicron or more aggressive COVID-19 variants.
  - Risks of tighter global financial conditions if higher-than-expected global inflation prompts earlier monetary policy normalization in advanced economies, leading to higher risk premia for emerging markets.
- Upside risk: sustained boost from global commodity markets; smaller-than-expected economic scarring.
- Climate risks: exposure to natural hazards, transition risks (stranded assets) given significance of coal rents and deforestation.
- Monetary policy surprises in advanced economies (notably the United States) could:
  - Tighten domestic conditions prematurely.
  - Increase risks of disruptive capital outflows, exchange rate depreciation, and higher financing costs, especially for rupiah-denominated debt.
  - Bring corporate solvency risks to the forefront, amplified by leverage in the nonfinancial corporate sector and tighter sovereign-financial sector linkages (increased bank holdings of rupiah government bonds).
- Comparative resilience versus 2013:
  - Nonresident holdings of rupiah government debt: 19 percent now versus 33 percent in 2013.
  - Current account: 0.4 percent of GDP surplus now versus a 3.2 percent deficit in 2013.
  - Reserves: 45 percent increase during 2013−21.

### Authorities’ views on outlook and risks
- Broad agreement with staff’s outlook and risk assessment.
- Authorities expect recovery to strengthen in 2022; main risks from severe pandemic disruptions and U.S. monetary policy tightening spillovers.
- Emphasis on continued synergy of national policies to overcome the pandemic, maintain macroeconomic stability, and support recovery.
- Authorities highlighted stronger fundamentals than prior episodes of global tightening: sound fiscal framework and low public debt, strong current account, adequate reserves, flexible exchange rate, and well-anchored inflation expectations.

### Fiscal policy: performance, plans, and recommendations
- 2021 preliminary budget outcome:
  - Budget deficit narrowed to 4.6 percent of GDP in 2021, below the target of 5.7 percent.
  - Stronger-than-expected revenue performance driven by tax revenue (notably VAT and trade-related taxes) and nontax revenue lifted by global commodity prices.
  - Spending on goods and services and subsidies increased; interest payments and salaries lower-than-budgeted.
  - Execution of the PEN program reached IDR 658.6 trillion, around 88.4 percent of budget allocations (slightly higher than 83.4 percent in 2020).
- Authorities plan to return to the budget deficit ceiling of 3 percent of GDP by 2023.
- 2022 budget and projections:
  - 2022 budget deficit target: 4.8 percent of GDP (IDR868 trillion), an adjustment of 0.9 percent of GDP relative to the 2021 budget target of 5.7 percent; does not incorporate revenue effects of the recently adopted tax reform.
  - Fund staff project a lower deficit of 4 percent of GDP in 2022, broadly in line with authorities’ planned adjustment.
  - Full unwinding of PEN expected to achieve much of the consolidation; flexibility to reallocate expenditure in 2022 without a supplementary budget retained.
- Tax reform (passed October 2021): main elements include:
  - Increase of the standard VAT rate from 10 to 12 percent in two steps—to 11 percent in April 2022 and to 12 percent by 2025 at the latest—with a reduction of the list of exempted goods and services.
  - New personal income tax bracket with a 35 percent tax rate on individuals earning above IDR 5 billion annually; increase in the upper bound of the lowest bracket from IDR 50 million to IDR 60 million; inclusion of fringe benefits in the income tax base.
  - Cancellation of the reduction in the corporate income tax rate from 22 to 20 percent.
  - Tax amnesty to encourage declaration of unreported assets, with tax rates ranging from 6 to 18 percent of the asset values.
- Revenue mobilization and medium-term strategy:
  - Staff estimates the tax reform could raise revenue by at least one percentage point of GDP by 2026.
  - Without additional measures, tax revenue ratio will remain lower than emerging market peers in 2026 (median tax ratio of all peers averaged around 18 percent in 2010−19; 15.4 percent for regional peers).
  - Suggested additional measures: broaden the tax base (e.g., lower VAT registration and basic personal income tax exemption thresholds), improve tax compliance (alternative minimum tax on businesses, compliance program for high-net-worth individuals and professionals).
- Fiscal sustainability indicators and policy guidance:
  - Indonesia’s debt-stabilizing primary balance estimated at around −1 percent of GDP.
  - Interest payments projected to converge to around 2 percent of GDP over the medium term.
  - Capping the overall deficit to 3 percent of GDP would ensure debt-to-GDP remains on a sustainable path and keep risks to public debt sustainability low.
  - Current public debt ratios and other indicators suggest Indonesia still has some fiscal space post-pandemic.
- Timing and composition of consolidation:
  - Negative fiscal impulse under baseline: 1 percent of GDP in 2022 and 0.7 percent of GDP in 2023; can be absorbed with accommodative monetary and macroprudential policy in short term.
  - If downside risks materialize, longer-lasting pandemic support could be necessary; any delay to reinstate the ceiling should be clearly communicated with modalities and policy interaction.
- Public financial management and transparency:
  - MOF consulted the Audit Board of Indonesia at the design stage of PEN programs.
  - Monthly reporting requirements for COVID-19-related programs in place.
  - Authorities should conduct and publish a full ex-post evaluation of fiscal incentives, a procurement audit under PEN (including list of companies awarded contracts and beneficial owners), and draw lessons for future use.
  - Tax Expenditure Reports published since 2018 have increased fiscal transparency.
- Authorities’ fiscal views:
  - Reiterated commitment to return to the 3 percent deficit ceiling by 2023.
  - Implementation of the tax harmonization law has begun and will yield additional revenues not incorporated in the 2022 budget.
  - Construction of the new capital (to rely on private funds) will not affect timing of return to the deficit ceiling.
  - Authorities have adequate cash reserves to cushion potential impacts on borrowing costs from adverse monetary policy spillovers.
  - Authorities are formulating a fiscal framework through 2025 and agree further revenue measures are needed; plans include a core IT infrastructure by 2024 to improve tax compliance, strengthen auditing, and reduce tax avoidance.
  - On expenditure: improving beneficiary database for targeted cash transfers and adopting zero-based budgeting to enhance spending efficiency.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 23.      Bank Indonesia further eased its

### 23.      Bank Indonesia further eased its monetary policy stance in 2021.

### Monetary policy stance and key actions in 2021
- BI influenced domestic monetary conditions with the policy interest rate and quantity-oriented instruments as part of the exceptional policy response to the pandemic.
- As of end-December 2021, BI’s holdings of government bonds rose by 40 percent from end-December 2020.
  - Primary market purchases under the market mechanism: about IDR 143 trillion, equivalent to 12 percent of the end-2020 monetary base.
  - Purchases under the BI-MOF agreement announced in August 2021: about IDR 215 trillion, equivalent to 18 percent of the end-2020 monetary base.
- BI kept the policy rate on hold at 3.5 percent after a 25-basis point cut in February 2021.
- The overnight interbank rate stayed close to the lower end of the interest rate corridor since July 2020; the monetary policy stance is moderately accommodative with market rates below the Fund staff-estimated range for the neutral real policy rate (2 to 3 percent).

### Policy guidance, risks, and recommended liquidity normalization
- BI expects its policy stance to stay accommodative through much of 2022, based on projections of a gradual increase in inflation.
- Rationale for accommodative stance under baseline: sizeable economic slack, well-anchored inflation expectations, planned fiscal consolidation in 2022, and downside risks.
- Recommendation to gradually reduce excess banking system liquidity to remain ahead of the curve and maintain stability in anticipation of Fed tightening.
  - Objective: bring the overnight interbank money market rate (currently at the floor rate of 2.75 percent) back to the midpoint of the corridor over time.
- January 2022 measure: BI announced a gradual increase in the rupiah reserve requirement (RRR) by a cumulative 300 bps for conventional banks and 150 bps for sharia banks over March–September 2022 to normalize banking system liquidity.
- Outside the baseline:
  - Decisive monetary tightening if broader, more sustained upward price pressures emerge that could de-anchor inflation expectations (inflation expectations breaching the upper end of the BI target range).
  - Tighten macroprudential policies if excess liquidity translates into rapid credit acceleration and higher financial stability risks.
  - Space to lower the policy rate if downside risks materialize.

### Monetary budget financing, exit, and market-intervention guidance
- Substantial bond purchases already scheduled for 2022 under the 2021 BI-MOF agreement require balancing benefits and risks of further monetary budget financing during 2022.
- Primary market purchases under the market mechanism should be confined to last-resort intervention in periods of severe market dysfunction.
- Authorities’ commitment to exit monetary budget financing by end-2022 is welcome; Law No. 2 of 2020 temporarily authorizes BI’s primary market purchases through end-2022.
- Risks of extending monetary budget financing beyond 2022:
  - Erosion of market discipline and inhibition of financial market development.
  - Risks to BI’s profitability and balance sheet, increasing with adverse monetary policy spillovers from advanced economies.
  - Potential distortion of price signals and discouragement of purchases by nonresidents as rupiah government bond market conditions normalize and fiscal financing needs decrease.
- Fund staff recommendation: would not advise extending monetary budget financing beyond 2022.
- Post-2022 operational stance:
  - Revert to conventional policy tools in the medium term.
  - Use government bond purchases in the secondary market as needed for market stabilization, including as part of the triple FX intervention strategy.
  - Policy rate movements should provide clearer signals as exceptional pandemic measures are phased out.

### Exchange rate policy and responses to spillovers
- If faced with adverse monetary policy spillovers, BI should preserve monetary policy space by allowing the exchange rate to act as a shock absorber.
- Under the baseline, U.S. monetary policy tightening could lead to capital outflows but be accompanied by stronger global demand strengthening the current account.
- If a sudden pickup in global risk premia pressures the rupiah, allow the exchange rate to act as a shock absorber.
- If spillovers become disruptive or the exchange rate acts as a shock amplifier:
  - Further monetary policy tightening and FX intervention to counter disorderly market conditions would mitigate balance sheet impacts where currency mismatches exist.
  - More gradual fiscal consolidation in 2022−23 could be warranted to preserve the economic recovery.

*Source: 1idnea2022001*

### 39.      The structural reform strategy should include measures to reduce pandemic scarring

### 39.      The structural reform strategy should include measures to reduce pandemic scarring

### Structural reform complementarities and priorities
- The job omnibus law is expected to increase investment and productivity growth, but its impact would be enhanced by complementary reforms in:
  - Education: establish a pipeline of skilled workers and promote female labor force participation.
  - Financial sector: ease financing constraints from shallow markets, as envisaged in the financial sector omnibus law.
  - Infrastructure: promote innovation, including through digitalization.
  - Governance: improve tax administration and compliance, government procurement, and product market regulations to reduce corruption risks and enhance efficiency.
- Progress noted by authorities:
  - Improvements in teacher training and remote learning.
  - Legal and constitutional establishment that the KPK has the mandate to investigate and prosecute corruption crimes.
- Government infrastructure spending needs:
  - Currently averages about 3 percent of GDP annually; needs to progressively increase overtime.
  - According to the ADB, Indonesia’s infrastructure needs, adjusted for climate change, are estimated at 6.0 percent of GDP annually.
- Expected outcome: These broad reforms, combined with a concerted effort to raise fiscal revenues, should help Indonesia climb the value-added chain in manufacturing and diversify its economy.

### Climate change mitigation steps and implementation details
- Recent measures and plans:
  - Updated NDC submitted to COP26 implies further increases in greenhouse gas emissions from current levels.
  - No net zero pledge yet; authorities are considering scenarios reaching net zero by 2060 or sooner.
  - 2021 tax reform bill includes a carbon price of IDR 30,000 per ton of CO2e (about US$2) applied to coal-fired power plants, coming into effect in April 2022.
  - Authorities seek to establish an emission trading system (ETS) by 2024 and launched a voluntary pilot program in the power sector with the participation of 32 coal-fired power plants.
  - A moratorium on new plans for coal-fired power plants will support the shift from coal to renewable sources in electricity generation; the moratorium does not apply to coal-fired plants already approved.
  - PLN aims for about half of the new generation capacity added in 2021−30 to be from renewable energy sources, which would lower the share of coal-based power generation to around 60 percent by 2030 while that of renewables would rise to around 25 percent.
  - Authorities have been issuing green sukuks since 2018 and launched Indonesia Green Taxonomy version 1.0 on January 20, 2022.
- Fund staff estimate: the annual financing needed to achieve Indonesia’s NDC targets would amount to 2.8 percent of GDP.

### Assessment of ambition, gaps, and recommended climate policies
- Key shortcomings:
  - Carbon price is low and has narrow sectoral coverage.
  - End user prices are not affected by carbon pricing due to current energy subsidies and lack of market pricing for fossil fuels and electricity.
- Recommendations:
  - Adopt plans for a predictable and increasing path for the carbon price.
  - Use the ETS to include sectors with the largest CO2 emitters and set free allowances sufficiently low to ensure a meaningful carbon-price equivalent.
  - Promptly reform energy subsidies and pricing to allow carbon pricing measures to affect end user prices.
  - Mobilize private investment by developing green financing market infrastructure.
  - Continue progress in monitoring and execution of adaptation plans, given Indonesia’s high exposure to natural hazards, including a rising sea level.

### Authorities’ views and implementation timing
- Authorities concurred with Fund staff priorities on structural reform and plan to frontload implementation to address pandemic scarring.
- Legal challenges to the omnibus law are being worked on with Parliament and are expected to be resolved in 2022.
- A recently passed law on central and regional government relations (HKPD) is expected to strengthen local government accountability and improve reform outcomes.
- Authorities agreed with Fund staff on climate recommendations:
  - Energy subsidy and pricing reforms will make the carbon price more effective.
  - Move gradually to cushion impact on the poor and minimize inflationary pressures amid the pandemic.
  - The initial low carbon tax rate was intended to signal commitment rather than raise revenue; rate and coverage could be adjusted when conditions permit.
  - Initial application of the carbon tax to the power sector will be a reference for future expansion to other sectors.

### Macroeconomic context and policy guidance related to reforms
- Macroeconomic backdrop:
  - Economy recovering at a brisk pace; inflation is low; credit outlook improving; external position strong.
  - With ample reserves and relatively low public debt, Indonesia is positioned to extend further support if severe downside risks materialize.
- Fiscal and monetary policy guidance:
  - Support for authorities’ plan to return to the budget deficit ceiling of 3 percent of GDP in 2023 and to end monetary budget financing by end-2022.
  - If recovery stalls, reasons for delay and path back should be clearly communicated.
  - Medium-term fiscal strategy should be clearly communicated with specific measures, targets, and contingencies, including steps to reform energy subsidies and pricing; savings from subsidy reform could strengthen the social safety net.
  - Fiscal consolidation to return to the deficit ceiling is not expected to unduly impede the recovery in 2022 given stronger-than-expected 2021 growth, favorable commodity prices, tax reform, available cash reserves, and budget reallocation flexibility.
  - Monetary policy should remain accommodative until the recovery is more firmly entrenched, provided inflation and inflation expectations remain well anchored; BI should stay ahead of the curve and gradually reduce excess banking system liquidity.
- Financial sector guidance:
  - Intensive supervision required while crisis-related measures are in place to monitor credit risks.
  - Accommodative macroprudential policies and improved access to government guarantees for bank lending to MSMEs and corporates are appropriate.
  - Authorities should consider ending the relaxation of loan classification standards ahead of the current 2023 target date.
  - Further credit deepening could be achieved by improving the role of credit bureaus in reducing information asymmetries.

### Staff appraisal summary points
- Authorities’ decisive pandemic response maintained economic and financial stability.
- Structural reforms could reduce pandemic scarring and reverse deterioration in poverty and income inequality over the medium term.
- Downside risks remain significant (e.g., aggressive COVID-19 variants, spillovers from tighter global financial conditions).
- Fund staff endorse authorities’ climate measures and recommend further steps:
  - Introduce a predictable and increasing path for carbon pricing.
  - Move ahead with energy subsidy and pricing reforms.
  - Expand the ETS to include the largest GHG emitters.
  - Foster the development of a green financial market.

*Source: IMF staff appraisal excerpt (Indonesia).*

### 53.      It is recommended that the next Article IV consultation take place on a standard

### 1idnea2022001 - 53.      It is recommended that the next Article IV consultation take place on a standard

### COVID-19 Developments
- Indonesia has seen significant spread of COVID-19.
- Daily new cases have been increasing because of omicron.
- Half of the population are fully vaccinated, but Indonesia lags behind Asian peers...
- Mobility has rebounded following the second wave, reaching levels well above those ASEAN peers.
- Daily new cases have been is increasing.  Indonesia’s social restrictions have been increased.

### Recent Economic Developments
- Real GDP growth has bounced back...  ...led by private consumption and investment growth.
- Private consumption appears to be recovering...
- Manufacturing sentiment increased above the pre-pandemic levels.
- Consumer sentiment has increased...
- The volume of merchandise export has risen well above pre-pandemic levels.

### Inflation Dynamics
- Inflation picked up in January and returned to the target band...
  - ...reflecting increased domestic demand and liquified petroleum gas price increase.
- Disinflationary pressures in 2021 appear to be broad-based, both across products... and across regions.
- Capacity utilization has increased but is still well below the pre-pandemic levels.
- PPI inflation rebounded in 2021, led by mining sector.

### Capital Flows and Market Developments
- Portfolio investment flows have fluctuated at a low level since last year.
- Rupiah government bonds held by foreign investors have stabilized in the US$ but have declined as a percent of stock.
- Markets interest rates have declined since mid-2020...
  - ...partly reflecting a lower sovereign premium...
  - ...and exchange rate stability.
- Stock prices have increased and reached pre-pandemic levels.

### External Sector
- The current account recorded a surplus in 2021, driven by an increase in the non-oil and gas balance.
- The rebound of exports in 2021 has been broad based.
- Imports increased sharply, particularly consumer goods and raw material, on the back of recovering domestic activity.
- The NIIP improved since end-2019, mainly due to a decline in portfolio liabilities.
- Indonesia’s foreign reserves in 2021 (US$144.9 billion) were at an adequate level.
- External financing needs are projected to increase in 2022 mainly due to a widening of the current account deficit.

### Fiscal Sector
- The primary deficit is projected to narrow in 2021, reflecting stronger than expected revenue performance.
- Total revenue-to-GDP ratio rose, mainly on account of non-tax revenue, but is expected to decline slightly in 2022.
- Indonesia’s tax-to-GDP ratio lags behind EM peers in Asia.
- Capital spending is expected to remain high in 2022.
- Commercial banks and BI increased their shares of rupiah government bond holdings compared to pre-pandemic.
- General government debt is expected to remain moderately higher in the medium term compared to recent history.

### Monetary Sector
- BI has kept its policy rate unchanged since February 2021...
  - ...and its government bonds purchased to support the national economic recovery program has slowed recently.
- Monetary base has increased recently, driven by bank reserves increase...
  - ...while broad money growth has accelerated.
- The banking system as a whole has ample liquidity...
  - ...although small banks experienced occasional deposit outflows.

### Macrofinancial Developments
- Credit growth, which was slowing down even prior to the pandemic due to high borrowing cost and weak demand, has started to bounce back...
  - ...meanwhile loan-to-deposit ratio still declining.
- The credit gap has widened in 2021.  Financial conditions continued to ease.
- Property prices remain stable...
  - ...and real estate loan growth has stabilized in 2021, but non-performing loans in this credit category increased.

### Financial Soundness Indicators
- Indonesia’s banking system capital remains adequate and above peers...
  - ...and although declining, profitability remains at a high level in comparison to peers reflecting large interest margins.
- System-wide banks liquidity remains ample and around the median among peers.
- Nonperforming loans have increased since the pandemic.

### Key Tables and Statistical Products (listed in source)
- Table 1. Indonesia: Selected Economic Indicators, 2018–23
- Table 2. Indonesia: Selected Vulnerability Indicators, 2018–22
- Table 3. Indonesia: Balance of Payments, 2018–23 (In percent of GDP)
- Table 4. Indonesia: Medium-Term Macroeconomic Framework, 2020–27
- Table 5. Indonesia: Summary of Central Government Operations, 2018–23 (In trillions of rupiah)
- Table 6. Indonesia: Summary of Central Government Operations, 2018–23 (In percent of GDP, unless otherwise indicated)
- Table 7. Indonesia: Summary of General Government Operations, 2018–23
- Table 8. Indonesia: Monetary Survey, 2018–23
- Table 9. Indonesia: Financial Soundness Indicators, 2017–21 (In percent, unless otherwise indicated)
- Table 10. Indonesia: Key Poverty and Social Indicators
- Table 11. Indonesia: Key FSAP Recommendations
- Table 12. Integrating Fund Surveillance and Capacity Development

### Key FSAP Recommendations and Authorities' Actions (selected highlights)
- Revise OJK Law, BI Law, and LPS Law to clarify mandates and focus on financial stability.
  - A comprehensive financial sector reform proposed as “Prolegnas” is currently being discussed by the Government and Parliament.
- Amend the Insurance Law to specify policyholder protection as principal objective of OJK.
  - Series of meetings with stakeholders to discuss the design of policyholders’ protection program (PPP); PPP concept would be part of financial sector reform discussion.
- Strengthen legal protection of supervisors and officials of all agencies involved in financial oversight and crisis management.
  - Completed. Legal protection further strengthened by Article 27 section 2 of Law Number 2 Year 2020.
- Introduce a foreign currency liquidity coverage ratio.
  - Completed. OJK imposes LCR based on significant currencies per regulation No.42/POJK.03/2015.
- Strengthen BI’s capacity for systemic risk analysis and macroprudential stress tests, and OJK’s capacity for regulatory stress tests; OJK to do bottom-up stress tests for D-SIBs regularly.
  - Completed. BI and OJK implement Joint Stress Test (JST) regularly; BI designed baseline, adverse I (for severe), and adverse II (for moderate) scenarios. BI developed the integrated macroprudential stress test (IMaPST) framework in 2021 with 7 modules.
- Reduce OJK’s silo structure as part of financial sector reform discussion.
- Strengthen the banking supervisory approach and supervisory practices for financial conglomerates (FCs).
  - OJK identified 14 FCs under POJK 45; transitional arrangements for 31 Financial Groups (FG).
- Further strengthen enforcement of credit and risk management regulations.
  - Completed. Multiple POJK regulations issued (e.g., No.40/POJK.03/2017; No.16/POJK.03/2018; No.20/POJK.03/2019; No.38/POJK.03/2019; No.40/POJK.03/2019; No.48/POJK.03/2020; No.13/POJK.03/2020; POJK No.44/POJK.05/2020). Updated regulation on Risk-Weighted Assets planned for implementation by 2023.
- Revise the insurance supervisory framework (three strikes-approach) to allow prompt actions.
  - Completed. Issuance of OJK Regulation Number 17/POJK.05/2017 and POJK Number 28/POJK.05/2020; POJK exit policy implemented.
- Strengthen corporate governance practices within the financial system.
  - OJK issued Good Corporate Governance regulations for banks, insurance, and capital market actors (e.g., No.55/POJK.03/2016; No.18/POJK.03/2016; POJK 73/POJK.05/2016; No.57/POJK.04/2017; No.10/POJK.04/2017).
- Introduce legal provisions for licensed non-operating financial holding companies.
  - OJK Regulation Number 45/POJK.03/2020 defines FCs with assets equal to or larger than IDR100,000,000,000,000 (one hundred trillion Rupiah).
- Revise the PPKSK Law to clarify the role of KSSK and limit Presidential involvement to approving public funding.
  - Law number 2 of 2020 provides legal foundation for KSSK meetings and role; Presidential role remains necessary with good governance practices.
- Adjust the emergency liquidity assistance (ELA) framework to ensure it is effective.
  - Completed. Law No. 2 of 2020 enhanced BI’s mandate; BI amended PLJP/PLJPS framework (including collateral, interest rate, application and post-approval processes). Loans restructured during the Covid-19 stimulus period (March 16th, 2020 - March 31st, 2021 and was later extended to March, 2023) may be used as PLJP collateral if qualifying. PLK (Pinjaman Likuiditas Khusus) guaranteed by the government for systemic banks is addressed but not yet in operation.
- Develop resolution options and implementation guidelines for banks, and resolvability assessment and resolution planning frameworks for D-SIBs.
  - Completed. Recovery plan regulated under Law Number 9 of 2016; OJK Regulation No. 14/POJK.03/2017 requires D-SIBs to have recovery plans. IDIC promulgated IDIC Regulation Number 1/2021 on Resolution Plan in March 2021; D-SIBs and selected non-DSIBs must prepare resolution plans starting in 2022.
- Integrate key ML/TF risks into priorities and operations of relevant agencies and finalize risk-based AML/CFT supervisory tools.
  - Completed. OJK implemented FATF recommendations, developed NRA and SRA guidelines, adopted e-CDD guidance, and carried out capacity building. BI completed 100% action plans of the National AML/CFT Strategy under its purview in 2021.
- Financial Inclusion and Financial Deepening initiatives completed or advanced:
  - Presidential Regulation No. 114 of 2020 on National Strategy for Financial Inclusion (SNKI).
  - SN-PPPK reviewed and revised; period extended to 2018-25 with Acceleration Phase extended to 2020-23.
  - Priority programs under SN-PPPK and measures to deepen markets (e-IPO, repo development, retail investor base expansion, equity crowdfunding via 57/POJK.04/2020).
- Enhance bond yield curve by consolidating debt issuance and improving secondary markets.
  - Completed. IDX launched IGBF; government issued benchmark series and conducted debt switching and buybacks (domestic auctions on June 17, 2021 and September 23, 2021). Global Tender Offer/Liability Management Exercise on September 20, 2021 received USD 2.68 Bio in tender instructions; repurchased USD 1.16 bio.

### Integrating Fund Surveillance and Capacity Development (selected linkages)
- Monetary policy and central bank communication
  - Recommendation: Clear and focused communication on monetary and financial policy.
  - Capacity development: The Fund provided technical assistance covering communication on monetary policy and financial stability.
- Statistics
  - Recommendation: Use of big data for timely economic monitoring.
  - Capacity development: The Fund provided TA on big data for residential property price index, integrated sectoral accounts and balance sheets statistics, and compiling Financial Soundness Indicators.
- Tax policy and administration
  - Recommendation: Implement a medium-term revenue strategy (MTRS) to raise revenue by at least 3 percent of GDP over five years.
  - Capacity development: The Fund provided TA in August 2017 to set a strategy.
- Public financial management
  - Recommendation: Improve fiscal governance, including infrastructure governance and public investment management.
  - Capacity development: The Fund conducted Indonesia’s PIMA in February 2019 and Public Sector Balance Sheet Analysis in October 2019.
- Financial sector
  - Recommendation: Improve financial oversight, crisis management framework, and monitoring of corporate vulnerabilities.
  - Capacity development: The Fund provided TA on financial conglomerate supervision, risk-based supervision, crisis management, stress testing, systemic risk analysis, and held a virtual fintech workshop.
- Financial sector supervision during COVID-19
  - Recommendation: Preparation and timely implementation of regulatory and supervisory response to the pandemic.
  - Capacity development: The Fund provided virtual workshops on financial supervision, IFRS9 implementation and supervisory treatment under COVID-19.

*Source: IMF staff report content as provided in the supplied PDF chapter/section.*

### Appendix I. Policy Measures in Response to COVID-19

### Appendix I. Policy Measures in Response to COVID-19

### Growth and Mobility During the Pandemic
- The COVID-19 pandemic caused lower and very volatile growth in Indonesia over the past two years.
- Cell phone–based mobility indicators (Google’s Community Mobility Report) closely correlated with:
  - national real GDP growth (quarter-on-quarter, seasonally adjusted), and
  - surges of infections, hospitalizations, and deaths.
- Residential mobility (the “stay-at-home” indicator) contains the most predictive content for real GDP growth; output tends to decline when individuals stay home and vice versa.
- The “stay-at-home” effect reflects both social restrictions imposed by authorities and adaptive individual behavior to changing health and economic conditions.

### A Simple Aggregate Model to Nowcast Growth
- Model specification (OLS, 2020Q1–2021Q3): Yt = α + βi · Mit + ε, where Y is real GDP growth (q/q, s.a.), M is mobility subcomponents (retail & recreation, grocery & pharmacy, parks, transit stations, workplaces, residential), using quarterly averages of daily Google mobility data.
- Seasonal adjustment: X12 method applied using 2010–2019Q4 seasonal factors to avoid pandemic-era distortions.
- Estimation results (summary):
  - Estimated elasticities of growth with respect to mobility range between 0.15 and 0.28 for all mobility subcomponents except residential mobility.
  - Residential mobility elasticity: −0.61.
  - Interpretation: a 10 percentage point increase in residential mobility is associated with reduced growth of 6.1 percent q/q, s.a.
  - Most mobility subcomponents show a strong statistical relationship with real GDP growth at the national level; grocery-related mobility is an exception.
- Out-of-sample / late-November 2021 implication:
  - The model with residential mobility as predictor points to growth of about 15 percent q/q, s.a.a.r., in 2021Q4.
  - This predicted rebound reflects normalization after the Delta surge in 2021Q3, when residential mobility jumped amid tight social restrictions and subsequently eased as infections dropped.

### Sectoral and Provincial Analysis (Panel Estimation)
- Objective: test whether aggregate relationship holds at sectoral and provincial level using a three-dimensional panel (sector × province × time).
- Model specification: Yjlt = α + βij · Mijt + γijl + δj + ϑt + ε, where:
  - Y is real GDP growth by sector j and province l,
  - M is mobility indicator,
  - γ is vector of pandemic and pre-pandemic variables,
  - δ captures sectoral fixed effects,
  - ϑ captures pandemic-quarter fixed effects.
- Controls and data:
  - Employment in 17 sectors across 34 provinces expressed as share of provincial population (pre-pandemic reference: February 2020).
  - Labor force participation in 34 provinces as share of working-age population (pre-pandemic reference: February 2020).
  - Share of workers in informal sectors in 34 provinces based on 2019 data.
  - COVID-19 infections and deaths for 2020Q1–2021Q3 measured as quarterly changes per 1,000 population by province.
- Key results:
  - Residential mobility remains highly statistically significant when including sectoral and time fixed effects.
  - Including pre-pandemic variables (sectoral employment by province, labor force participation, share of informal workers) does not eliminate the predictive power of residential mobility.
  - In specifications comparing mobility versus COVID-19 infections and deaths, mobility clearly outperforms the pandemic indicators in predicting growth.
- Conclusion: the close statistical relationship between mobility and growth at the national level is confirmed at disaggregated (sectoral and provincial) levels; panel estimation provides more observations and robustness.

### Key Findings and Policy Implications from Mobility Analysis
- Mobility data are a valuable real-time resource for understanding shifts in economic momentum amid COVID-19 disruptions.
- Residential (“stay-at-home”) mobility is the strongest single mobility predictor of quarterly real GDP growth.
- Mobility indicators provide policymakers and private sector agents with timely information to inform decisions.
- Findings are consistent with related literature:
  - Calì and Ryandiansyah (2020): residential mobility predictive in early pandemic quarters.
  - Putra and Arini (2020): strong positive correlation between mobility changes and economic growth across provinces.
  - Sampi and Jooste (2020): Google mobility index predicts industrial production.
  - Gamtkitsulashvili and Plekhanov (2021): globally, a 10 percent decline in mobility is associated with 2 percentage point slower GDP growth; elasticity of value added with respect to mobility declines as mobility normalizes.

*Prepared by Robin Koepke and Rani Setyodewanti (both APD); analysis covers mobility and growth relationships for 2020Q1–2021Q3 and out-of-sample implications through late November 2021.*

### Risk Assessment Matrix (selected entries)
- Global risks:
  - Outbreaks of lethal and highly contagious COVID-19 variants:
    - Likelihood: High
    - Expected impact: High (larger economic scarring; decline in capital inflows; currency depreciation; tighter domestic credit conditions; higher poverty rate)
    - Policy recommendation: Increase spending on health and social protection; loosen monetary and macroprudential policies; keep exchange rate flexible and market driven.
  - De-anchoring of inflation expectations in the U.S. and/or advanced European economies:
    - Likelihood: Medium
    - Expected impact: Medium-High (lower GDP growth; larger scarring; decline in capital inflows; currency depreciation; tighter credit conditions)
    - Policy recommendation: Pace down fiscal consolidation if growth impact is substantial; tighten monetary policy and intervene in FX if spillovers are disruptive.
  - Abrupt growth slowdown in China:
    - Likelihood: Medium
    - Expected impact: Medium (weaker exports; reduced FDI; weaker investment)
    - Policy recommendation: Use exchange rate flexibility, fiscal and monetary policy to soften demand impact; accelerate structural reforms; augment trade liberalization.
- Domestic risks:
  - Faster containment of COVID-19:
    - Likelihood: Low to Medium
    - Expected impact: Medium-High (investment and employment recover; capital inflows resume; currency appreciation; easier credit conditions)
    - Policy recommendation: Accelerate MTRS implementation; increase infrastructure and social spending; monetary policy on hold or gradually tightened; let regulatory relief expire.
  - Sharper deterioration in banks' asset quality and funding positions:
    - Likelihood: Medium to High
    - Expected impact: High (lower GDP; larger scarring; capital outflows; currency depreciation; tighter credit)
    - Policy recommendation: Recognize and address solvency and capital adequacy issues upfront; banks should actively provision against credit losses even under relaxed loan standards.
  - Natural disasters related to climate change:
    - Likelihood: Medium
    - Expected impact: Low (regional disruption; slower growth; decline in portfolio inflows)
    - Policy recommendation: Prioritize expenditure to affected regions; ease monetary and macroprudential policies if economy slows significantly; provide bank support and monitor corporate borrowers at risk.

### External Balance Assessment (selected summaries and statistics)
- Overall assessment (2021): external position broadly in line with level implied by medium-term fundamentals and desirable policies; external financing needs appear sustainable but sizable and exposed to global financial condition fluctuations.
- Policy guidance: maintain exchange rate flexibility; pursue structural reforms to boost competitiveness and facilitate post-COVID-19 sectoral adjustment (higher infrastructure and social spending while maintaining fiscal sustainability through revenue mobilization; fewer restrictions on FDI and external trade; greater labor market flexibility).
- Foreign asset and liability position (end-2020 and September 2021 snapshots):
  - NIIP end-2020: −26.4 percent of GDP (improved from −30.2 percent at end-2019).
  - NIIP as of September 2021: −23.3 percent of GDP.
  - Gross external assets (Sep 2021): 36.4 percent of GDP (one-third reserves).
  - Reserve assets (Sep 2021): 12.4 percent of GDP.
  - Gross external liabilities (Sep 2021): 59.7 percent of GDP.
  - Gross external debt (end-Sep 2021): 35.7 percent of GDP (from 39.3 percent at end-2020).
  - At end-2020, 16 percent of external debt (6 percent of GDP) had remaining maturity < one year.
- Assessment: NIIP and gross external debt composition indicate sustainability and limited roll-over risk, but nonresident holdings of rupiah government bonds remain sizeable (declined from 25 percent of total stock at end-2020 to 19 percent (or 5.3 percent of GDP) at end-2021), leaving vulnerability to global financial volatility.
- Current account (2021):
  - Background: expected modest surplus of around 0.4 percent of GDP in 2021 (vs. deficit of 0.4 percent of GDP in 2020), driven by exports growing faster than imports amid higher commodity prices.
  - Staff estimates and decompositions:
    - 2021 (% GDP): CA: 0.4; Cycl. Adj. CA: −1.0; EBA Norm: −0.5; EBA Gap: −0.5; COVID-19 Adj.: 0.1; Other Adj.: 0.9; Staff Gap: 0.5.
    - Staff estimates a CA gap of 0.5 percent for 2021; considering uncertainties, the CA gap for 2020 is in the range of −1.0 percent to 2.0 percent of GDP.
  - Policy implication: maintain external balance via structural reforms, strengthen revenue mobilization, and increase public expenditure on health, education, and infrastructure.
- Real exchange rate (REER):
  - 2020: average REER depreciated by 1.3 percent relative to 2019 average; within-year REER depreciated ~10 percent between February and April before settling ~6.3 percent below the February level.
  - 2021: REER depreciated by 1.4 percent compared to 2020 average, fluctuating within a narrow band.
  - Staff CA gap estimate of 0.5 percent of GDP implies an REER gap of −2.9 percent with standard elasticities.
  - REER model ranges:
    - REER index and level REER models point to 2021 REER gaps of about −1.1 percent to −13.9 percent respectively.
    - Staff assesses the REER gap in the −7.0 to

*Appendix II–IV excerpts on mobility, risks, and external balance drawn from the supplied IMF chapter content.*

### 3.0 percent range, with a midpoint of −2.0 percent.

### 3.0 percent range, with a midpoint of −2.0 percent.

### Capital and Financial Accounts: Flows and Policy Measures
- Background:
  - Net financial inflows stabilized at 0.8 percent of GDP in 2021 after a decline to 0.7 percent of GDP in 2020 (from 3.3 percent in 2019).
  - Portfolio inflows into equity and corporate debt increased compared to the previous year.
  - Nonresident holdings of rupiah government securities declined to 19 percent at end-2021, from 25 percent at end-2020.
  - Net portfolio inflows rose to 0.7 percent of GDP in 2021 compared to 0.3 percent in 2020.
  - Net FDI inflows were flat relative to 2020 at 1.3 percent of GDP.
- 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 are recommended, focused on:
    - safeguarding the fiscal position;
    - keeping inflation in check;
    - advancing financial deepening;
    - easing obstacles to investment through structural reforms.
  - These policies would help sustain capital inflows in the medium term.

### FX Intervention and Reserves Level
- Background:
  - Since mid-2013, Indonesia has had a more flexible exchange rate policy framework.
  - Reserves were US$135.9 billion at end-2020, compared with US$129.2 billion at end-2019.
  - Contingencies and swap lines amount to about US$95 billion.
  - International reserves increased to US$145 billion at end-2021 from US$136 billion in December 2020.
  - Bank Indonesia has intervened in spot and forward FX markets and conducted secondary market purchases of rupiah government securities for sterilization at times of increased market volatility.
- Assessment and adequacy metrics:
  - Current level of reserves is equal to 12.2 percent of GDP.
  - Reserves are about 123 percent of the IMF’s reserve adequacy metric.
  - Reserves are about 7.4 months of prospective imports of goods and services.
  - This reserve level should provide sufficient buffer against a wide range of possible external shocks, with predetermined drains manageable.
  - Exchange rate flexibility should continue to act as a shock absorber.
  - If external pressures result in disorderly market conditions in the foreign exchange market, the use of FXI can be appropriate to mitigate negative impacts on balance sheet exposures.

### Appendix V. The 2021 Revenue Tax Reform — Main measures, assessment, and implications
- Overview:
  - The tax reform bill was enacted on October 29, 2021.
  - The new law aims to improve revenue mobilization while fostering growth and promoting tax equity.
  - The Law on the Harmonization of Tax Regulations introduces several tax administration and policy measures consistent with earlier analyses and the Medium-Term Revenue Strategy (MTRS).
- Measures aligned with MTRS:
  - Introduction of an additional bracket of 35 percent to the Personal Income Tax (PIT) and extension of its base to include fringe benefits.
  - Gradual increase of the Value-Added Tax (VAT) rate to 11 percent in 2022 and to 12 percent no later than 2025.
  - Streamlining of the list of VAT exemptions.
  - Cancellation of the permanent reduction of the Corporate Income Tax (CIT) rate from 22 percent to 20 percent as previously envisaged in Perppu No. 1/2020.
  - Broadening of the excise tax base to include plastic products.
  - Introduction of a carbon tax.
- Tax administration measures:
  - Appointment of third parties for tax collection (income tax, VAT, and electronic transaction tax).
  - Easing and simplification of VAT filing.
  - Use of the Population Identity Number (NIK) as a tax identifier for individuals.
- Potentially adverse or suboptimal features:
  - Taxpayer Compliance Improvement program (amnesty) allowing disclosures of undeclared assets with tax rates between 6 to 11 percent (12 to 18 percent) on assets accumulated before 2015 (between 2016 and 2020).
    - Risk: tax amnesties often reduce voluntary compliance and may generate long-term losses that offset short-term gains, especially where previous amnesties were offered (most recently in 2016 and 2008).
  - Increase of the upper-bound of the bottom PIT bracket from IDR 50 million to IDR 60 million likely reduces the tax burden on the middle class.
  - Four-year tax holiday for skilled workers and exemption from tax on dividends invested in Indonesia may be distortionary.
- Missed opportunities and further reform areas:
  - Harmonization of special regimes in the CIT system into one to broaden the tax base and reduce distortions.
  - Lowering the basic PIT exemption threshold and shifting the tax unit to an individual base to capture the growing middle class.
  - Lowering the turnover threshold for the small business tax regime to IDR 600 million and aligning VAT registration threshold with this small business threshold.
  - Combining the carbon tax with fuel and vehicles excises, and phasing out energy subsidies to enhance environmental benefits and revenue mobilization.
  - Introduction of Alternative Minimum Tax and General Anti Avoidance Rule—GAAR provisions (present in initial draft) could have strengthened compliance.
  - Measures to enhance compliance among professional services providers and high-wealth individuals.
  - Consider increasing the recurrent property tax rate and reducing the property transaction tax rate from 5 to 2 percent for greater efficiency in the sector.
- Regulatory design and implementation:
  - The law enhances government scope to specify tax parameters by regulation without changes to primary legislation.
  - To maximize revenue gains, the Ministry of Finance should ensure implementing regulations are well-designed to avoid creating additional loopholes or new distortions.
- Revenue impact estimates:
  - Staff assessment: the reform could yield revenue increases of at least 1 percentage points by 2026 and by 1 to 1½ percentage points in the medium term.
  - Composition of estimated gains: around 0.6 to 0.8 percent of GDP from VAT, 0.5 percent of GDP from IT and other administrative measures, and 0.2 percent of GDP from the reversal of the permanent reduction in CIT rate from 22 percent to 20 percent initially planned for 2022.

- Table summary highlights (selected measures and exact parameters as provided):
  - Income Tax:
    - Inclusion of fringe benefits and exclusion of some dividends from the PIT tax base (Art No. 4, 6, and 9).
    - Addition of a bracket of 35 percent tax rate on taxable income above IDR 5 billion annually for individual taxpayers, and the reduction of the upper-bound of the bottom bracket from IDR 50 million to IDR 60 million (Art No. 17).
    - Exemption from the 0.5 taxation on turnover is granted for up to IDR 500 million/year (Art No. 7).
  - VAT and Luxury Goods Sale Tax:
    - Increase of VAT rate to 11 percent in 2022 and 12 percent no later than 2025 (Art. 7 (1)).
    - Reducing VAT exemptions and Facilities (Art No. 4a and 16).
    - Easing and simplifying VAT (final VAT/GST) (Art. No. 8A and 9A).
  - Plastic Excise:
    - Adding plastic products as excisable goods.
  - Carbon Tax:
    - Introduction of a carbon tax at a rate of IDR 75 per CO2e.
  - Tax Administration (selected):
    - Appointment of other parties to collect Income Tax, VAT, and Electronic Transaction Tax (Art No. 32A).
    - Taxpayer Compliance Improvement Program provisions and related tax rates for disclosed assets (Art No. 37B−37I).
    - Introduction of the use of Population Identity Number (NIK) as Tax Identity Number (NPWP) Art. 2 (10).

### Appendix VI. Debt Sustainability Analysis
- Overview conclusion:
  - Indonesia’s external and public debt remain moderate and sustainable.
  - Potential risks include weaker-than-expected revenue and contingent liabilities from state-owned enterprises (SOEs) and public-private partnerships (PPPs).
  - Reduction in nonresident participation in the local currency bond markets has contributed to reduced vulnerabilities, but reliance on foreign investors remains sizable.
- External debt:
  - External debt reached 39 percent of GDP in 2020, up three percentage points from its pre-pandemic level.
  - General government external debt accounted for about half of the increase, rising to 19.5 percent of GDP.
  - External debt is estimated to have edged down to 36.8 percent of GDP by end-2021.
  - Projection: external debt is projected to stabilize around 34 percent of GDP in the medium term under the baseline scenario.
  - Sensitivities:
    - A one standard deviation widening of the current account deficit would increase external debt to 36.5 percent of GDP by 2027.
    - A 30 percent depreciation in 2022 would raise external debt to 49 percent of GDP in 2023 and it would remain around that level throughout the forecast horizon.
- Public debt:
  - General government debt is estimated to have reached 42.8 percent of GDP in 2021 from 30.6 percent in 2019.
  - Foreign-currency denominated debt is estimated to have declined to about 33 percent in 2021.
  - Nonresidents held around 47 percent of general government debt in 2021 from 58 percent in 2019.
  - Projection:
    - 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 envisages the general government deficit to narrow to about 4 percent in 2022 before declining to 2.2 percent of GDP over the medium term.
    - The primary deficit is projected to reach 1.3 percent of GDP in 2022, and thereafter converge to 0.4 percent over the medium term.
    - Public debt is projected to decline from 42.8 percent in 2021 to around 41.3 percent of GDP in 2027.
    - The decline is mainly driven by declining primary deficits and a negative cumulative interest rate-growth differential of around −7 percent over the medium term.
    - Gross financing needs are expected to fall from 6.6 percent of GDP in 2021 to around 3.8 percent of GDP in 2027.

*Source: IMF staff analysis in the provided chapter/appendices.*

### 6.      Public debt dynamics are robust to both standard shocks and stress tests (Figures 4

### 1idnea2022001 - 6.      Public debt dynamics are robust to both standard shocks and stress tests (Figures 4

### Public debt dynamics and stress-test outcomes
- Under the most severe scenario with a combined macro-fiscal shock, total government debt would stabilize at around 51 percent of GDP by 2027.
- Under the same severe scenario, total government debt would stabilize at around 364 percent of revenue by 2027.
- Gross financing needs would gradually decline to around 5.4 percent of GDP.
- Fiscal risks to monitor:
  - Potentially weaker-than-expected revenue.
  - Expanding balance sheets of SOEs.
  - Expanding balance sheets of PPPs.
- Policy implication:
  - These fiscal risks will need to be managed carefully, especially if the recovery is slower than projected in the baseline.

### Authorities’ views
- The authorities agreed with the external and public debt sustainability analysis.

### Temporary monetary budget financing (Appendix VII) — objectives, modalities, and amounts
- Legal and time framework:
  - Law No. 2 of 2020 authorized Bank Indonesia (BI) to purchase rupiah-denominated government bonds directly in the primary market, on a temporary basis through end-2022.
  - The same law also authorized the suspension of the budget deficit ceiling of 3 percent of GDP for the national government for the same time window.
- Three joint-decree arrangements used:
  - Market Mechanism (established 2020; extended through end-December 2022).
  - 2020 Burden Sharing Agreement (announced early July 2020).
  - Coordination Agreement between BI and the Ministry of Finance (announced August 2021).
- Market Mechanism principles and modalities:
  - Four main principles: (i) prioritizing market mechanisms; (ii) considering the impact on inflation; (iii) purchasing tradable government bonds; and (iv) acting as a last resort when market capacity could not absorb the government’s auction target.
  - BI is a noncompetitive, stand-by bidder in the primary bond market auction, with the maximum bid amount capped in terms of the issuance target.
  - Cap: 30 percent for sharia bond and 25 percent for conventional bonds.
  - If the auction target is unmet through main and additional primary auctions, the government may conduct a private placement with BI.
- Market Mechanism purchase amounts and ratios:
  - Purchases under the market mechanism amounted to IDR 76 trillion in 2020 and to IDR 143 trillion in 2021.
  - These purchases amounted to 0.5 and 0.9 percent of 2020 GDP, respectively.
  - These purchases amounted to 6.3 and 11,9 percent of the end-2019 monetary base.
- Burden Sharing Agreement:
  - Aimed to finance COVID-19 related expenditure and tap BI revenue.
  - Involves pre-defined amounts of bond purchases by tranche, with each tranche associated with specific expenditure categories under the National Economic Recovery (PEN) program.
  - Revenue (“seignorage”) sharing modalities differ by tranche.
- Coordination Agreement:
  - Aimed to finance humanitarian expenditure and BI revenue.
  - Involves pre-defined amounts of bond purchases, with amounts defined by year (2021 and 2022).
  - Revenue sharing is defined on the basis of purchase amounts.

### Assessment of BI purchases and program role
- Compared with other emerging market economies (EMs) with asset purchase programs, BI’s program has been in effect longer than in many others.
- Most EM purchases were concentrated in early months of the pandemic for bond market stabilization; BI’s purchases extended beyond this stabilization role.
- BI’s primary market purchases amounted to direct monetary budget financing and supported monetary policy easing in support of fiscal response to the pandemic.
- In relative terms, BI purchases reduced the amount of rupiah bonds held by the public and coincided with lower domestic bond yields in 2020 and a broadly stable rupiah government yield curve in 2021.

### Public banks and the credit recovery (Appendix VIII)
- Credit recovery pattern:
  - Credit recovered after declines in early stages of the pandemic.
  - Recovery led by large banks, especially the four large state-owned banks—Bank Mandiri, Bank Rakyat Indonesia (BRI), Bank Negara Indonesia (BNI), and Bank Tabungan Negara (BTN).
  - These large public banks reported increasing credit growth in January 2021 after declines in December 2020.
  - Their credit further recovered in recent months, growing at 7½ percent in November 2021.
  - Regional banks (owned by provincial governments) had lending growth of around 6 percent in 2021.
  - Recovery in credit of private national banks started around March 2021 and was growing at 3 percent in November 2021.
  - Foreign and joint banks registered declines in credit of more than 20 percent.
  - Total lending growth of the banking system was about 4½ percent (capturing differences across bank types).
- Drivers and interpretation:
  - Slow credit recovery is not related to bank liquidity issues but to credit demand considerations and differences in bank behavior after crises.
  - Pandemic triggered an increase in deposits across bank types—reflecting precautionary motives and government measures.
  - BI provided liquidity via conventional tools (e.g., lower reserve requirements) and indirectly via monetary budget financing.
  - Low credit demand linked to the sharp impact of the pandemic on economic activity contributed to the early credit slowdown.
  - Differences in recovery across public and private banks reflect intrinsic characteristics and objectives of public banks to play a stabilizing lending role in downturns.
- Market reaction and fiscal risk:
  - The willingness of public banks to lead the credit rebound has not been penalized by markets; stock price developments and recent credit ratings of the largest banks are similar to other banks.
  - While public banks’ stabilizing role is helpful, it could entail quasi-fiscal risk and costs if credit risk is not effectively managed.
  - Public banks need to carefully monitor and properly assess potential high volumes of new credit to clients that are difficult to assess during crises.

*Source: IMF staff report text (Indonesia: Staff Report for the 2022 Article IV Consultation—Informational Annex).*

### 1. On February 18, Bank Indonesia (BI) released the Q4 2021 Balance of Payments

### 1idnea2022001 - 1. On February 18, Bank Indonesia (BI) released the Q4 2021 Balance of Payments Report

### Balance of Payments and External Sector Findings
- The current account balance (CAB) recorded a modest surplus of 0.3 percent of GDP in 2021 (slightly lower than staff’s projection of a surplus of 0.4 percent of GDP in the staff report), compared to a deficit of 0.4 percent of GDP in 2020.
- During 2021, the CAB moved from a deficit of 0.7 percent of GDP in 2021Q2 to a surplus of 1.7 percent in 2021Q3 and a surplus of 0.7 percent of GDP in 2021Q4.
- The trade balance in 2021 increased to 3.7 percent of GDP, from 2.7 percent of GDP in 2020.
- Net financial inflows stabilized at 1.0 percent of GDP in 2021 after a decline to 0.7 percent of GDP in 2020 (from 3.3 percent in 2019).
  - Net portfolio inflows rose to 0.4 percent of GDP in 2021 compared to 0.3 percent in 2020.
  - Net FDI inflows increased to 1.4 percent of GDP compared to 1.3 percent in 2020.
- Gross external debt declined from 39.3 percent of GDP at end-2020 to 35.7 percent of GDP at end-September 2021, and further to 35.0 percent of GDP at end-December 2021.
- Resilience indicators: strong international reserves position; exchange rate management using triple intervention (spot, DNDFs, SBN secondary market purchases).

### Economic Development and Outlook
- 2021 GDP growth returned to pre-pandemic level with growth at 3.7 percent, higher than staff’s projection of 3.3 percent.
- Key 2021 macro outcomes:
  - Inflation remained low at 1.87 percent, below the 3.0±1 percent target range.
  - Revival of credit growth at 5.2 percent.
  - Poverty declined from 10.2 percent in 2020 to 9.7 percent in 2021.
  - Financial system stability: low NPL and ample liquidity.
- 2022 projections and expectations:
  - Growth projected in the range of 4.7–5.5 percent, supported by faster vaccination, broader reopening, and maintained policy stimuli.
  - Inflation expected to rise to the target band of 3.0±1.0 percent.
  - Current account deficit projected to remain low in the range of 1.1–1.9 percent of GDP.
  - Credit growth projected to accelerate to 6.0–8.0 percent.
  - Medium-term: growth projected to accelerate with improved productivity from structural reforms.

### Policy Responses — Overall and Strategic Directions
- Authorities emphasize a bold, comprehensive, and well-coordinated policy mix and accelerated vaccine deployment.
  - As at February 28, 2022, the first and second vaccination doses were delivered to 70.9 and 53.6 percent of the population respectively.
- Five policy directions to strengthen recovery:
  - (i) faster real sector transformation and reform,
  - (ii) synergy between fiscal, monetary, and financial sector policies,
  - (iii) faster financial sector transformation,
  - (iv) economic and financial digitalization,
  - (v) green economy and finance.
- Legal and institutional framework:
  - Act No. 2 of 2020 provides legal basis for extraordinary pandemic responses, including temporary relaxation of the budget deficit ceiling beyond 3 percent of GDP until 2022 and permitting BI to purchase government bonds in the primary market until 2022.

### Fiscal Policy — Performance and Plans
- 2021 fiscal outcomes:
  - Fiscal deficit stood at 4.62 percent of GDP in 2021, declining from 2020 and lower than the initial budget at 5.70 percent.
  - Revenue exceeded the target and grew 21.6 percent, driven by tax revenue returning to pre-pandemic level.
  - Government spending increased by 7.4 percent to support COVID-19 containment, health, social protection, and MSME assistance.
- Governance and transparency:
  - Monthly reporting requirements on COVID-19-related programs with ex-post evaluation.
  - 2020 audited report by BPK provided an Unqualified Opinion (WTP) on the Central Government Financial Report (LKPP).
  - Tax Expenditure Reports published since 2018.
- 2022 fiscal direction:
  - Government envisages the 2022 budget deficit to continue to decline lower than the 2021 figure and the initial 2022 budget at 4.85 percent of GDP, contributed by recent tax reform implementation.
  - Authorities reiterate commitment to return to the 3.0 percent deficit ceiling by 2023.
  - Tax reform: Tax regulation harmonization law (HPP) in effect, covering general provisions and tax procedures, voluntary disclosure program, excisable goods mechanism, income tax, VAT, and carbon tax.
  - Additional efforts: launch of a core IT infrastructure by 2024 to improve tax compliance, reinforce auditing, and reduce tax avoidance.
- Energy subsidy reform considerations:
  - Prices of selected fuel oil with higher octane were adjusted in early February 2022 to follow market price.
  - Carbon tax to be applied to coal-fired power plants at a rate of IDR30,000/tCO2e starting April 1, 2022 (to be evaluated periodically).

### Monetary and Exchange Rate Policy
- 2021 monetary stance and operations:
  - BI cut policy rate in February 2021 to 3.50 percent.
  - Quantitative easing totaling Rp147.8 trillion in 2021 to maintain ample liquidity.
  - Stabilization policy using triple intervention: spot market, Domestic Non-Deliverable Forwards (DNDF), and SBN secondary market purchases.
- SBN purchases and coordination with fiscal policy:
  - Under KB I, BI purchased SBN amounting to Rp143,3 trillion in 2021.
  - Under KB III, BI committed to purchasing SBN directly from the Government totaling Rp215 trillion in 2021 and Rp224 trillion in 2022.
  - BI adheres to four principles in purchases: (i) prioritizing market mechanisms; (ii) considering the impact on inflation; (iii) purchasing only tradable and marketable SBN; and (iv) BI’s purchases on a last-resort basis.
- 2022 monetary strategy and normalization:
  - Monetary policy will focus on maintaining stability while remaining supportive; direction and phasing to be pre-emptive, ahead the curve, and front loading.
  - Low policy rate maintained until signs of inflation pressures emerge.
  - Gradual normalization by absorbing excess liquidity without impeding banks’ ability to expand credit and purchase SBN.
  - BI will gradually increase Rupiah Reserves Requirement starting in March 2022.
  - Foreign exchange intervention as needed to address disorderly market conditions; measured adjustments to maintain competitive yield differential.
  - BI will not rely solely on interest rate but integrate quantity measures, exchange rate policy, and monetary operations.

### Financial Sector Policies and Digitalization
- 2021 measures to support credit intermediation and stability:
  - BI loosened down payment requirements on automotive loans and LTV/FTV on property loans; gradually raised Macroprudential Intermediation Ratio.
  - BI assessed Prime Lending Rate transparency since February 2021.
  - RPIM introduced (refinement of MSME Credit Ratio).
  - OJK extended loan restructuring programs and relaxed certain risk-weighting policies.
  - Government extended credit guarantees within PEN from 1 to 3 years, increased coverage and lowered minimum amounts.
- 2022 and forward priorities:
  - BI to continue accommodative macroprudential policy; provide incentives (reserve requirement reduction up to 1 percent) for banks disbursing financing to priority sectors or achieving RPIM, effective March 1, 2022.
  - RPIM requirement adjusted to be set for each individual bank based on the bank’s commitment in their annual Business Plan.
  - OJK priorities: (i) joint incentives for downstreaming commodity sector financing; (ii) innovative financing for green sectors; (iii) expand financial access, targeting MSME lending of 30 percent 2024; (iv) strengthen digital transformation in financial services.
  - Extension of loan classification relaxation until 2023Q1 to maintain banking sector stability.
  - Credit information improvements: 2019 regulation allows private sector credit bureaus.
- Payment system and market deepening:
  - Indonesia Payment System Blueprint 2025: expand QRIS uptake and cross-border QRIS, accelerate open banking via SNAP, increase acceptance of BI-FAST.
  - BI to accelerate preparations to issue digital rupiah.
  - Blueprint for Money Market Development 2025 to expedite market deepening.
  - Development of national sharia economy and finance as inclusive growth source.

### Structural Reforms
- Omnibus Law on Job Creation implementation accelerated; 51 follow-up regulations issued since promulgation on February 2, 2021.
  - Implementation of Risk-Based Business Licensing via OSS system; simplification through risk-based licensing.
  - Investment climate improvement: all business fields open for investment except those reserved for central government; 2021 regulation expanded 246 business activities as priority and 182 activities requiring partnership with cooperatives and MSMEs.
- Climate and green finance initiatives:
  - Nationally Determined Contribution: conditional GHG reduction target up to 41 percent and unconditional target of 29 percent.
  - Net Zero Emission aim at reaching zero emissions in 2060 or sooner.
  - Policies: Climate Change Fiscal Framework to mobilize funds outside the budget; carbon pricing/economic value as part of mitigation package.
  - Carbon tax initial step: IDR30,000/tCO2e on coal-fired power plants starting April 1, 2022.
  - OJK’s Sustainable Finance Roadmap and Indonesia Green Taxonomy: classification of green sectors/sub-sectors, development of regulatory framework of carbon exchange, financial services sector reporting for green financing/instruments.

### Conclusion and Policy Commitments
- Authorities commit to strengthening policy synergy to accelerate recovery, preserve stability, and advance structural reforms.
- Indonesia’s G20 Presidency in 2022 will carry the spirit of policy synergy globally under the theme “Recover Together, Recover Stronger.”

*Statement by Rosemary Lim, Firman Mochtar, and Ferry Kurniawan; March 11, 2022.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1idnea2022001.pdf_