## 1idnea2023002

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### Context and near-term outlook
- Findings
  - Real GDP grew by 5.3 percent in 2022; real exports of goods and services grew by 15 percent (y/y) in Q4 2022.
  - Unemployment fell from 7.1 percent at the pandemic peak to 5.9 percent in H2 2022; remains slightly above pre-pandemic range of 5-5.5 percent.
  - Output gap estimated at -1.1 percent in 2022 (large margin of error).
  - Current account surplus: 1.0 percent of GDP in 2022, up from 0.3 percent in 2021.
  - IDR/USD depreciated by 10.3 percent in 2022; average REER appreciated by 3.3 percent.
  - Official foreign reserves declined from US$145 billion in 2021 to US$137 billion in 2022; BI’s reserve assets at end-2022 stood at 118 percent of the ARA metric; months of prospective imports peer median: 6.0.
  - Portfolio investment net outflows every quarter during 2021Q4-2022Q4; cumulative outflows about 0.7 percent of 2022 GDP.
  - Share of non-resident holdings of government debt declined from 37 percent in 2020 to 14.4 percent in 2022.
- Inflation and labor market
  - Headline inflation: rose from 1.3 percent in June 2021 to 4.3 percent in June 2022; peaked at 6.0 percent in September 2022 after a 30 percent administered gasoline price adjustment.
  - Inflation expectations one-year-ahead peaked at 4.8 percent in October 2022, slowed to 4.2 percent by end-2022.
  - Core inflation: 2.8 percent as of April (just below the mid-point of BI’s headline inflation target range).
  - Wage dynamics: manufacturing and trade wages exceed 2019 nominal levels; hospitality wages not yet back to pre-pandemic levels.
- Outlook projections
  - GDP growth: projected to moderate to 5.0 percent in 2023 from 5.3 percent in 2022.
  - Baseline assumption: policy rate kept constant until 2023Q4.
  - Headline inflation: expected to return to BI’s target range in H2 2023 and decline to 3 percent by mid-2024.
  - Core inflation projected around 3.0 percent in 2023.
  - Real exports expected to expand at 10 percent; small current account deficits expected in 2023 and 2024.
  - Balance of payments surplus expected to increase gradually with pickup in FDI and return of portfolio inflows.

### Fiscal policy, public debt, and fiscal strategy
- Recent performance and stance
  - Fiscal deficit narrowed to 2.4 percent of GDP at end-2022 (budget target was 4.4 percent).
  - PEN allocation for 2022: IDR455.6trn; realization as of end-December: IDR414.5trn (91 percent).
  - Authorities’ 2023 budget target: deficit of 2.8 percent of GDP; staff project slightly lower deficit with a broadly neutral fiscal stance in 2023 (a -0.3 change in the cyclically adjusted primary balance).
- Central government operations (selected figures, percent of GDP)
  - Revenues and grants: 11.8 (2021), 9.4 (Est.), 13.4 (Budget), 11.5 (Proj.), 12.7 (2023)
  - Oil and gas revenues: 0.9, 0.7, 1.2, 0.9, 0.9
  - Non-oil and gas revenues: 11.0, 8.7, 12.2, 10.6, 11.8
    - Income tax: 3.7, 3.2, 4.7, 4.1, 4.5
    - VAT: 3.3, 2.8, 3.5, 3.5, 3.7
  - Expenditure and net lending: 16.4, 13.9, 15.8, 14.3, 15.4
    - Current expenditure: 9.3, 8.1, 9.6, 8.8, 9.3
      - Subsidies: 1.4, 1.1, 1.3, 1.4, 1.3
      - Compensations to SOEs: 0.3, 0.1, 1.9, 0.6, 0.6
  - Overall balance: -4.6, -4.4, -2.4, -2.8, -2.6
  - Memorandum: Primary balance: -2.5, -2.4, -0.4, -0.7, -0.6; General government debt: 41.1, 40.1, 39.3
- Debt sustainability and investor base
  - Public debt projected to decline from 40.1 percent of GDP in 2022 to 37.4 percent of GDP over the medium-term.
  - Gross financing needs projected to remain around 5 percent of GDP over the medium-term.
  - SRDSF indicates overall "low" risk of sovereign stress.
  - Rapid change in investor base: non-resident holdings of local-currency debt fell by more than 20 percentage points within two years.
  - Banks held 8.8 percent of GDP in government debt as of end-2022, with 4.8 percent of GDP accumulated since 2019.
- Medium-term fiscal strategy — recommended measures
  - Keep the 3 percent deficit ceiling as the anchor; develop a concrete medium-term fiscal strategy clarifying objectives, risks, and contingency policies.
  - Revenue mobilization:
    - 2021 tax reform law could yield about 1-1.5 ppts of GDP in revenues; additional measures and administration improvements could double this estimate.
    - Suggested tax policy measures: harmonize sector-based special regimes in CIT; introduce alternative minimum taxes; lower VAT registration and basic PIT exemption thresholds; expand excise taxes to plastics and sweetened beverages.
    - Tax administration: improve compliance among high-net-worth individuals and professionals.
  - Energy subsidy reform:
    - Energy subsidies and compensations to producers more than tripled versus original 2022 budget (about 2 percentage points of GDP increase).
    - Recommendation: transition back to regular adjustments in fuel and electricity prices — potentially review semi-automatic pricing formula — to save fiscal resources and support cost recovery at SOEs.
  - Social protection:
    - Move from commodity-based to people-based assistance; improve automaticity and targeting; expand benefits and coverage.
  - Transparency and SOE risks:
    - Prepare and publish comprehensive ex-post PEN evaluation; prepare consolidated public sector balance sheet including SOEs.

### Monetary policy, exchange rate, and FX intervention (FXI)
- Monetary policy actions and stance
  - BI raised policy rate by a cumulative 225 basis points during August 2022‒January 2023 to 5.75 percent (above pre-pandemic 5 percent at end-2019).
  - RRR increased from 3.5 percent to 9 percent over February-September 2022; reverse repo transactions withdrew about IDR 36.6 trillion of banking system liquidity in 2022.
  - BI used "operation twist" to improve monetary transmission and support long-term credit.
  - Private sector credit-to-GDP ratio stands at 41 percent.
  - Real policy rate has risen to 1.8 percent (staff’s estimated neutral range: 1-2 percent).
  - Guidance: maintain neutral stance near term, retain tightening bias; raise policy rate promptly if inflation surprises on the upside.
  - End of BI’s primary market purchases under BI-MOF burden sharing agreement is welcomed; future purchases should be time-bound, modest, transparent, and accompanied by exit conditions.
  - Recommendation: reinstate and improve monthly surveys of inflation expectations (forecast horizon e.g., 12-18 months).
- Exchange rate and FXI role
  - Rupiah should be allowed to move in line with market forces; FX interventions appropriate under specific shocks and circumstances to act as shock absorber.
  - Historical estimated average BI intervention on seven UIP premium spike occasions: about 0.6 percent of GDP (US$4.2 billion).
  - BI introduced an FX term deposit facility in March with maturities of 1-6 months to keep export receipts onshore and improve USD funding liquidity.
- IPF model scenarios on FXI (illustrative outcomes preserved)
  - Scenario 1 (tighten policy rate by 90 bps): exchange rate depreciates by about 5 percent; inflation rises by 1.2 percent; output lower by about 1 percent relative to baseline.
  - Scenario 2 (delay hike; FXI only ~2 percent of GDP over a year): initial exchange rate depreciation reduced by about half; near-term inflation similar; output positive due to lower real interest rate; sustained FXI reduces reserves and limits scope to address persistent inflationary shocks.
  - Scenario 3 (combined interest rate + FXI; monetary tighten 55 bps): exchange rate depreciation less pronounced than Scenario 2; inflation reduced by 0.3 percentage points relative to baseline; output lower as net exports decline outweigh domestic demand boost.
  - Scenario 4 (monetary + FXI + fiscal stimulus via targeted transfers): mitigates decline in output; marginally higher interest rate; small increase in government debt of 1 percent of GDP in five years.
- Policy trade-offs and guidance
  - FXI can ease burden on monetary policy in UIP shocks and help prevent rises in debt-at-risk, but effectiveness depends on FX market shallowness, shock size, and reserves availability.
  - Decision to use FXI must weigh near-term stabilization benefits against longer-term costs (reserve losses, market development effects).

### Financial sector resilience, risks, and reforms
- System soundness and vulnerabilities
  - Banking regulatory capital ratio: 26.0 percent as of February 2023.
  - NPLs and loans-at-risk: 2.4 and 14 percent of total loans respectively in December 2022 (loans-at-risk peaked at 24.2 percent in early 2021).
  - Credit-to-GDP gap: negative (-2  percent as of 2023Q1).
  - Household debt: about 17 percent of GDP.
  - Corporate debt: 38.4 percent of GDP.
  - Debt-at-risk among listed firms: would rise from 21 to 28 percent under cumulative policy rate increases since 2022.
  - Banks increased loan loss provisions (214 percent of NPLs as of January) and shifted bond portfolios from AFS to HTM to reduce mark-to-market losses.
  - Authorities estimate banks held about 8.8 percent of GDP assets in government bonds as of January, with more than half (5.2 percent of GDP) in held-to-maturity form.
- Stress testing and contingency
  - IMF GST adverse scenario: growth down by 3 percentage points, interest rates up by 200 basis points, asset prices down by 10 percent; GST shows capital adequacy ratio could decline by about 4.3 percentage points relative to baseline but remain above minimum regulatory requirement.
  - Small and medium banks more vulnerable due to higher AFS shares, limited bond market access, and lack of collateral.
- Policy recommendations
  - Do not extend loan classification relaxation beyond expiry in March 2024; enhanced supervisory scrutiny of restructured loans welcomed.
  - Gradually tighten macroprudential instruments as financial cycle picks up: restore pre-pandemic LTV limits (property and car loans), scale back some RRR incentives, regularly review macroprudential intermediation ratio to support sustainable credit growth including to SMEs.
  - Regular asset quality reviews and strict supervision to ensure adequate bank capital commensurate with sovereign-bank nexus risks.
- Financial sector reform progress (FSOL and follow-up)
  - FSOL passed January 2023 integrating 17 laws; authorizes BI with macroprudential mandate; expands IDIC role; strengthens OJK; sets legal foundation for CBDC.
  - Remaining gaps: clarify supervisory triggers for troubled banks, establish a clear funding mechanism for recovery strategies, strengthen insolvency and creditor rights framework.
  - FSAP follow-up recommended.

### Structural reforms, downstreaming, and industrial policy
- Downstreaming experience and outcomes (nickel-focused)
  - Indonesia is described as the world's largest nickel producer—accounting for nearly half of global output in 2022—and holds the largest reserves.
  - Timeline: export tariff on nickel ore in 2012; export ban on raw nickel in 2014 (lifted in 2017, reimposed in January 2020 with domestic processing requirement).
  - FDI and investment outcomes:
    - Overall FDI increased to US$22 billion in 2022.
    - Foreign investment realization increased by 47 percent in 2022, almost half of the increase from China and Hong Kong.
    - Investment realization in nickel and bauxite smelters during 2021-22: about US$5.5 and US$3 billion respectively.
    - Number of nickel smelters rose to 11 from 3 in 2014, with a further 19 expected.
  - Export performance: exports of nickel surged from US$4.5 billion in 2019 to $19.6    billion in 2022.
  - Staff estimates: less than one third of this increase explained by higher global commodity prices; remainder plausibly from higher value added from smelting and higher export volumes.
  - Employment: formal sector jobs created in lower-income regions, though overall employment impact modest relative to national economy.
- Costs, risks, and legal issues
  - Potential costs and risks to monitor: foregone fiscal revenues; resource misallocation and rent seeking; cross-border spillovers and potential retaliation.
  - WTO dispute: November 2022 panel found export ban and domestic processing requirement inconsistent with Article XI:1 of GATT 1994; Indonesia appealed December 8, 2022.
- Policy recommendations on downstreaming
  - Conduct regular cost-benefit analysis to assess effectiveness and fiscal costs.
  - Ensure industrial policies promote innovation and competition, generate positive domestic spillovers, and minimize cross-border spillovers.
  - Consider phasing out export restrictions and avoid extending restrictions to other commodities.
  - Encourage policies that raise value added while phasing out export restrictions gradually.

### Climate change mitigation and transition policies
- Commitments and policy instruments
  - Enhanced NDC (September 2022): emissions reduced by 31.9 percent by 2030 relative to BAU; about 2/3 of unconditional reductions from FOLU measures; remaining 1/3 mainly from energy sector.
  - Long-Term Strategy for Low Carbon and Climate Resilience Strategy 2050: vision to achieve net-zero emissions by 2060 or sooner; roadmap to phase-out coal-fired power plants by 2050.
  - Plans for carbon tax (in 2021 tax bill) delayed; voluntary ETS pilot in 2021; mandatory cap-and-trade introduced in 2023 covering large coal-fired power plants, envisaged to evolve to a hybrid cap-trade-and-tax system.
  - Climate budget allocations averaged 3.7 percent of total expenditures per year over 2016-2021.
  - Expected mobilization of US$20 billion in external financing through JETP.
  - OJK adopted a green taxonomy to facilitate private financing.
- Modeling results (IMF-ENV model scenarios through 2030)
  - Authorities’ strategy emphasizing FOLU mitigation lowers GDP level by about 0.5 percentage points in 2030.
  - An energy-sector-only carbon price scenario yields a larger GDP fall of 2.0 percentage points in 2030.
  - Removing consumer and producer subsidies modeled to reduce overall emissions by 7 percent; equivalent to imposing a carbon tax of 5 USD/TCO2e to achieve the NDC.
  - Modeled subsidy removal increases renewables share in generation from 30 percent in baseline to 40 percent under subsidy-removal scenario.
  - National abatement cost curves imply a carbon price range of $1-29/tCo2e by 2030 (excluding implementation costs).
- Recommendations
  - Focus mitigation through FOLU measures in near term; gradually reduce energy subsidies and introduce carbon pricing as conditions permit.
  - Mobilize private and international financing (e.g., JETP) to support decommissioning of coal plants and renewable investment.

### Risk assessment and contingency guidance
- Near-term upside risks
  - Stronger-than-expected China recovery; pent-up domestic demand; faster fall in inflation domestically or among trading partners; more expansionary fiscal stance before 2024 elections.
- Downside risks
  - Abrupt global slowdown or recession depressing commodity prices and trade; sharp swings in market sentiment causing capital outflows and rupiah depreciation; geopolitical conflicts disrupting supply chains and reinforcing inflation.
- Policy recommendations under risks
  - Use available fiscal space for targeted support in downside scenarios; save upside revenue improvements to bolster buffers.
  - Allow exchange rate to act as shock absorber; use FXI to address disorderly market conditions (e.g., sharp UIP premium pickup) to ease burden on monetary policy.
  - Tighten monetary policy decisively if inflation surprises on the upside; tighten macroprudential policy if credit accelerates strongly.
  - Keep macroprudential stance broadly unchanged near term and move toward neutral in 2024 as credit gap narrows.

### External sector assessment and external debt
- Key 2022 external sector figures (percent of GDP)
  - NIIP: –19.1
  - Gross Assets: 34.1
  - Res. Assets: 10.4
  - Gross Liab.: 53.2
  - Debt Liab.: 30.1
  - CA: 1.0; Cycl. Adj. CA: –1.5; EBA Norm: –1.1; Staff Gap: 0.4
- Assessment
  - Preliminary assessment: external position in 2022 broadly in line with medium-term fundamentals and desirable policies.
  - Gross external debt: 30.1 percent of GDP at end-2022 (down from 34.9 percent in 2021).
  - External debt projections: decline to 26 percent of GDP in medium term under baseline.
  - External debt is robust to interest rate, current account, and growth shocks but sensitive to exchange rate shocks (e.g., 30 percent depreciation raises external debt to 40 percent of GDP in 2024).
  - Reserves as of end-2022: US$137 billion; metrics: 10.4 percent of GDP, 118 percent of IMF ARA metric, 5.9 months of prospective imports.

### Data reporting, SDDS, and policy coordination
- SDDS flexibility use: periodicity/timeliness flexibilities for labor market indicators and general government operations data.
- Table of common indicators: latest observations and frequencies preserved for exchange rates, reserves, money, central bank balance sheet, banking system consolidated balance sheet, CPI, government operations, external sector, and GDP (dates preserved in source).
- Policy coordination: enhanced fiscal-monetary policy synergy during COVID-19 via Joint Agreement mechanisms; five interrelated components: fiscal-monetary coordination, financial sector transformation, real sector transformation, digitalization, green economy and finance.

*Source: IMF staff report content for Indonesia (content unit: 1idnea2023002).*

### 1. Early Experience with Indonesia’s Downstreaming Policies __________________________________ 27

### 1. Early Experience with Indonesia’s Downstreaming Policies __________________________________ 27

### Context
- The Indonesian economy has emerged from the pandemic performing strongly but confronts an increasingly uncertain global economic environment.
- Easing of pandemic-related restrictions and improved mobility underpinned a strong recovery in domestic demand.
- A surge in global commodity prices shielded the rupiah against capital outflows triggered by monetary policy tightening in advanced economies.
- Near-term headwinds: continued high inflation, weaker growth prospects in advanced economies, waning commodity prices, and heightened volatility in global financial markets.
- Policies have been geared toward restoring pre-pandemic macroeconomic policy frameworks and accelerating structural reforms.
  - By end-2022: monetary policy rates raised decisively, fiscal deficit returned to the 3-percent fiscal deficit ceiling, and authorities ended monetary budget financing.
  - Structural reforms implemented include the approval of the tax reform law in 2021, the Financial Sector Omnibus Law (FSOL), and the Government Regulation in Lieu of Law (Perppu) on Job Creation in 2023.
- Indonesia’s medium-term prospects depend on generating high-quality jobs, upgrading infrastructure, improving education, and facilitating a transition towards a greener economy.
- Upcoming general election slated for February 2024 could help mobilize political consensus around structural reforms critical to Vision 2045.

### Recent Developments and Outlook
Findings and indicators
- Real GDP grew by 5.3 percent in 2022; real exports of goods and services grew by 15 percent (y/y) in Q4 2022.
- Unemployment rate fell from 7.1 percent at the peak of the pandemic to 5.9 percent in the second half of 2022; stands slightly above pre-pandemic range of 5-5.5 percent.
- Labor market: share of workers in full-time or formal employment remains lower than pre-pandemic levels; share of underemployed workers higher.
- Wage dynamics: wages in manufacturing and trade exceed 2019 levels in nominal terms; wages in hospitality not yet back to pre-pandemic levels.
Inflation
- Headline inflation rose from 1.3 percent in June 2021 to 4.3 percent in June 2022; peaked at 6.0 percent in September 2022 following a 30 percent adjustment in administered gasoline prices.
- Inflation expectations one-year-ahead peaked at 4.8 percent in October 2022 before slowing to 4.2 percent by end-2022.
- Core inflation: 2.8 percent as of April (stands just below the mid-point of BI’s headline inflation target range).
- Staff note limited exchange rate pass-through to headline inflation; pass-through rises with the level of inflation and with depreciation sourced from tightening of US monetary policy (Carrière-Swallow and others citations retained in source).
Output gap and slack
- Staff’s estimate: output gap estimated at -1.1 percent in 2022, with a large margin of error.
- Demand-driven inflationary pressures are subdued; capacity utilization remains below pre-pandemic levels in some sectors (manufacturing, tourism).
External sector and reserves
- Current account surplus: 1.0 percent of GDP in 2022, up from 0.3 percent in 2021; driven mainly by the non-oil and gas trade balance amid higher commodity prices.
- IDR/USD depreciated by 10.3 percent in 2022; average REER appreciated by 3.3 percent due to higher commodity prices.
- Preliminary assessment: 2022 external position broadly in line with medium-term fundamentals and desirable policies.
Portfolio flows and BOP
- Portfolio investment net outflows every quarter during 2021Q4-2022Q4, cumulative outflows about 0.7 percent of 2022 GDP.
- Share of non-resident holdings of government debt declined from 37 percent in 2020 to 14.4 percent in 2022.
- Despite outflows, larger current account balance and FDI inflows resulted in a BOP surplus of 0.3 percent of GDP in 2022.
Foreign reserves
- Official foreign reserves declined from US$145 billion in 2021 to US$137 billion in 2022.
- BI’s reserve assets at end-2022 stood at 118 percent of the Assessing Reserve Adequacy (ARA) metric; months of prospective imports peer median: 6.0.
- BI introduced in March an FX term deposit facility with maturities of 1-6 months to keep export receipts onshore and improve USD funding liquidity.
Domestic financial conditions
- Interest rates increased through 2022; bank lending rates relatively unchanged, equity prices flat, house prices declined in real terms.
- Banks: deposit funding increased by 12.1 percent (September); private sector credit growth at 11.3 percent (y/y) in November.
- Loan growth led by mining, manufacturing, wholesale/retail sectors; loans to MSMEs grew 10.4 percent in December (MSMEs ≈ one-fifth of total outstanding loans).
- Non-bank financial institutions grew at a similar pace as banks; fintech presence small but fast-growing.

Outlook projections
- GDP growth: projected to moderate from 5.3 percent in 2022 to 5.0 percent in 2023 due to tighter domestic policy settings and external headwinds.
- Baseline assumptions: policy rate kept constant until 2023Q4.
- Headline inflation: expected to return to BI’s target range in the second half of 2023 and decline to 3 percent by mid-2024.
  - Core inflation projected around 3.0 percent in 2023.
- Real exports expected to expand at 10 percent with imports remaining strong; small current account deficits expected in 2023 and 2024.
- Balance of payments surplus expected to increase gradually with pickup in FDI and return of portfolio inflows and modest increase in foreign reserves.

Risks to near-term outlook (Annex II)
- Upside: stronger-than-expected China recovery or pent-up domestic demand; faster fall in inflation domestically or among key trading partners; more expansionary fiscal stance leading up to 2024 elections.
- Downside: abrupt global slowdown or recession depressing commodity prices and trade; sharp swings in market sentiment and risk premia causing capital outflows and rupiah depreciation; intensification of geopolitical conflicts and sanctions disrupting supply chains and reinforcing inflation.

Medium-term scarring and potential growth
- Medium-term level of output projected about 8 percentage points lower than pre-pandemic projections.
- Pandemic effects: reduced physical capital accumulation, weakened labor market (skills erosion, delayed labor market entry), increased labor market informality which could depress future incomes and widen income inequality.
- Staff estimates Indonesia’s long-term potential growth at about 5 percent.

### Authorities’ Views
- Authorities broadly shared staff’s views on outlook and risks; noted strength of recovery despite adverse global environment.
- Authorities monitoring global developments and potential for higher-for-longer policy rates in advanced economies affecting capital flows and exchange rates.
- Authorities foresee Indonesia’s potential growth rate rising higher than 5 percent as structural reforms progress.

### Policy Discussions
- Main focus: policy mix to sustain macroeconomic and financial stability and reforms for a more efficient, high-value-added, and greener economy.
- Normalization of fiscal and monetary policies toward pre-pandemic settings seen as appropriate near-term given a closing output gap, elevated inflation, and tighter global financial conditions.
- Financial sector policies should guard against systemic risks and strengthen banking system resilience to support inclusive growth amid higher interest rates.
- Enhancing revenue mobilization and reforming energy subsidies critical to enhance fiscal space for development investments.
- Broad-based structural reforms to improve policy framework and business environment should accompany government industrial policy to increase economic diversification.

### A. Fiscal Policy
Recent fiscal performance (2022)
- Fiscal deficit narrowed to 2.4 percent of GDP at end-2022 (restoring the 3 percent of GDP deficit ceiling one year earlier); budget target was 4.4 percent of GDP.
- Revenue increases: windfall from higher global commodity prices (~1.0 percent of GDP from oil, gas, and mining); VAT rate hike in April 2022 (0.3 percent of GDP); one-off tax amnesty (0.3 percent of GDP).
- Tax administration measures improved tax buoyancy; VAT exemptions reduced under 2021 tax reform law.
- Current expenditures on COVID-related items declined; higher energy subsidies and compensations to SOEs rose amid surging global oil prices.
- A 30-percent hike in administered fuel prices in September limited further increases in subsidies; reallocations to social spending including cash transfers to low-income households.
PEN program
- National Economic Recovery Program (PEN) allocation for 2022: IDR455.6trn; realization as of end-December: IDR414.5trn (91 percent).
2023 budget stance
- Authorities’ 2023 budget targets deficit of 2.8 percent of GDP.
- Staff project a slightly lower deficit with a broadly neutral fiscal stance in 2023 (a -0.3 change in the cyclically adjusted primary balance).
- Revenues expected to decline somewhat from 2022 due to lower commodity prices but to benefit from recent tax reforms.
- Expenditures projected to fall with expiration of PEN program and lower subsidy burden.
- A broadly neutral stance while keeping the deficit below the 3 percent ceiling is considered appropriate given the cyclical position, Indonesia’s development needs, low debt, and the need to secure policy credibility.

### Central Government Operations, selected figures (In percent of GDP)
- Revenues and grants: 11.8 (2021), 9.4 (Est.), 13.4 (Budget), 11.5 (Proj.), 12.7 (2023)
- Oil and gas revenues: 0.9, 0.7, 1.2, 0.9, 0.9
- Non-oil and gas revenues: 11.0, 8.7, 12.2, 10.6, 11.8
  - Income tax: 3.7, 3.2, 4.7, 4.1, 4.5
  - VAT: 3.3, 2.8, 3.5, 3.5, 3.7
- Expenditure and net lending: 16.4, 13.9, 15.8, 14.3, 15.4
  - Current expenditure: 9.3, 8.1, 9.6, 8.8, 9.3
    - Subsidies: 1.4, 1.1, 1.3, 1.4, 1.3
    - Compensations to SOEs: 0.3, 0.1, 1.9, 0.6, 0.6
  - Development expenditure: 2.4, 1.8, 2.0, 1.6, 1.8
  - Transfers to local governments: 4.6, 3.9, 4.2, 3.8, 4.2
- Overall balance: -4.6, -4.4, -2.4, -2.8, -2.6
- Memorandum items:
  - Primary balance: -2.5, -2.4, -0.4, -0.7, -0.6
  - Cyclically-adjusted primary balance: -2.1, -0.2, -0.5
  - General government debt: 41.1, 40.1, 39.3

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

### 18.      Debt sustainability risks are well contained. With the deficit anchor back in place, public

### 1idnea2023002 - 18.      Debt sustainability risks are well contained. With the deficit anchor back in place, public

### Debt sustainability and investor base
- Public debt projected to decline from "40.1 percent of GDP in 2022 to 37.4 percent of GDP over the medium-term", driven mostly by a favorable interest rate-growth differential.
- Gross financing needs projected to remain "around 5 percent of GDP over the medium-term".
- The Sovereign Risk and Debt Sustainability Framework (SRDSF) indicates an overall "low" risk of sovereign stress.
- Rapid change in investor base: non-resident holdings of local-currency debt fell "by more than 20 percentage points within two years".
- Banks held "8.8 percent of GDP in government debt" as of end-2022, of which "4.8 percent of GDP has been accumulated since 2019".
- Increased bank holdings reduce rollover risk but raise sovereign-bank nexus concerns: potential for bank losses and cuts in lending if market value of government debt declines.
- SRDSF assessment: banks’ claims on government are high relative to peers, limiting space for banks to act as residual financiers under shock scenarios.
- Policy points:
  - Develop a diverse domestic investor base including pension funds and insurance companies to deepen the bond market.
  - Continue adherence to the deficit ceiling, sound debt management, and maintain adequate cash buffers to keep the sovereign-bank nexus secure.

### Medium-term fiscal strategy: findings and recommended measures
- Need for a concrete medium-term fiscal strategy clarifying objectives, risks, and contingency policies while keeping the deficit ceiling as anchor.
- Priority: identify measures to raise additional revenues and rationalize current spending (including energy subsidies) to finance high-priority development expenditures within the deficit ceiling.
- Revenue mobilization:
  - The 2021 tax reform law is an important first step; Indonesia’s tax-to-GDP ratio remains below emerging market peers.
  - Additional tax policy measures suggested: harmonize sector-based special regimes in the CIT system; introduce alternative minimum taxes for businesses; lower the VAT registration and basic PIT exemption thresholds; expand excise taxes to include plastics and sweetened beverages.
  - Tax administration reforms suggested: improve compliance of specific taxpayer segments, especially high-net-worth individuals and professionals.
  - Staff estimates: measures implemented under the tax reform law could yield "about 1-1.5 ppts of GDP in revenues", while additional measures to broaden the tax base and improve administration could "double this estimate".
- Energy subsidy reform:
  - Global oil price surge led expenditures on energy consumer subsidies and compensations to producers to more than triple compared to the original 2022 budget (increased by "about 2 percentage points of GDP").
  - Below-market pricing and delayed compensations affected SOE cost recovery, particularly Pertamina and PLN.
  - Recommendation: transition back to regular adjustments in fuel and electricity prices — potentially by reviewing the existing but unused semi-automatic pricing formula — to save fiscal resources, allow cost recovery, anchor expectations, and depoliticize price adjustments.
  - Subsidy reform is essential to change incentives in the energy sector and help achieve climate objectives.
- Social protection:
  - Coverage of social protection programs remains low compared to peers, partly due to a large informal workforce.
  - Government social assistance expenditure is relatively low, discretionary, predominately in-kind, and payment methods are more cash-based than peers.
  - Recommendations: move from commodity-based to people-based assistance; improve automaticity and targeting of social assistance; expand benefits and coverage to strengthen the social safety net and facilitate energy subsidy reform while protecting the poor.
- Fiscal transparency and SOE risks:
  - With expiration of the PEN program, prepare and publish a comprehensive ex-post evaluation to assess effectiveness of COVID-related fiscal incentives, including procurement audits and tax expenditures.
  - Staff analysis suggests overall risks from SOEs are moderate; ongoing SOE restructuring under the SOE 2020-24 roadmap is welcome.
  - Recommendation: prepare a consolidated public sector balance sheet that includes SOEs to further improve fiscal transparency and governance.

### Authorities’ views on fiscal strategy
- Authorities committed to the "3 percent deficit ceiling" as an important policy anchor.
- 2023 budget underpinned by conservative commodity price assumptions.
- Post-PEN priorities: development expenditures focused on education, social protection, and infrastructure; limited public spending on the new capital intended to catalyze private sector involvement.
- Authorities are frontloading financing to take advantage of benign conditions; arrangements with line ministries and regional governments and adequate cash buffers are in place to cushion shocks.
- Authorities agree strengthening the domestic institutional investor base and adhering to the deficit ceiling will help manage the sovereign-bank nexus.
- Revenue and expenditure reforms:
  - Integration of national ID and taxpayer numbers started in early 2023 to improve tax compliance.
  - Plan to launch a new IT core tax system early next year to digitize tax administration and strengthen risk-based auditing.
  - Planned tax policy measures: finalize implementation decrees on excise taxes on plastics and sweetened beverages by 2024; increase the VAT rate to "12 percent in 2025" as envisaged under the tax harmonization law.
  - Expenditure reforms: improve the unified social registry database to enable a targeted, people-based social safety net.
  - Authorities accelerated energy compensation payments to SOEs to be made quarterly instead of bi-annual.
  - Authorities improving fiscal transparency by publishing tax incentives, including those under PEN, in the MoF’s annual Tax Expenditure Reports and welcomed publishing a comprehensive ex-post PEN evaluation.

### Monetary and exchange rate policies
- BI tightened monetary policy to address inflation risks: raised policy rate by a cumulative "225 basis points (bps) during August 2022‒January 2023 to 5.75 percent" (above pre-pandemic "5 percent at end-2019").
- Complementary measures: reserve requirement ratio (RRR) for banks increased from "3.5 percent to 9 percent over February-September 2022"; reverse repo transactions withdrew "about IDR 36.6 trillion of banking system liquidity in 2022".
- BI used "operation twist" (sell short-term, purchase long-term government bonds of tenors 5 years and above) to improve monetary transmission and support long-term credit.
- Private sector credit-to-GDP ratio: recovered from past lows and stands at "41 percent".
- Real policy rate has risen to "1.8 percent", within staff’s estimated neutral range of "1-2 percent".
- Guidance:
  - Maintain a neutral monetary policy stance to help bring inflation within BI’s headline target range in the second half of 2023, but retain a tightening bias given upside risks to inflation.
  - BI should raise the policy rate promptly if inflation surprises on the upside (e.g., increases in core inflation from levels above the midpoint of BI’s headline inflation target range).
  - End of BI’s primary market purchases under the BI-MOF burden sharing agreement is welcome; any future primary market purchases should be confined to significant financial stress, time-bound, modest, transparent, and accompanied by exit conditions.
  - Reinstating and improving monthly surveys of inflation expectations (forecast horizon e.g., 12-18 months) recommended to aid policy.

### Exchange rate role
- Rupiah recovered some ground after 2022 depreciation; exchange rate should be allowed to move in line with market forces.
- FX interventions (FXI) are appropriate under certain shocks and circumstances; exchange rate should act as a shock absorber.

### Financial sector policies: system resilience and vulnerabilities
- Banking system well-capitalized: regulatory capital ratio "26.0 percent as of February 2023".
- Liquidity and FX exposures: banks have ample liquidity; FX exposures appear limited.
- Asset quality and credit:
  - Ratio of non-performing loans and loans-at-risk declined to "2.4 and 14 percent of total loans respectively" in December 2022 (loans-at-risk peaked at "24.2 percent in early 2021").
  - Credit-to-GDP gap estimated "negative (-2  percent as of 2023Q1)".
  - Household debt remained about "17 percent of GDP".
  - Growth-at-risk analysis suggests moderate and stable downside risks to growth.
- Systemic risk assessed as moderate and broadly unchanged year-on-year.
- Vulnerabilities from rising interest rates:
  - Corporate debt "38.4 percent of GDP".
  - Staff analysis of listed firms: share of debt held by vulnerable firms ("debt-at-risk" where interest coverage ratio (ICR) < 1) would rise from "21 to 28 percent" under cumulative policy rate increases since 2022.
  - Banks increased loan loss provisions ("214 percent of NPLs as of January") and rebalanced government bond portfolios from AFS to HTM to reduce mark-to-market losses.
  - Authorities estimate banks held about "8.8 percent of GDP assets in government bonds as of January", with "more than half (5.2 percent of GDP)" in held-to-maturity form.
- IMF Global Bank Stress Test (GST) results:
  - Adverse shock scenario: growth down "by 3 percentage points", interest rates up "by 200 basis points", asset prices down "by 10 percent" relative to baseline.
  - GST shows banking system capital adequacy ratio could decline "by about 4.3 percentage points relative to the baseline" but remain above minimum regulatory requirement.
  - Banking system liquidity is sufficient; small and medium banks may be more vulnerable due to higher AFS shares, limited bond market access, and lack of collateral for money market participation.
- Policy recommendations:
  - Do not extend relaxation of loan classification beyond its expiry in March 2024; authorities’ enhanced supervisory scrutiny over restructured loans is welcomed.
  - Gradually tighten macroprudential instruments as financial cycle picks up: restore pre-pandemic loan-to-value limits (property and car loans), scale back some RRR incentives, regularly review macroprudential intermediation ratio to support sustainable credit growth including to SMEs.
  - Regular asset quality reviews and strict supervision to ensure adequate bank capital commensurate with sovereign-bank nexus risks.

*Source: IMF staff report content for Indonesia (content unit: 1idnea2023002 - chapter/section).*

### 33.      The authorities made notable progress on financial sector reform but continued

### 1idnea2023002 - 33. The authorities made notable progress on financial sector reform but continued

### Financial sector reform: progress and remaining gaps
- Authorities passed a comprehensive Financial Sector Omnibus Law (FSOL) in January 2023 that integrates 17 institutional and sectoral laws to strengthen financial efficiency and resilience.
- Key FSOL features:
  - Authorizes BI with a macroprudential policy mandate.
  - Expands the role of the Indonesia Deposit Insurance Corporation (IDIC).
  - Strengthens OJK’s supervisory and regulatory framework, in line with past FSAP recommendations.
  - Sets the legal foundation for a central bank digital currency (CBDC).
- Remaining gaps and suggested future reforms:
  - Reduce inaction bias with troubled banks by further clarifying rules for when supervisors should act.
  - Establish a clear funding mechanism as a key element of a recovery strategy to minimize fiscal liabilities.
  - Strengthen insolvency and creditor rights framework to prepare the bankruptcy system for a potential surge in corporate defaults.
- The upcoming FSAP is an opportunity to follow up on these issues and other recommendations to enhance financial sector resilience.

*Authorities’ views*
- Authorities agreed with staff’s assessment of systemic risk and future direction of financial sector policies.
- Banking system considered resilient, but vigilance needed to monitor risks from increases in interest rates.
- Macroprudential policy stance will remain accommodative in the near-term to support economic recovery momentum but will be tightened as the credit gap closes.
- Authorities noted importance of not extending forbearance measures beyond 2024, and emphasized small and targeted coverage, heightened supervision, and banks’ increased provisions.

### Managing short-term risks: policy space and initial conditions
- Indonesia has ample policy space, strong financial buffers, and favorable initial conditions:
  - Risks to public debt sustainability are low.
  - Recent tightening in monetary policy has created room for maneuver.
  - Foreign reserves remain adequate.
  - Banking sector has good capital and liquidity buffers.
  - Closing output gap, declining inflation trend, and well-anchored inflation expectations are favorable.
- Policy guidance:
  - Fiscal policy: act counter-cyclically under risk scenarios; save upside revenue improvements to enhance fiscal space; use available fiscal space in a targeted way under downside shocks; if going above deficit ceiling, clearly communicate reasons and path back to ceiling to secure medium-term fiscal sustainability.
  - Monetary policy: balance risks to inflation, output, and financial stability; maintain tightening bias but consider a more accommodative stance if growth decelerates substantially and inflationary pressures subside faster than expected; tighten sharply if faced with persistent shocks pushing inflation higher.
  - Financial sector policies: adjust to mitigate financial stability risks; calibrated and targeted relaxation of prudential policies may be appropriate in severe downturns but should be time-bound and coupled with enhanced supervision and risk assessment.

### Use of foreign exchange intervention (FXI): rationale, model scenarios, and tradeoffs
- Principle: allow exchange rate to act as shock absorber; FXI may be appropriate under certain shocks and circumstances per IMF integrated policy framework (IPF).
- Rationale for FXI in Indonesia:
  - Shallow FX markets may warrant FXI in response to financial shocks from sudden changes in investor risk appetite.
  - BI’s use of FXI appears to coincide with periods of spiking UIP premia; since 2008, BI interventions are estimated to average about 0.6 percent of GDP (US$4.2 billion) on the seven occasions in which the UIP premium spiked to more than 3 percent.
- Model-based downside scenario setup:
  - Global supply shocks lead to higher inflation and a further tightening of monetary policy in advanced economies: modelled as a one percentage point increase in core inflation and about 80 basis points hike in the policy rate in the representative foreign economy.
  - Global financial conditions tighten and a “risk-off” sentiment—proxied by one standard deviation shock to Indonesia’s UIP premium—trigger capital outflows, sharp currency depreciation, and a spike in domestic inflation.
- Illustrative policy scenarios and specific outcomes:
  - Scenario 1: Monetary policy tightened with a policy rate hike by 90 basis points (blue line).
    - Exchange rate depreciates by about 5 percent.
    - Inflation rises by 1.2 percent.
    - Output is lower by about 1 percent relative to baseline.
  - Scenario 2: Interest rate hike delayed; only FXI used of about 2 percent of GDP over a year (black dashed line).
    - Near-term inflation outcome similar because FXI reduces initial exchange rate depreciation by about half.
    - Impact on output is positive due to decline in real interest rate stimulating domestic demand.
    - Sustained FXI reduces reserves, limiting its scope to address persistent inflationary shocks.
  - Scenario 3: Combined interest rate and FXI policies (red dotted line).
    - Exchange rate depreciation less pronounced than Scenario 2.
    - Monetary policy tightens by only 55 basis points (smaller than 90 basis points).
    - Inflation reduced by 0.3 percentage points relative to baseline.
    - Output is lower as lower net exports outweigh positive domestic demand effects; lower interest rates would mitigate financial stability risks and an increase in debt-at-risk (not captured by model).
  - Scenario 4: Monetary + FXI + fiscal stimulus via targeted transfers to households (green dashed line).
    - Mitigates decline in output.
    - Results in a marginally higher interest rate and a small increase in government debt of 1 percent of GDP in five years.

- Factors determining appropriate policy response:
  - Initial conditions and policy priorities: increased interest rates have raised debt-at-risk in the corporate sector; FXI can ease burden on monetary policy in a UIP shock and help prevent further rises in debt-at-risk.
  - Size of shock: very large shocks increase relevance of price and financial stability considerations; partial hedging of FX exposures and potential de-anchoring of inflation expectations could make FXI, coordinated with monetary tightening, useful to stem capital outflows and prevent further exchange rate weakening.
  - Effectiveness of FXI: depends on FX market shallowness, nature and size of shock, and reserves availability; large reserve use may be costly; practical policymaking may require combining tools due to uncertainty about shocks in real time; policy target horizon matters as FX intervention often smooths high-frequency intraday volatility not well captured by macro models.

*Authorities’ views*
- Authorities welcomed IPF analysis and emphasized need for models with a broader set of policies (monetary policy, FXI, capital flows management, macroprudential policy).
- BI’s IPF model includes these instruments plus financial variables such as credit growth to capture the financial cycle.
- On FXI, authorities view current implementation as effectively maintaining stability and supporting recovery.
- Authorities stressed importance of maintaining reserves at prudent levels and expected the newly introduced FX deposit facility to increase supply of FX liquidity in domestic financial markets.

### Tackling long-term challenges: structural reform priorities
- Medium-term development plan (The National Medium-Term Development Plan for 2020-2024) aims to boost manufacturing and services share of GDP, diversify away from raw commodity exports, and raise potential growth to achieve high-income economy status by 2045.
- Downstreaming strategy:
  - Focus on developing downstream activities and priority sectors down the value chain from raw commodities to increase export value added and regional development.
  - Example: nickel downstreaming has increased foreign direct investment to process nickel ore and increased export value; authorities consider extending downstreaming to copper, bauxite, tin, and agricultural commodities, and eventually domestic manufacturing of batteries for electric vehicles.
- Costs and design considerations for downstreaming:
  - Need regular cost-benefit analysis to assess effectiveness and fiscal costs; fiscal costs currently appear small and should be monitored.
  - Industrial policies should avoid hindering competition and innovation and minimize negative cross-border spillovers.
  - Authorities should consider domestic policies achieving value added increases while phasing out export restrictions and not extending restrictions to other commodities.

- Priority complementary reforms for durable transformation:
  - Labor market efficiency and investment climate:
    - Prompt implementation of presidential decrees reforming labor market and easing regulatory burden needed to support labor market recovery and long-term investment.
    - New regulations aim to reduce informality, reformulate minimum wages, introduce unemployment benefits, establish new working hours arrangements for digital economy jobs, and simplify licensing to ease business creation.
    - Ensuring legal and policy certainty and removing non-tariff trade measures could attract foreign direct investment.
  - Human capital development:
    - Train more engineers and professionals; improve quality of education with focus on analytical and digital skills.
    - Develop centralized system to monitor and evaluate quality of technical and vocational education and training to promote upskilling and reskilling.
    - Pandemic-related lengthy school closures risk long-lasting human capital impacts, particularly in remote regions with poor internet connectivity.
  - Infrastructure investment:
    - Address substantial gaps and bottlenecks; modernize infrastructure governance and public investment management to ensure economic benefits.
    - Apply June 2019 Public Investment Management Assessment recommendations to guide newly established sovereign wealth fund (Indonesia Investment Authority).
  - Financial deepening:
    - Mobilize more domestic resources to finance growth and low-carbon transition, lessen reliance on volatile external financing, and strengthen financial system shock absorption.
    - FSOL provisions will facilitate development of a liquid market for risk hedging and broaden scope for mobilizing long-term IDR financing.
    - Further develop money and repo market per Blueprint for Money Market Development 2025 to establish reliable infrastructure and a well-informed investor base.
    - BI’s initiative to integrate Indonesia’s digital payments system with other ASEAN members will support regional integration and digitalization.

- Selected numeric and regulatory details cited:
  - FXI interventions average about 0.6 percent of GDP (US$4.2 billion) on seven occasions with UIP premia spikes over 3 percent since 2008.
  - Model shocks: one percentage point increase in core inflation and about 80 basis points hike in foreign policy rate; policy scenarios include hikes of 90 basis points and 55 basis points; FXI use of about 2 percent of GDP over a year; inflation changes of 1.2 percent and reductions of 0.3 percentage points; output changes of about 1 percent; government debt increase of 1 percent of GDP in five years.
  - Prudential and hedging rules: minimum hedging requirement of 25 percent for corporates on short-term net foreign currency liabilities; minimum FX liquidity ratio of 70 percent for corporates’ liquid foreign currency assets as share of short-term foreign currency liabilities (maturities less than three months).
  - Tax expenditures averaged 1.66 percent of GDP per year over 2016-2022; mining sector accounts for 1 percent of total tax incentives on average; processing sector accounts for 24 percent of total incentives on average, about 0.4 percent of GDP per year.
  - Policy and plan references: The National Medium-Term Development Plan for 2020-2024; Blueprint for Money Market Development 2025; June 2019 Public Investment Management Assessment.

*Italic: Source — 1idnea2023002 - 33. The authorities made notable progress on financial sector reform but continued (PDF).*

### 44.      The authorities agreed with the importance of advancing broad-based structural

### 1idnea2023002 - 44. The authorities agreed with the importance of advancing broad-based structural

### Structural reforms, downstreaming, and industrial policy
- Authorities continue to advance reform agenda, building on recent passage of important tax, financial, and job creation reforms.
- Industrial policies are used to jump-start diversification by revitalizing the manufacturing sector and positioning Indonesia in supply chains around electric vehicle manufacturing.
- Downstreaming activities are expected to:
  - improve the trade balance and the current account;
  - strengthen resilience against commodity boom-bust cycles;
  - reduce reliance on portfolio financing;
  - attract foreign direct investment and create jobs in remote areas as part of a broader regional development strategy to reduce income inequality and unemployment and improve economic welfare in the medium to long-term.
- Authorities are considering extending downstreaming to other minerals (copper, bauxite, tin) and food commodities (palm oil, fish).

### Early experience with Indonesia’s downstreaming policies (Box 1) — findings and statistics
- Over the last decade, industrial policy aimed to increase value added in commodity exports and boost productivity and competitiveness, with particular focus on nickel ore.
- Indonesia is described as the world's largest nickel producer—accounting for nearly half of global output in 2022—and holds the largest reserves.
- Timeline of nickel policy actions:
  - export tariff on nickel ore in 2012;
  - export ban on all raw nickel in 2014 (lifted in 2017, reimposed in January 2020 along with a domestic processing requirement).
- FDI and investment outcomes:
  - overall FDI increased to US$22 billion in 2022;
  - foreign investment realization increased by 47 percent in 2022, led by sectors related to downstreaming with almost half of the increase accounted for by China and Hong Kong;
  - several foreign investors have built smelters in Central Sulawesi and North Maluku;
  - investment realization in nickel and bauxite smelters during 2021-22 has reached about US$5.5 and US$3 billion respectively;
  - number of nickel smelters rose to 11 from 3 in 2014, with a further 19 expected to be built.
- Export performance:
  - exports of nickel surged from US$4.5 billion in 2019 to $19.6    billion in 2022.
- Staff estimates and caveats:
  - staff estimates that less than one third of this increase can be explained by higher global commodity prices, with the rest plausibly coming from higher value added from smelting activities and higher export volumes;
  - formal sector jobs are being created in lower-income regions, though overall employment impact remains modest relative to the national economy.
- Potential costs and risks to monitor:
  - foregone fiscal revenues;
  - unintended consequences of export restrictions (resource misallocation, rent seeking);
  - cross-border spillovers (price effects in global commodity markets) and potential retaliation from trade partners.
- International trade notes:
  - bilateral trade data from UN Comtrade available for 2021 shows that more than 80 percent of Indonesia’s exports of refined nickel were to China.
- Legal dispute note:
  - In November 2022, a WTO dispute panel found that the export ban and domestic processing requirement for all nickel ore were inconsistent with Article XI:1 of the GATT 1994; Indonesia appealed the panel’s decision on December 8, 2022.

### Climate change policies and mitigation strategy
- Exposure and commitments:
  - Indonesia is exposed to climate-related risks (natural disasters, sea-level rise) and transition risks given coal’s significance.
  - Indonesia submitted an Enhanced NDC in September 2022 with revised emission reduction targets: by 2030, emissions will be reduced by 31.9 percent with respect to a business-as-usual (BAU) scenario.
  - About 2/3 of these unconditional emission reductions would come from forestry and land use (FOLU) measures; the remaining 1/3 coming mainly from the energy sector.
  - Under the plan, overall emissions would peak by 2030, with FOLU becoming a net carbon sink.
  - Long-Term Strategy for Low Carbon and Climate Resilience Strategy 2050 establishes a vision to achieve net-zero emissions by 2060 or sooner and includes a roadmap to phase-out coal-fired power plants by 2050.
- Policy instruments and timing:
  - Plans for introducing a carbon tax (envisaged in the 2021 tax bill) have been delayed due to geopolitical concerns and commodity prices.
  - A voluntary ETS pilot occurred in 2021; a mandatory cap-and-trade system was introduced in 2023 covering large coal-fired power plants, expected to gradually increase in coverage and envisaged to turn into a hybrid cap-trade-and-tax system with the introduction of carbon taxes as conditions permit.
  - Recent increase in administered gasoline prices noted as a step in the right direction.
- Financing and mobilization:
  - climate budget allocations averaged 3.7 percent of total expenditures per year over 2016-2021;
  - expected mobilization of US$20 billion in external financing through the Indonesia Just Energy Transition Partnership (JETP) to allow early decommissioning of coal plants and accelerate renewable investment;
  - private financing facilitated by recently adopted green taxonomy developed by OJK.
- Staff view on mitigation priorities:
  - mitigation through FOLU measures have lower abatement cost through 2030 than mitigation achieved exclusively through a carbon price in the energy sector;
  - gradual reduction of energy subsidies and distortions that incentivize fossil fuel use is essential to reach net zero and provide price-based signals for efficient transformation.
- Authorities’ emphasis:
  - authorities welcomed staff focus on climate change and affirmed green transition as integral to development strategy;
  - they agreed reforms (carbon pricing, subsidy reform) should be gradual, mindful of inflation impacts, and stressed need for international cooperation and concessional financing to facilitate a just transition.
  - as part of Indonesia’s 2023 ASEAN chairmanship, authorities will promote development and adoption of the ASEAN Taxonomy for Sustainable Finance including transition activities.

### Modeling climate mitigation strategies (Box 2) — scenarios and quantitative results
- Modeling framework:
  - uses the global IMF-ENV model capturing sectoral, trade, and employment consequences, incorporating Indonesian features: consumer subsidies calibrated to match ratio of total subsidies to GDP in 2022; link between forestry output and deforestation rates; requirement for coal producers to sell 25 percent domestically at a lower price; existence of long-term contracts constraining substitution away from coal power plants.
- Scenario comparisons through 2030:
  - authorities’ strategy emphasizing FOLU mitigation limits economic costs and allows smoother transition for power sector.
  - modeled result: authorities’ strategy lowers level of GDP by only about 0.5 percentage points in 2030.
  - illustrative scenario that shifts short-run mitigation burden entirely to the energy sector (carbon price only) results in a larger fall in GDP of 2.0 percentage points in 2030.
- Subsidy removal and equivalent carbon pricing:
  - modeling a scenario where consumer and producer subsidies are removed finds overall emissions decrease by 7 percent, with offsetting increase in fiscal transfers preventing a fall in output.
  - removal of subsidies would be as effective as imposing a carbon tax of 5 USD/TCO2e on all economic activity to achieve the NDC commitment.
  - equivalent policies lead to lower gross investments in fossil fuels (investments in coal falling by more than half) and increased investments in renewables.
  - renewables increase share in generation from 30 percent in the baseline to 40 percent under the modeled subsidy-removal scenario.
- Caveats:
  - credible monitoring is critical for effective implementation of FOLU measures.
  - national estimates of abatement cost curves used correspond to a carbon price in the range of $1-29/tCo2e by 2030, not including implementation costs.

### Staff appraisal and policy recommendations
- Macro outlook and buffers:
  - Indonesia’s post-COVID recovery is nearly complete, with the output gap expected to close in 2023.
  - monetary and fiscal policies returned to normal faster than expected; BI primary market purchases concluded as scheduled.
  - growth remains strong, inflation and public debt are under control, and the current account is balanced.
  - Indonesia has ample policy space and financial buffers; use of FXI (foreign exchange intervention) is appropriate under certain shocks and circumstances.
- Fiscal policy recommendations:
  - maintain a broadly neutral fiscal stance below the 3 percent deficit ceiling to meet development needs while securing policy credibility.
  - continue adherence to the ceiling, underpinned by sound debt management and adequate cash buffers.
  - adopt a concrete medium-term fiscal strategy including revenue mobilization, energy subsidy reform, expanded social protection, and greater transparency.
  - strategy should clarify medium-term budget objectives, risks, and contingency policies; broaden tax base and improve tax collection; adopt regular adjustments in energy prices through an automatic pricing formula; expand unified social registry and social safety net benefits and coverage.
  - conduct a comprehensive ex-post evaluation of the PEN program and publish a consolidated public sector balance sheet including SOEs.
- Monetary and financial sector recommendations:
  - current neutral monetary stance appropriate near term; BI should monitor underlying price pressures and act decisively if inflation surprises on the upside.
  - consider reinstating surveys on inflation expectations to inform policy making.
  - future primary market purchases of government bonds should be confined to periods of significant financial stress and used as a last resort to preserve BI’s independence and operational autonomy.
  - financial system resilient with moderate systemic risk; keep macroprudential stance broadly unchanged this year and move toward a more neutral stance in 2024 as the credit gap narrows.
  - do not extend relaxation of loan classification rules when they expire in March 2024.
  - remain vigilant to vulnerabilities from higher interest rates increasing corporate debt-at-risk and potential unrealized losses in banks’ government debt portfolios.
- External sector and FX policy:
  - the exchange rate has been effective as a shock absorber; preliminary assessment of 2022 external position is broadly in line with level implied by medium-term fundamentals and desirable policies.
  - in the event of downside risks, policies should remain nimble, use available policy space effectively, ensure medium-term fiscal and external sustainability, and enhance communication.
  - FXI can help reduce inflation and mitigate financial stability risks by allowing monetary policy to tighten by less, depending on its effectiveness in stabilizing the exchange rate.
- Structural reform priorities:
  - promote an enabling business environment and investment climate; overcome sector-specific market failures.
  - reform priorities include reducing labor market restrictions, improving the investment climate, human capital development, infrastructure investment, and financial deepening.
  - steadfast implementation of recent labor market and financial sector legislations will be critical.

*Source: IMF staff report text provided in Content unit 1idnea2023002 - 44.*

### 58.      A regular cost-benefit analysis should inform assessments of whether Indonesia’s

### 1idnea2023002 - 58.      A regular cost-benefit analysis should inform assessments of whether Indonesia’s

### Downstreaming policies and industrial strategy
- Findings:
  - A regular cost-benefit analysis should inform assessments of whether Indonesia’s downstreaming policies are working.
- Policy recommendations:
  - The government should ensure industrial policies:
    - promote innovation and competition,
    - generate positive spillovers within and across sectors to help boost jobs and exports,
    - minimize cross-border spillovers.
  - The government should consider phasing out export restrictions and not extending the restrictions to other commodities.

### Climate change mitigation and long-term strategy
- Findings:
  - The government is taking steps toward climate change mitigation, but broader reforms would be needed to reach net zero.
  - The authorities’ carbon mitigation strategy is appropriately focused on forestry and land-use regulation, which has a lower estimated abatement cost through 2030 than an alternative strategy in which mitigation is achieved exclusively through a carbon price in the energy sector (Box II).
- Policy recommendations:
  - To achieve net zero carbon emissions by 2060 would require:
    - the gradual reduction of energy subsidies,
    - carbon pricing to shift incentives in the wider economy away from fossil fuels and towards renewable energy.
  - Mobilizing private and international financing, including through JETP, will be also vital to achieve Indonesia’s long-term mitigation and adaptation plans.

*Source: 1idnea2023002 - 58.*

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

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

### COVID-19 Developments
- Daily new cases have remained low.
- Vaccination rates across ASEAN are high.
- Mobility stayed above pre-crisis levels through most of 2022.
- Most restrictions have now been lifted.

### Recent Economic Developments
- Real GDP growth has been strong in 2022, supported by both domestic demand and net export.
- Private consumption has been strong as the economy recovered following the pandemic.
- Manufacturing sentiment has remained expansionary.
- Consumer sentiment was very strong throughout 2022.
- The volume of merchandise export bounced back strongly.

### Inflation Dynamics
- Inflation picked up sharply in 2022 and remains above BI’s target band.
- 2022 inflation reflected large spikes to food and administered goods, and a more gradual increase in core inflation.
- Inflationary pressures in 2022 were primarily driven by food and transportation categories and were felt in all regions.
- Capacity utilization has increased but is still well below the pre-pandemic levels.
- PPI inflation saw a broad-based rebound in 2022.

### Capital Flows and Market Developments
- Portfolio investment recorded large outflows of debt securities during 2022, partly offset by equity inflows.
- Rupiah government bonds held by foreign investors declined further in 2022, in US$ and as a percent of the debt stock.
- Market interest rates increased during 2022, with large volatility in sovereign premium reflecting global uncertainty.
- Exchange rate depreciation occurred in 2022.
- Stock price increases slowed in 2022 while volatility increased.

### External Sector
- The current account surplus increased further in 2022, driven mainly by the non-oil and gas balance.
- Broad-based strong export growth in 2022, with coal leading.
- Import growth remained robust, particularly capital goods and raw materials.
- The NIIP has improved since end-2019, mainly due to a decline in portfolio liabilities.
- Indonesia’s foreign reserves declined in 2022 (US$137 billion) but remain at an adequate level.
- External financing needs are projected to increase in 2023 mainly due to a decline in the current account balance.

### Fiscal Sector
- The primary deficit narrowed in 2022, reflecting stronger than expected revenue performance.
- Public debt-to-GDP ratio is lower than peers.
- Indonesia’s tax-to-GDP ratio lags behind EM peers.
- Capital spending is expected to remain high in 2023.
- 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 tightened its monetary policy since August 2022, leading to a flatter yield curve.
- BI ended its primary market government bond purchases in 2022.
- Monetary base continued to expand strongly, led by bank reserves.
- Broad money growth has moderated recently, reflecting relatively slower increases in term deposits.
- The banking system as a whole has ample liquidity, with strong deposit growth maintained across the banking system.

### Macrofinancial Developments
- Credit growth continued its recovery towards pre-pandemic levels, yet commercial banks’ loan-to-deposit ratio is slow to come back.
- The credit gap remains negative.
- Overall financial condition continued to ease, despite the increase in interest rates.
- Credit to MSMEs grew strongly during 2022.
- Real estate loan growth picked up, and non-performing loans ratio declined.

### Financial Soundness Indicators
- Indonesia’s banking system capital remains adequate and above peers.
- Profitability remains at a high level in comparison to peers reflecting large interest margins.
- System-wide bank liquidity is ample and slightly up compared to pre-pandemic levels.
- Nonperforming loans have only slightly increased since the pandemic, due to regulatory forbearance measures.

### Implementation of Past Fund Advice (Selected items)
- Fiscal policy
  - Authorities announced in 2023 Budget their target to go back to the 3 percent deficit ceiling.
  - The fiscal outturn for 2022 showed that the deficit ceiling was already met in 2022.
  - A VAT rate hike and tax amnesty program were implemented as part of the 2021 tax reform bill. There was also a one-off increase in administered fuel prices in September 2022.
  - Authorities continued publishing weekly updates on PEN realization.
- Monetary policy
  - BI responded to the increase in inflation through policy rate hikes and liquidity absorption.
  - BI ended monetary budget financing at end-2022.
  - BI responded to large portfolio outflows in 2022 through policy rate hikes and sales of short-term government bonds in the secondary market; rupiah depreciated in line with other regional EM currencies.
- Financial sector policies
  - The authorities narrowed the scope of the regulatory incentive related to the relaxation of loan classification standards when they expired in March 2023; coverage remains broad.
  - The authorities passed a comprehensive Financial Sector Omnibus Law (FSOL) in December that integrates 17 institutional and sectoral laws.
- Structural policies and climate change
  - Passage of omnibus laws on job creation and financial sector, and the Government Regulation in Lieu of Law (Perppu) on Job Creation constitute important first steps.
  - Indonesia submitted an Enhanced NDC in September 2022 with revised emission reduction targets. Plans for introducing a carbon tax envisaged in the 2021 tax bill have been delayed.

### Key FSAP Recommendations and Authorities' Actions (Selected entries)
- Institutional and Legal Arrangements
  - The omnibus law (Law No. 4 of 2023 on Development and Strengthening of the Financial Sector or "UU P2SK") issued on January 12, 2023 revised 17 laws related to the financial sector, including OJK Law, BI Law, and LPS Law.
- Systemic Risk Monitoring and Prudential Policy
  - Indonesia supervises banks' foreign exchange liquidity position using an additional monitoring tool and imposes LCR based on significant currencies per Regulation No.42/POJK.03/2015.
  - BI and OJK have been implementing Joint Stress Test (JST) regularly once a year since 2017; BI designs macroeconomic scenarios (baseline, adverse I, adverse II) and performs Top-Down Stress Test (TDST) and Granular Stress Test (GST); OJK coordinates Bottom-Up Stress Test (BUST) for systemic banks (D-SIB).
- Financial Sector Oversight
  - OJK implemented cross-sectoral supervision steps including the RKPT forum and integrated regulations; OSIDA (OJK Supervisory Technology Integrated Data Analytics) was launched in 2022.
  - OJK issued multiple POJKs to strengthen credit and risk management practices; OJK is in the process of issuing updated regulation on Risk-Weighted Assets for Credit Risk and Market Risk to be implemented by 2023.
- Governance of Financial Conglomerates and Resolution
  - OJK Regulation Number 45/POJK.03/2020 defines financial conglomerates and sets IDR100,000,000,000,000 (one hundred trillion Rupiah) as a threshold for FCs.
  - The Law number 2 of 2020 provides legal foundation for KSSK meetings and support schemes; recent FSOL enhances LoLR provisions for Bank Indonesia including collateral types and extension of LoLR provision period (from multiples of 14 days to 30 days; max period of LoLR provision is 90 days).
  - Recovery plans are regulated under Law Number 9 of 2016 and POJK No. 14/POJK.03/2017; IDIC promulgated IDIC Regulation Number 1/2021 on Resolution Plan in March 2021 requiring DSIBs and selected non-DSIBs to prepare resolution plans.

*Source: 1idnea2023002 - Indonesia: Selected chapters and tables (IMF).*

### 2022. The regulation also stipulates the resolvability assessment requirement.

### 1idnea2023002 - 2022. The regulation also stipulates the resolvability assessment requirement.

### Financial integrity — Key FSAP recommendations and authorities' actions
- Recommendation 16: Integrate key money laundering or terrorist financing (ML/TF) risks in the priorities and operations of relevant agencies.
  - OJK actions:
    - Implemented FATF’s recommendations regarding risk-based AML/CFT as adopted by the National Committee of Prevention and Eradication of the Criminal Act of Money Laundering (NCC) in the National Strategy.
    - Issued National Risk Assessment (NRA) and Sectoral Risk Assessment (SRA) guidelines for the financial services sector.
    - Strengthened regulation for utilization of technological means in AML/CFT programs, including electronic customer due diligence (e-CDD).
    - Provided guidance letters to financial institutions during the Covid-19 Pandemic; organized dissemination, mentoring workshops, and webinars; conducted self-assessment in preparation of MER (mutual evaluation review).
  - BI (Bank Indonesia) actions on the payment system:
    - Implemented national and international AML/CFT standards; increased public and operator awareness; increased coordination/cooperation among national and international institutions.
    - Contributed to MER on-site interviews; provided spokespersons and input for draft MER report.
    - Completed all action plans for 2022 National AML/CFT Strategy in collaboration with PPATK and other competent authorities. Of the 71 action plans of the 2022 National AML/CFT Strategy that NCC members must fulfill, 20 action plans are under BI's purview.
    - Highlights of BI action plans: publishing and socialization of SRA, KYC guidance and ML/TF typology assessment, thematic supervision, assessment on ML/TF risk of new technologies, capacity building for supervisors and payment system providers.

- Recommendation 17: Finalize and implement risk-based AML/CFT supervisory tools.
  - OJK actions:
    - Carried out AML/CFT risk-based supervision in accordance with FATF Recommendation and MER APG 2018 findings.
    - Developed risk-based supervision tools per OJK Commissioner Board Circular Letter on AML/CFT Supervision; developed SupTech infrastructure; conducted mentoring workshops and in-house trainings; joint audits with FIU/PPATK; MoUs and Risk-Based Mentoring Program (Promensisko).
    - Implemented Risk-Based Assessment Tools (SIGAP System) to assess AML/CFT implementation annually and determine audit frequency based on assessment results (high, medium, low).
  - BI actions:
    - Developing supervisory framework for non-bank payment institutions including supervisory technology tools to detect suspicious transactions.
    - Strengthening supervision over money processing service providers (PJPUR) via risk-based supervision frameworks and Internal Supervision Guidelines (PADG Intern) ratified in 2021 (AML/CFT Supervision Guidelines; Licensing and Supervision of Non-Bank Money Changers and Remittance PSPs).
    - Conducted joint audits with PPATK over Remittance Businesses and Non-Bank Money Changers in 2021.
    - Supported National AML/CFT Strategy (Stranas) 2021 by conducting thematic audits on adequacy of AML/CFT and CDD practices for PEPs, Foreign Trusts, Corporations, Foundations, Travel Agent Customers, with auditees sampled across regions.

### Financial deepening and inclusion — Key FSAP recommendations and authorities' actions
- Recommendation 18: Develop an integrated roadmap for promoting financial deepening and inclusion.
  - National Financial Market Development and Deepening Strategy (SN-PPPK):
    - Reviewed and revised for pandemic and changing environment; period extended from 2018-24 to 2018-25; Acceleration Phase extended from 2020-22 to 2020-23.
    - In 2022, FK-PPPK focused on 7 priority programs under SN-PPPK initiatives:
      1. Development financing: exploring collaboration between Indonesian Ministry of National Development Planning and Millenium Challenge Corporation under Compact-2 program.
      2. Financial Sector Reform: review of establishment of Local Operating Unit (LOU) to issue Legal Entity Identifier (LEI); finalising OJK regulation on Non-Centrally Cleared Derivatives (NCCDs) and Capital Requirement for banks’ exposure to Central Counterparty.
      3. Benchmark Reform: launched Compounded IndONIA and IndONIA Index; collaboration with National Working Group on Benchmark Reform (NWGBR).
      4. Development of Repo Market: publication of revised market standard; establishing roadmap for repo market development in the Alternative Trading System (ATS).
      5. Development of Retail Investor Base: LIKE-IT (LIterasi KEuangan Indonesia Terdepan) financial literacy series; LIKE IT series 1 theme "Sustain Habit in Investing, Investing in Sustainable Instruments."
      6. Harmonization of Tax Regulations in the Financial Market: establishment of PP 91/2021 "Income Tax on Income in the Form of Bond Interest".
      7. Development of Green & Sustainable Instruments: publishing Indonesian Green Taxonomy (THI) 1.0; consultative paper “Principles of Effective Management of Climate-related Financial Risks”; issuance of PBI No.24/3/2022 concerning "Macroprudential Inclusive Financing Ratio (RPIM)" which adjusts inclusive financing by banks through purchase of sustainability bonds (SBPI).
    - In 2023 SN-PPPK and priority programs will be aligned with the establishment of UU No. 4/2023 or The Financial Sector Omnibus Law.
    - Bank Indonesia complement: Blueprint for Indonesia’s Money Market Development 2025 (BPPU 2025) launched to build an ecosystem of a modern and advanced money market.

- Recommendation 19: Enhance bond yield curve by consolidating debt issuance and improving secondary markets.
  - IDX actions:
    - Launched IGBF (Indonesia Government Bond Futures) products; as of November 2020 IGBF offered two new series via Indonesia Stock Exchange Platform; market participation and demand need improvement.
  - Government actions:
    - Undertakes prudent portfolio management including issuing benchmark series in primary market; conducts debt switching to smooth maturity profile and reduce non-liquid series; private placement used to increase volume of specific series.
    - Domestic debt switch auctions in 2021:
      - June 17, 2021: bids submitted IDR 11.5 trillion; nominal won by government IDR 4.98 trillion.
      - September 23, 2021: nominal bids submitted IDR 11.24 trillion; nominal won by government IDR 7.07 trillion.
    - Global liability management:
      - Inaugural Tender Offer/Liability Management Exercise launched on eight series of Notes on September 20, 2021. Total tender instructions received USD 2.68 Bio; government repurchased total nominal amount of USD 1.16 bio as part of cash management and external liabilities management.
    - To enhance trading activity, government and IDX developing an electronic trading platform for government bonds to provide more transparency in the OTC market and improve infrastructure with government bond primary dealers.

### Monetary policy and recent drivers of core inflation (Annex I)
- Context and recent developments:
  - Core inflation rose gradually after remaining subdued in 2020-21 and exceeded BI’s midpoint of the target range for headline inflation of 3+-1 percent in 2022.
  - Non-core commodity prices reverted in the last quarter of 2022, reducing headline inflation, while core inflation continued to rise through December in year-over-year terms.
- Phillips Curve specification used (following World Economic Outlook (2016) and REO: Asia and Pacific (2022)):
  - πt^c = ρ πt−1^c + (1−ρ) πt^e + θ y˙t + φ et + δ πt^I + εt
    - πt^c: annualized growth rate of quarterly core CPI index
    - πt^e: inflation expectations measured by two-year ahead inflation expectations in Consensus Forecasts
    - y˙t: output gap (HP-filtered quarterly real output cyclical deviation)
    - et: annualized growth rate of bilateral exchange rate vs the US dollar (rupiah per US dollar)
    - πt^I: annualized growth rate of import price index in US dollars
  - Note: Import prices and inflation expectations are expressed as deviations from the lagged year-on-year growth rate of the core CPI index.
- Main findings from the counterfactual exercise:
  - The increase in core inflation during 2022 was mainly driven by rising import prices.
  - Large past output gaps from the pandemic exerted downward pressure on core inflation.
  - Depreciation of the rupiah against the US dollar led to very limited pass-through to core inflation.
  - A substantial unexplained component contributed to higher core inflation, possibly reflecting mobility restrictions and supply disruptions related to the pandemic not captured by the model, or a recent fall in persistence of core inflation.
- Cross-country comparison:
  - Core inflation in Indonesia has historically been more persistent than in other Asian economies.
  - Indonesia’s Phillips Curve slope indicates a response of core inflation to the domestic output gap stronger than in other ASEAN emerging market economies but weaker than in advanced economies such as Australia, New Zealand, and Singapore.
  - Recent reversion of core inflation toward the 3 percent midpoint in Q1 2023 after rising in H2 2022 represents a departure from historical patterns.

### Risk Assessment Matrix — key risks, likelihoods, impacts, and policy recommendations
- Global risks
  - Abrupt global slowdown or recession
    - Likelihood: Medium
    - Expected impact: High. Lower GDP growth, weaker investment and exports; decline in capital inflows, currency depreciation, tighter domestic credit conditions; higher poverty rate.
    - Policy recommendation: Use available fiscal space to provide targeted support while allowing the exchange rate to act as a shock absorber. FXI could be used to address disorderly market conditions (e.g., sharp pickup in the UIP premium), easing burden on monetary policy.
  - Systemic financial instability
    - Likelihood: Medium
    - Expected impact: Medium. Increase in capital outflows leading to large exchange rate depreciation and volatility; tighter financial conditions; upward pressures on inflation via exchange rate passthrough.
    - Policy recommendation: If monetary stance remains adequate for inflation risks, and given Indonesia’s shallow FX markets, use of FXI may be appropriate under certain circumstances.
  - Commodity price volatility
    - Likelihood: Medium
    - Expected impact: Medium. Impacts depend on direction: price rises or declines. A sharper-than-expected decline would lower growth, worsen external balance, and moderate inflation momentum faster.
    - Policy recommendation: Use fiscal and monetary policy countercyclically; progress on reforming energy subsidies; allow exchange rate to remain flexible and market-determined.
  - Deepening geo-economic fragmentation
    - Likelihood: High
    - Expected impact: Medium. Weaker exports; reduced FDI; increased uncertainty and weaker investment.
    - Policy recommendation: Accelerate structural reforms for transition to higher value-added and greener economy, including investment in education and infrastructure and reducing trade restrictions.

- Domestic risks
  - Persistently high domestic inflation due to supply disruptions and slower growth
    - Likelihood: Medium
    - Expected impact: High. Slower closing of output gap; weaker consumption and investment; decline in capital inflows.
    - Policy recommendation: Use fiscal space for targeted support to low-income households and small businesses. Monetary policy should balance risks to output, inflation and financial stability and be tightened further if inflation surprises on upside or global conditions tighten substantially; consider FXI given depreciation pressures.
  - Major natural disasters (e.g., volcanic eruptions and/or earthquakes)
    - Likelihood: Medium
    - Expected impact: Low. Regional economic disruption; slower growth; decline in portfolio inflows.
    - Policy recommendation: Prioritize expenditures to affected households and businesses. If slowdown significant, loosen monetary and fiscal policies and strengthen monitoring of corporate vulnerabilities.
  - Stronger-than-expected boost from pent-up demand or faster China recovery
    - Likelihood: Medium
    - Expected impact: Medium. Stronger private investment; faster closing of output gap; inflation stays high longer; faster recovery in bank credit.
    - Policy recommendation: Tighten monetary policy if inflation momentum picks up. Tighten macroprudential policies if credit growth accelerates, closing credit gap earlier.

*Source: IMF staff compilation from the provided content.*

### Annex II I. External Sector Assessment

### Annex II I. External Sector Assessment

### Overall Assessment
- On a preliminary basis, the external position in 2022 was broadly in line with the level implied by medium-term fundamentals and desirable policies.
- In the medium term, exchange rate flexibility and structural policies should help contain the CA deficit, keeping it in line with its norm.
- Although external financing needs appear sustainable, a strong reliance on foreign portfolio investment expose the economy to fluctuations in global financial conditions.
- The final assessment will be presented in the 2023 External Sector Report.

### Potential Policy Responses
- Maintain external balance through structural reforms to enhance productivity and facilitate post-COVID-19 sectoral adjustments, including:
  - (i) higher infrastructure investment, higher social spending to foster human capital development and strengthen the social safety net,
  - (ii) a reduction of restrictions on inward FDI and external trade,
  - (iii) promotion of greater labor market flexibility.
- Continue exchange rate flexibility to support external stability during the ongoing structural transformation of the Indonesian economy.

### Foreign Asset and Liability Position and Trajectory
- Background findings:
  - At the end of 2022, Indonesia’s NIIP stood at –19.1 percent of GDP, improving from –23.4 percent in 2021.
  - Improvement explained by a reduction of 6.4 percentage points in gross external liabilities, to 53.2 percent of GDP.
  - Gross external assets declined by 2.2 percentage points to 34.1 percent of GDP, with more than half of the decline explained by reserve assets.
  - Indonesia’s gross external debt remained moderate at 30.1 percent of GDP at end-2022, declining from 34.9 percent of GDP at the end of 2021.
  - At end-2022, 16.8 percent of external debt (or 5.1 percent of GDP) had a remaining maturity of less than one year.
- Assessment:
  - The level and composition of the NIIP and gross external debt indicate that Indonesia’s external position is sustainable and subject to limited rollover risk.
  - The relatively large dependence on foreign portfolio investment makes Indonesia vulnerable to global financial volatility, higher global interest rates, and a stronger US dollar.
  - The NIIP as a percent of GDP is projected to stabilize at current levels in the medium term, with projected small CA deficits being offset by strong nominal GDP growth.
- Key 2022 figures (% GDP):
  - NIIP: –19.1
  - Gross Assets: 34.1
  - Res. Assets: 10.4
  - Gross Liab.: 53.2
  - Debt Liab.: 30.1

### Current Account
- Background findings:
  - The CA surplus increased to 1.0 percent in 2022, from 0.3 percent in 2021.
  - Increase driven mainly by the non-oil and gas trade balance, reflecting supportive commodity prices, notably coal and palm oil.
  - Strong import growth due to resilient domestic demand and higher oil prices mitigated the increase in the CA surplus.
  - Positive impact on national savings from higher commodity terms of trade and related higher government revenue offset lower private savings and investment.
  - Expected downward correction in commodity prices in 2023 will lead to a small CA deficit from 2023 onwards, although structural policies will help maintain the CA balance close to the norm.
- Assessment and gap estimates:
  - Staff estimates a CA gap of 0.4 percent of GDP for 2022.
  - Consistent components: cyclically adjusted CA deficit of –1.5 percent of GDP; staff assessed norm of –1.1 percent of GDP; adjustors for COVID-19 (0.4 percent of GDP attributed to travel) and demographics.
  - Considering uncertainty in the estimation of the norm, the CA gap for 2022 is in the range of -0.2 to 1.0 percent of GDP.
- Key 2022 figures (% GDP):
  - CA: 1.0
  - Cycl. Adj. CA: –1.5
  - EBA Norm: –1.1
  - EBA Gap: -0.4
  - COVID 19 Adj.: 0.4
  - Other Adj.: 0.4
  - Staff Gap: 0.4

### Real Exchange Rate
- Background findings:
  - The average REER appreciated by 3.3 percent in 2022 compared to the average level in 2021 (or 0.8 percent relative to the pre COVID 2016-19 average), despite the large depreciation of the rupiah relative to the US dollar (10.3 percent).
  - Stronger commodity prices supported the rupiah against other major trading partners.
- Assessment:
  - The staff CA gap estimate of 0.4 percent of GDP implies a REER gap of –2.5 percent (applying an estimated elasticity of 0.16).
  - The REER index and level models point to 2022 REER gaps of –2.7 percent and –16.3 percent, respectively.
  - Staff assesses the REER gap in the range of –6.3 to 1.3 percent, with a midpoint of –2.5 percent.
  - Note on range: The width of the range for the REER gap takes the standard +/-3.75 percent interval applied to the midpoint of −2.5 percent, leading to a range of −6.3 to 1.3.

### Capital and Financial Accounts: Flows and Policy Measures
- Background findings:
  - 2022 marked the first year of negative net financial inflows since the GFC, amounting to –0.7 percent of GDP (after positive net financial inflows of 1.1 percent in 2021).
  - Driven mainly by local currency bond market outflows, partly offset by net equity inflows.
  - Share of nonresident holdings of IDR government bonds declined from 19 percent in 2021 to 14.4 percent in 2022, compared to a peak of 39 percent in 2019.
  - Nonresident holdings accounted for almost 4 percent of GDP in 2022.
  - Net FDI inflows declined to 1.1 percent of GDP in 2022, from 1.5 percent of GDP in 2021.
- Assessment:
  - The improvement in the CA in 2022 helped offset large portfolio investment outflows and ease the impact on the exchange rate.
  - The broadly contained CA balance going forward, and strengthened policy frameworks, including exchange rate flexibility, have helped reduce capital flow volatility.
  - Net and gross financial flows continue to be prone to periods of volatility.
  - Continued strong policies—safeguarding the fiscal position, curbing inflation, advancing financial deepening, and easing obstacles to investment—would help sustain capital inflows in the medium term.

### FX Intervention and Reserves Level
- Background findings:
  - Since mid-2013, Indonesia has had a more flexible exchange rate policy framework.
  - Official foreign reserves declined to US$137 billion in 2022, from US$145 billion in 2021, reflecting FX intervention and some negative valuation effects from the appreciation of the US dollar.
- Assessment:
  - Current level of reserves: 10.4 percent of GDP, 118 percent of the IMF’s reserve adequacy metric, and 5.9 months of prospective imports.
  - These metrics should provide a sufficient buffer against external shocks, with predetermined drains also manageable.
  - Exchange rate flexibility should continue to help absorb shocks, with foreign exchange interventions limited to addressing disorderly market conditions triggered by external pressures, or to risks of de-anchoring inflation expectations.

### Public Debt Sustainability
- Key findings:
  - General government debt is estimated to have reached 40.1 percent of GDP in 2022 from 30.6 percent in 2019, owing to the exceptional fiscal measures deployed in 2020-22 during which the fiscal rule was suspended.
  - Debt is projected to gradually decline to around 37.4 percent of GDP over the medium-term, mainly driven by a negative cumulative interest rate-growth differential.
  - Gross financing needs are expected to remain moderate, at about 5 percent of GDP over the medium-term.
  - Debt coverage is adequate, and realism tools suggest projections of key debt drivers are within norms.
- Risk assessment:
  - The new SRDSA suggests an overall low risk of sovereign stress.
  - Medium-term risks are assessed as low (in line with the mechanical signal from the SRDSA).
  - Debt Fanchart Module indicates an adequate balance of risks around the projected debt baseline.
  - For the GFN Financeability Module, a combination of low GFNs and an initial high bank exposure to the government results in moderate risks under a macro-fiscal and debt holder shock.
  - Mitigating factors include a declining share of foreign holdings of local-currency debt, and relatively large cash buffers.
  - Aggregate MTI produces a mechanical low signal.
- Policy note:
  - Over the longer run, reforms should continue to tackle risks from climate change.

### External Debt Sustainability
- Key findings:
  - External debt stood at 34.9 percent of GDP in 2021, down from 39.2 percent of GDP at the end of 2020.
  - External debt is estimated to have fallen further to 30.1 percent of GDP by end-2022, driven mainly by an improvement in the current account balance, to reach a surplus of 1.0 percent of GDP in 2022.
  - External debt is projected to gradually decline to 26 percent of GDP in the medium term in the baseline scenario.
- Sensitivity and stress tests:
  - External debt sustainability is robust to interest rate, current account, and growth shocks, but is sensitive to exchange rate shocks.
  - A one-half standard deviation widening of the current account would increase external debt to 29 percent of GDP by 2028.
  - A 30 percent exchange rate depreciation would raise external debt to 40 percent of GDP in 2024, and it would decline only slightly at the end of the forecasting horizon.
- Authorities’ views:
  - The authorities agreed with the external and public debt sustainability analysis.

*Source: IMF staff — Annex II I. External Sector Assessment (Indonesia).*

### 5. Debt consolidation across sectors:

### 5. Debt consolidation across sectors

### Coverage and recording
- Coverage in this SRDSA is General Government debt, consistent with the Government Financial Statistics Manual, 2014.
- Reporting framework items indicated: Budget. central govt; Extra-budget. funds; Social security funds; State govt.; Local govt.; Nonfin pub. corp.; Central bank; Oth. pub. fin. corp. (all shown with zero entries in the holder/issuer matrix provided).
- Notes on recording and valuation:
  - Stock of arrears could be used as a proxy in the absence of accrual data on other accounts payable.
  - Insurance, Pension, and Standardized Guarantee Schemes typically include government employee pension liabilities.
  - Basis of recording may include accrual recording, commitment basis, due for payment, etc.
  - Nominal value at any moment in time is the amount the debtor owes to the creditor. It reflects the value of the instrument at creation and subsequent economic flows (such as transactions, exchange rate, and other valuation changes other than market price changes, and other volume changes).
  - The face value of a debt instrument is the undiscounted amount of principal to be paid at (or before) maturity.
  - Market value of debt instruments is the value as if they were acquired in market transactions on the balance sheet reporting date (reference date). Only traded debt securities have observed market values.

### Public debt structure: current composition and trends
- Perimeter shown throughout the public-debt charts: general government.
- Commentary: The currency composition and maturity profile of public debt are expected to remain about the same over the projection horizon.
- Observed shifts:
  - Domestic banks and the Central Bank (BI) increased their share of public debt holdings during the Covid years.
- Debt composition indicators (labels from figures; percent of GDP):
  - Debt by currency categories shown: Foreign currency; Local currency; Local-linked.
  - Public debt by holder categories shown: External private creditors; External official creditors; Domestic other creditors; Domestic commercial banks; Domestic central bank.
  - Governing law split for 2022 shown: Domestic law; Foreign law ex. multilateral; Multilateral.
  - Debt by instruments: Marketable debt; Nonmarketable debt.
  - Public debt by maturity buckets: ≤ 1 year; 1-5 years; > 5 years.
- Residual maturity: 6. years (as labeled in figure).

### Baseline scenario: public debt dynamics and macro assumptions
- Public debt levels (percent of GDP):
  - Actual 2022: 40.1
  - 2023: 39.3
  - 2024: 39.0
  - 2025: 38.7
  - 2026: 38.3
  - 2027: 37.9
  - 2028: 37.4
  - 2029: 37.0
  - 2030: 36.5
  - 2031: 36.1
  - 2032: 35.6
- Change in public debt (percent of GDP): -1.0; -0.8; -0.4; -0.3; -0.4; -0.4; -0.5; -0.4; -0.5; -0.4; -0.4 (for 2022–2032 respectively).
- Contribution of identified flows (percent of GDP): -2.0; -0.5; -0.2; -0.2; -0.3; -0.3; -0.4; -0.4; -0.4; -0.4; -0.4.
- Primary deficit (percent of GDP): 0.4; 0.6; 0.5; 0.3; 0.1; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0 (2022–2032).
- Noninterest revenues (percent of GDP): 15.2; 14.5; 14.5; 14.6; 14.8; 14.9; 15.0; 15.0; 15.0; 15.0; 15.0 (2022–2032).
- Noninterest expenditures (percent of GDP): 15.6; 15.1; 15.0; 14.9; 15.0; 15.0; 15.0; 15.0; 15.0; 15.0; 15.0 (2022–2032).
- Automatic debt dynamics (percent of GDP): -2.7; -1.2; -0.9; -0.7; -0.6; -0.5; -0.5; -0.5; -0.5; -0.5; -0.5 (2022–2032).
- Components of automatic debt dynamics:
  - Real interest rate and relative inflation (percent): -0.7; 0.7; 1.0; 1.2; 1.2; 1.3; 1.3; 1.2; 1.2; 1.2; 1.3.
  - Real interest rate (percent): -1.4; 0.5; 0.9; 1.1; 1.2; 1.2; 1.2; 1.2; 1.2; 1.2; 1.2.
  - Relative inflation (percent): 0.7; 0.2; 0.1; 0.1; 0.1; 0.0; 0.0; 0.1; 0.0; 0.0; 0.0.
  - Real growth rate (percent): -2.1; -1.9; -1.9; -1.8; -1.8; -1.8; -1.8; -1.8; -1.8; -1.7; -1.7 (labels indicate formatting issues but values preserved as shown).
- Other identified flows (percent of GDP): 0.3; 0.2; 0.2; 0.2; 0.1; 0.1; 0.1; 0.1; 0.1; 0.1; 0.1.
- Contingent liabilities (percent of GDP): 0.0 for all years 2022–2032.
- Other transactions (percent of GDP): 0.3; 0.2; 0.2; 0.2; 0.1; 0.1; 0.1; 0.1; 0.1; 0.1; 0.1.
- Contribution of residual (percent of GDP): 1.0; -0.3; -0.1; -0.1; -0.1; -0.1; -0.1; 0.0; -0.1; -0.1; -0.1.
- Gross financing needs (percent of GDP): 4.6; 5.2; 5.4; 4.3; 4.9; 5.2; 5.0; 4.7; 4.4; 4.2; (incomplete row formatting in source preserved).
- Of which: debt service (percent of GDP): 4.2; 4.6; 5.0; 4.9; 4.8; 4.6; 5.2; 5.0; 4.7; 4.4; 4.2.
- Gross financing needs split:
  - Local currency (percent of GDP): 3.0; 3.8; 3.8; 3.7; 3.7; 3.5; 4.0; 3.9; 3.7; 3.4; 3.3.
  - Foreign currency (percent of GDP): 1.3; 0.8; 1.2; 1.3; 1.3; 1.1; 1.1; 1.2; 1.1; 1.1; 1.0; 0.9 (note: sequence in table spans years; preserved as shown).
- Memo macro assumptions:
  - Real GDP growth (percent): 5.3; 5.0; 5.1; 5.0; 5.0; 5.0; 5.0; 5.0; 5.0; 5.0; 5.0.
  - Inflation (GDP deflator; percent): 9.6; 4.4; 3.0; 2.7; 2.6; 2.5; 2.5; 2.5; 2.4; 2.4; 2.3.
  - Nominal GDP growth (percent): 15.4; 9.6; 8.2; 7.8; 7.7; 7.5; 7.6; 7.6; 7.6; 7.6; 7.6.
  - Effective interest rate (percent): 5.5; 5.6; 5.6; 5.8; 5.9; 5.9; 6.0; 6.0; 6.0; 5.9; 5.9 (preserved ordering).
- Commentary: Public debt is expected to decrease gradually from 40.1 percent of GDP in 2022 to 37.4 percent of GDP over the medium-term, due to a favorable interest-growth differential. Gross financing needs are expected to remain manageable around 5 percent of GDP over the medium-term.

### Realism of baseline assumptions
- Forecast Track Record assessed for t+1, t+3, t+5 horizons across comparator groups for public debt to GDP, primary deficit, r - g, and exchange rate depreciation.
- Commentary: Realism analysis does not point to major concerns. Forecast errors show some signs of past optimism in the underlying debt creating flows, but this is largely influenced by unexpected outcomes during the Covid years.
- The projected 3-year fiscal adjustment and 3-year debt reduction are well within norms.
- The real GDP growth path is in line with the assumed fiscal adjustment and potential growth.
- Distributional metrics highlighted:
  - 3-year adjustment above 75th percentile: (2 ppts of GDP) with percentile rank 51.
  - 3-year reduction above 75th percentile: (5.9 ppts of GDP) with percentile rank 63.5.

### Medium-term analysis and risk indicators
- Debt Fanchart & GFN Financeability metrics (values preserved as presented):
  - Fanchart width: 37.2
  - Probability of debt not stabilizing (pct): 26.2; 0.2 (two values shown in source figure).
  - Terminal debt level x institutions index: 18.9; 0.4.
  - Debt fanchart index: ...1.2 (formatting preserved).
  - Average GFN in baseline: 5.1; 1.7.
  - Bank claims on government (pct bank assets): 13.9; 4.5.
  - Change in claims on govt. in stress (pct bank assets): 9.0; 3.0.
  - GFN financeability index: ...9.3.
- MTI outcome:
  - Commentary: The Debt Fanchart Module indicates an adequate balance of risks around the projected debt baseline.
  - For the GFN Financeability Module, a combination of low GFNs and an initial high bank exposure to the government result in moderate risks under a macro-fiscal and debt holder shock.
  - Mitigating factors include a declining share of foreign holdings of local-currency debt, and relatively large cash buffers.
  - Taken together, the MTI produces a mechanical "low" signal.
- Probability metrics:
  - Prob. of missed crisis, 2023-2028 (if stress not predicted): 9.1 pct.
  - Prob. of false alarm, 2023-2028 (if stress predicted): 48.9 pct.

### Long-term risks and climate adaptation
- Relevancy of long-term factors listed: Climate change; Demographics; Long-term amortization; Natural resource production; Long-term public debt projection.
- Commentary on climate adaptation costs:
  - Adaptation cost estimates (from Aligishiev, Bellon and Massetti (2022) and ESCAP (2019)) focus on two types of adaptation investments: strengthening physical assets and investing in coastal protection.
  - In the case of Indonesia, these amount to about 0.8 percent of GDP per year over the long-term.
- Policy implication: Fiscal reforms to create fiscal space to finance adaptation needs will be critical over the longer run for Indonesia.
- Long-term projections shown:
  - Long-term gross financing needs projection with scenarios: Baseline; With extra pension/health exp.; Extended baseline; With climate adaptation (standardized scenario).
  - GFN-to-GDP ratio and Total public debt-to-GDP ratio presented in figure form (percent of GDP labels preserved in source).

### External debt sustainability (bound tests and table summary)
- Baseline: External debt (percent of GDP) and projections:
  - 2018: 36.0
  - 2019: 36.1
  - 2020: 39.2
  - 2021: 34.9
  - 2022: 30.1
  - 2023: 29.0
  - 2024: 27.8
  - 2025: 27.1
  - 2026: 26.4
  - 2027: 25.8
  - 2028: 25.3
  - D (deviation row): -2.4 (as presented).
- Change in external debt (percent of GDP): 1.3; 0.0; 3.2; -4.4; -4.8; -1.1; -1.2; -0.7; -0.7; -0.6; -0.5 (2018–2028).
- Identified external debt-creating flows (4+8+9) (percent of GDP): 0.8; -1.5; 1.2; -6.0; -6.1; -2.6; -2.1; -1.7; -1.3; -1.2; -1.1.
- Current account deficit, excluding interest payments (percent of GDP): 1.9; 1.6; -1.0; -1.6; -2.1; -0.8; -0.2; 0.1; 0.5; 0.6; 0.6.
- Deficit in balance of goods and services (percent of GDP): -0.6; -0.4; 1.7; 2.5; 3.2; 1.9; 1.5; 1.2; 0.8; 0.8; 0.8.
- Exports (percent of GDP): 20.3; 17.9; 16.8; 20.8; 24.0; 21.8; 22.2; 22.4; 22.5; 22.5; 22.5.
- Imports (percent of GDP): -21.0; -18.2; -15.0; -18.3; -20.7; -19.9; -20.7; -21.3; -21.6; -21.7; -21.6.
- Net nondebt creating capital inflows (negative) (percent of GDP): -0.8; -1.8; -0.9; -1.7; -1.4; -1.5; -1.5; -1.5; -1.5; -1.5; -1.4.
- Automatic debt dynamics 1/ (percent of GDP): -0.2; -1.3; 3.1; -2.8; -2.5; -0.4; -0.4; -0.4; -0.3; -0.3; -0.3.
  - Contribution from nominal interest rate (percent): 1.1; 1.1; 1.4; 1.3; 1.1; 1.0; 1.0; 0.9; 0.9; 0.9; 0.9.
  - Contribution from real GDP growth (percent): -1.7; -1.7; 0.8; -1.3; -1.7; -1.4; -1.4; -1.3; -1.2; -1.2; -1.2.
  - Contribution from price and exchange rate changes 2/: 0.5; -0.7; 0.9; -2.7; -2.0; .................. (formatting preserved).
- Residual, including change in gross foreign assets (2-3) (percent of GDP): 0.5; 1.6; 2.0; 1.7; 1.3; 1.6; 0.9; 1.0; 0.6; 0.6; 0.6.
- External debt-to-exports ratio (percent): 177.1; 201.7; 233.7; 167.7; 125.6; 133.0; 125.2; 120.6; 117.5; 114.6; 112.4.
- Gross external financing need (in billions of U.S. dollars) 4/: 85.5; 90.5; 67.7; 61.6; 46.2; 70.5; 79.9; 90.6; 104.7; 114.7; 124.8.
- Gross external financing need (percent of GDP): 8.2; 8.1; 6.4; 5.2; 3.5; 5.1; 5.3; 5.6; 5.9; 6.0; 6.1.
- Scenario with key variables at their historical averages (10-Year historical average key variables): 29.0; 29.9; 30.8; 31.3; 31.8; 32.4; -1.7 (formatting preserved as in source table).
- Key macroeconomic assumptions underlying baseline (selection of series preserved):
  - Real GDP growth (percent): 5.2; 5.0; -2.1; 3.7; 5.3; 4.3; 2.3; 5.0; 5.1; 5.0; 5.0; 5.0; 5.0.
  - GDP deflator in U.S. dollars (change in percent): -2.4; 2.2; -3.1; 7.8; 5.4; -0.4; 5.6; 0.6; 3.2; 3.0; 2.8; 2.8; 2.8.
  - Nominal external interest rate (percent): 3.2; 3.4; 3.6; 3.6; 3.6; 3.1; 0.5; 3.6; 3.6; 3.6; 3.6; 3.6; 3.6.
  - Growth of exports (U.S. dollar terms, percent): 9.1; -5.6; -10.8; 38.3; 28.0; 5.3; 17.2; -3.9; 10.2; 9.4; 8.0; 8.1; 7.8.
  - Growth of imports (U.S. dollar terms, percent): 19.6; -6.6; -21.7; 36.1; 25.6; 4.1; 19.0; 1.4; 12.8; 11.0; 9.6; 8.2; 7.7.
  - Current account balance, excluding interest payments (percent of GDP): -1.9; -1.6; 1.0; 1.6; 2.1; -0.6; 1.6; 0.8; 0.2; -0.1; -0.5; -0.6; -0.6.
  - Net nondebt creating capital inflows (percent of GDP): 0.8; 1.8; 0.9; 1.7; 1.4; 1.4; 0.4; 1.5; 1.5; 1.5; 1.5; 1.5; 1.4.
- Footnotes (preserved references to formulas and definitions as in source):
  - 1/ Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in U.S. dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.
  - 2/ The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation.
  - 3/ For projection, line includes the impact of price and exchange rate changes.
  - 4/ Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.
  - 5/ The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.
  - 6/ Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels.

### Annex V: Integrated Policy Framework (IPF) application and FX intervention (FXI)
- Purpose of Annex: Use the IMF's Integrated Policy Framework (IPF) and model-based scenario analysis to evaluate policy options, particularly the potential role for FXI under adverse external shocks.
- Key findings on FXI suitability:
  - Indonesia’s shallow FX markets is the main consideration for using FXI in response to external financial shocks that trigger a destabilizing increase in risk premia during stress periods.
  - FXI would alleviate the burden on monetary policy by reducing the extent of exchange rate depreciation, thus moderating the pass through to inflation.
  - Given the lack of significant frictions related to FX balance sheet exposures and well anchored inflation expectations, the case for using FXI becomes stronger as the size of the shock increases.
- Historical context:
  - Historically, BI’s use of FXI appears to have been consistent with periods of severe FX market stress, with sharp spikes in risk premia.
  - The size of FXI is estimated to have declined gradually over time, consistent with progress in FX market deepening, greater monetary policy credibility, and the introduction of regulations that limit FX exposures.
  - BI does not publish FXI data; this annex relies on the intervention database compiled by Adler and others (2021).
- The IPF’s three “use cases” for FXI:
  a. To smooth destabilizing premia related to arbitrage frictions in shallow FX markets: sudden large capital outflows can cause sharp changes in FX market premia (e.g., UIP premia); FXI aimed at reducing these premia could help achieve domestic and external balance.
  b. To counter financial stability risks from balance sheet currency mismatches: large exchange rate depreciations increase debt service burdens for borrowers with unhedged FX exposures and can propagate stress to the banking system and capital flows.
  c. To preserve price stability when large exchange rate depreciation can de-anchor inflation expectations: FXI is more effective in economies with relatively high exchange rate passthrough and weakly anchored inflation expectations.
- Assessment for Indonesia:
  - Indonesia does not appear to face significant frictions related to unhedged FX balance sheet exposures and has well anchored inflation expectations.
  - Policy and regulatory developments:
    - Hedging and liquidity requirements for non-bank corporations introduced in 2014 and strengthened in 2016 significantly mitigated financial stability risks associated with FX maturity and balance sheet mismatches.
  - External corporate debt as share of GDP: declined from a peak of 16.8 percent in 2015Q3 to about 10 percent in 2022Q2.
  - Staff’s estimate of the rate of exchange rate passthrough for Indonesia: a modest 0.1 percent.
  - Inflation targeting framework history: BI adopted inflation targeting in July 2005, with a gradual reduction of BI’s inflation target band from 5-7 percent in 2005 to 2-4 percent in 2023.
  - Inflation expectations have trended down, tracking closer to the inflation target band in later years.

*Source: 1idnea2023002 - 5. Debt consolidation across sectors (extracted from the provided IMF PDF content).*

### 3.      But Indonesia’s FX market remains shallow, despite recent progress in market

### 3.      But Indonesia’s FX market remains shallow, despite recent progress in market

### FX market deepening: recent progress and remaining gaps
- Several indicators of FX market depth have steadily improved recently, reflecting a series of market reforms aimed at financial market deepening during 2014‒2016.
- Average 3-month UIP premium:
  - 3 percent during 2008-2012
  - 1.7 percent during 2018-2021
- Bid-ask spread in the IDR/USD market:
  - average of 22.5 bps during 2008-2012
  - 7.3 percent during 2021-2022
- Regulation 16/21/PBI/2014 (hedging and liquidity requirements for non-bank corporates):
  - minimum hedging ratio initially 20 percent for negative differences between maturing foreign currency assets and foreign currency liabilities in next three months and next three to six months; increased to 25 percent since 2016
  - BI report: about three quarters of “the 2,064 nonbank corporations with external debt met the minimum hedging ratio for foreign currency obligations maturing till the next six months” as of end-2020Q1
  - minimum FX liquidity ratio: hold liquid foreign currency assets to meet FX liabilities with maturities less than three months; ratio set at a minimum of 70 percent
  - prudential regulations limit banks’ net open FX positions
  - hedging and liquidity requirements assessed as both capital flow management measures as well as macroprudential policy measures (CFM/MPMs) under the Fund’s Institutional View
- New instruments introduced:
  - call-spread options introduced in 2016 as an additional hedging instrument

- Remaining gaps (international comparison):
  - Indonesia’s volume of FX instrument turnovers accounted for 0.4 percent of the global FX market turnovers as of 2019
  - Comparison examples: 6.8 percent for Australia-AUD and 1.7 percent for Mexico-MXN
  - Bid-ask spread in the FX market for Indonesia, normalized in percent of the ask price: 0.16 percent
    - wider than Malaysia and the Philippines
    - narrower than Mexico, Poland, and Thailand

### Use of FX interventions (FXI) by Bank Indonesia (BI)
- BI’s policy framework and mandate:
  - “Flexible Inflation Targeting” framework: primary objective controlling inflation with flexibility to support exchange rate and financial stability
  - legal mandate to safeguard rupiah stability within a freely floating exchange rate regime
  - BI adopts multiple policy tools—including FXI and macroprudential measures—to achieve objectives and to safeguard and develop payment and financial systems
- BI’s “triple intervention” strategy (three measures):
  1. selling/buying FX in the spot market
  2. selling/buying FX both in the spot and the domestic non-deliverable forward (DNDF) markets
  3. selling/buying FX in the spot market while buying/selling local currency-denominated government bonds from the secondary market
- Data limitations:
  - BI does not publish FXI data; analysis relies on intervention database compiled by Adler and others (2021), providing estimated spot and derivative transactions conducted by central banks for intervention purposes
- Historical patterns of FXI:
  - BI’s use of FXIs concentrated during periods of severe FX market stress: global financial crisis (2008), the taper tantrum (2013), EM stress episode (2018), early stages of the pandemic (March 2020), and 2022 Fed hiking episode
  - Large monthly FX sales (“large FXIs”) coincide with periods of higher UIP premia:
    - 3-month UIP premium averaged 3.1 percent in crisis months vs. 2.3 percent in normal periods
  - Average annual FX sales amount:
    - 2.3 percent of GDP during 2008-2015
    - 1.2 percent during 2016-August 2022
  - Interpretation: decline could reflect favorable financial market conditions, fewer episodes of large exchange rate volatility, and progress in improving FX market depth

### Case studies of recent interventions and market frictions
- March 2020 intervention (pandemic onset):
  - context: global financial market panic; sudden dry-up of FX market liquidity; sharp pickup in UIP premia; widening bid-ask spread
  - IDR/USD exchange rate depreciated by 13.9 percent in March
  - exchange rate volatility more than doubled
  - driven by a major portfolio outflow from the local government bond market of about US$8 billion
  - intervention involved FX transactions both in the FX spot and DNDF markets—the first time DNDF used for large-scale interventions
  - outcome: March intervention followed by a relatively larger and more persistent decline in UIP premia and exchange rate volatility compared with July 2022 intervention
- July 2022 intervention (Fed tightening):
  - context: repricing of risk assets; depreciation of rupiah and other EM currencies in risk-off environment
  - IDR/USD depreciation in run up to July intervention: about 2.8 percent during April‒June; remained virtually unchanged in July
  - signs of frictions (increase in UIP premia, widening bid-ask spread) were less evident than in March 2020
  - both interventions similar in size (about 0.5 percent of GDP) but differed in market conditions and post-intervention dynamics
- Definition note:
  - “large FXIs” defined as episodes of monthly FX sales, through both spot and derivative instruments, larger than one standard deviation of the estimated FXI series from Adler and others (2021) over January 2008–August 2022, equivalent to about 0.4 percent of GDP
- Caution on evaluating intervention effectiveness:
  - effects can be very short-lived and materialize ex-ante; low-frequency (quarterly) ex-post comparisons may be uninformative without comprehensive assessment of domestic and global market conditions

### Model-based analysis: structure and calibration
- Model used:
  - micro-founded New Keynesian open-economy model (linearized version of Adrian et al (2021) IPF model), extended to include a supply side, commodities, and a more elaborate fiscal sector
- Policy instruments assumed:
  - policy rate (it) following a Taylor-like rule (Equation A.1) with coefficients estimated jointly (coefficients shown in square brackets):
    - [0.87] on interest rate smoothing (it−1)
    - [1.24] on expected four-quarter change in core CPI inflation around its target (π^c_{t+4|t})
    - [0.13] on output gap (y_t)
  - FXI (ff_t) defined as change in central bank reserves (Equation A.3) and governed by a rule (Equation A.2) where FXI is proportional to the size of nominal exchange rate depreciation (Δs_t>0) when γ_{Δs}>0.34F
    - parameters shown in Equation A.2: [0.39], [0.02], [0.5]
    - error correction term includes −ρ_{ff,2} b_{M,t−1} to ensure reserves are rebuilt over time and steady state with positive reserves
  - reserves change identity: ff_t = b_{M,t} − b_{M,t−1} (Equation A.3)
  - temporary deviations from rules allowed as policy shocks
- Fiscal sector:
  - includes targeted transfers, consumption and labor taxes, and energy subsidies
  - introduces rule-of-thumb (Keynesian) agents, breaking Ricardian equivalence; Keynesian households have no assets and do not optimize labor supply, so fiscal transfers directly affect consumption and aggregate demand
- Market frictions incorporated:
  - Greater exchange rate passthrough:
    - depreciation raises imported goods prices and via wage channel raises domestic inflation
    - wage formation follows Erceg et al. (2000) Calvo-style with optimizing and non-optimizing wage setters (Equation A.4)
    - model-implied exchange rate passthrough to core inflation (year-over-year) is about 0.1 percentage point by the end of the first year
  - Shallow FX markets and risk-bearing limits:
    - risk-augmented UIP (Equation A.6) includes a term (1+m)Γ capturing sensitivity of exchange rate to capital flow fluctuations and the effectiveness of FXI
    - when flows intermediated by investors rise (b_F,t up), depreciating pressure on exchange rate (q_{p,t} rises)
    - shallower FX markets (larger Γ) imply greater exchange rate sensitivity to flows and greater effectiveness of FXI in affecting exchange rate

### Policy response under the illustrative downside scenario
- Downside scenario assumptions:
  - worsening global outlook via global supply shocks → higher inflation than baseline → major advanced economy central banks hike policy rates further → tightening global financial conditions and abrupt repricing of risky assets
  - representative foreign economy hikes policy rate by around 80 basis points to fight a nearly 1 percentage point increase in core inflation, leading to foreign output decline of about 1 percent lower than the baseline
  - a non-fundamental “risk-off” shock modeled as roughly one standard deviation shock to Indonesia’s UIP premium, amplified by shallow FX markets
- Four illustrative policy scenarios evaluated (macroeconomic outcomes compared):
  1. Monetary policy tightening only (blue line):
     - policy rate hike: 90 bps
     - core inflation rises by 1.2 percent
     - exchange rate depreciates by 5 percent
     - private domestic demand contracts sharply; imports contract sharply
     - exports decline initially then improve; net exports improve
     - total output declines by 0.35 percent compared to baseline
     - note: a more aggressive interest rate hike would yield even lower output
  2. Delayed rate hike, FXI only (black dashed line):
     - central bank delays interest rate hike by 8 quarters and uses FXI of about 2 percent of GDP to respond
     - near-term inflation outcome similar by reducing initial exchange rate depreciation by half relative to scenario 1
     - inflation expectations rise sufficiently to induce decline in real interest rate → stimulates domestic demand
     - output higher than scenario 1 by about 1 percent
     - cost: sustained use of FXI reduces reserves and its scope to mitigate persistent inflationary shocks
  3. Interest rate and FXI used together (red dotted line):
     - exchange rate depreciates less than in scenario 2 due to higher interest rates
     - smaller depreciation → smaller inflation increase (about 0.9 percentage point)
     - less aggressive monetary response required (55 basis points vs. 90 basis points in scenario 1)
     - mitigates financial stability risks and increase in debt-at-risk; reduces inflation by 0.3 percentage points relative to scenario 1
     - output slightly lower than scenario 1 by about 0.1 percentage point because relatively stronger domestic demand is more than offset by weaker net exports
  4. Combined monetary, FXI, and fiscal stimulus (green dashed line):
     - addition of targeted transfers to vulnerable households of about 0.5 percent of GDP for two years
     - mitigates decline in output and reduces consumption inequality
     - cost: marginally higher interest rate and a small increase in government debt (of 1 percent of GDP in five years)
- Summary of policy trade-offs and conclusions:
  - coordinated use of monetary policy, FXI, and fiscal policy (scenario 4) achieves more exchange rate and price stability with least disruption to private domestic demand
  - some degree of exchange rate flexibility is desirable across scenarios, reflecting foreign interest rate shocks and widening interest rate differentials
  - FXI in response to non-fundamental risk-off shock alleviates burden on monetary policy by limiting depreciation and passthrough to inflation; using interest rates alone to achieve similar inflation reduction would require a much larger output sacrifice
    - illustrative comparison: to reduce inflation rise from 1.2 percent to 0.9 percent using interest rate alone, output sacrifice would be 0.7 percent (almost twice the 0.4 percent sacrifice when FXI is also used)
  - benefits and costs of FXI depend critically on initial conditions, nature of shocks, and observed frictions (level of inflation, output gap, stock of usable reserves, degree of financial stability risks related to higher interest rates)

*Source: IMF chapter "3.      But Indonesia’s FX market remains shallow, despite recent progress in market" (content unit 1idnea2023002).*

### 14.      Under large shocks, price and financial stability considerations could become

### 14.      Under large shocks, price and financial stability considerations could become

### Inflation expectations and exchange rate passthrough
- Inflation expectations in Indonesia have remained well anchored, but a very large exchange rate depreciation could de-anchor inflation expectations.
- Existing studies find threshold effects for exchange rate shocks: Caselli and Roitman (2019) find passthrough becomes nonlinear when the exchange rate depreciates by more than 24 percent in a sample of emerging markets.
- Historical Indonesian episodes since 2000 with large depreciations:
  - 2000-01, 2008-09, and 2013-14.
  - During these episodes inflation increased markedly and the exchange rate depreciated by about 27-64 percent.
  - In 2000-01 and 2008-09 there were indications of higher risk of inflation expectations getting de-anchored:
    - 2000-01: dispersion of market inflation forecasts increased significantly.
    - 2008-09: smaller dispersion of market forecasts, but long-term inflation expectations (2-year ahead Consensus forecasts) deviated from the BI’s inflation target band.
- Model experiment findings:
  - If the exchange rate passthrough coefficient is assumed twice as high as model estimates (through a steeper import price Phillips curve) and there is a larger and more persistent exchange rate depreciation (of about 10 percent) due to larger U.S. monetary policy tightening, inflation rises persistently above the inflation target band.
  - Under that scenario, risks of de-anchoring of inflation expectations become much higher and the required monetary policy response is stronger.

### Balance sheet effects
- A large exchange rate depreciation could have non-linear impacts on private sector balance sheets because minimum hedging requirements apply only to 25 percent of short-term net exposures for the corporate sector.
- The impact depends on:
  - Size of unhedged exposures.
  - Persistence of the exchange rate depreciation (hedging requirements apply only to near-term exposures).
  - Whether exposures are systemic.
- Lack of information on hedging limits assessment of potential non-linearities and the size of shocks that would warrant FXI to mitigate financial stability risks.
- Offsetting factors:
  - Decline in total FX exposures since the Asian Financial Crisis.
  - Strong capital buffers in the banking sector.
  - These suggest a high threshold for non-linear balance sheet effects to kick in.

### FX intervention (FXI) effectiveness and constraints
- Model estimate of FXI effectiveness aligns with Blanchard and others (2015) for a sample of EMs:
  - A 1 percent of GDP FX intervention leads to about 1 percent movement in the exchange rate on average.
- Effectiveness could be higher for Indonesia given relatively shallow FX markets but large uncertainties surround these estimates due to:
  - Unavailability of historical FXI data.
  - Low frequency (quarterly) information used in estimation.
- FXI effectiveness may be time-varying:
  - Possibly more effective under stress episodes when interventions alleviate pressures as markets become shallower.
  - In other situations, moving the exchange rate meaningfully may require large amounts of reserves, making FXI very costly or infeasible if reserves are limited.
- Risks and longer-term costs of using FXI:
  - Impeding financial market development.
  - Encouraging excessive buildup of foreign currency debt.
  - Using FX sales in a risk-off episode may risk large and potentially destabilizing losses of reserves if risk-off sentiment is more persistent than anticipated, or a large loss of reserves triggers further repricing of risk premium.

### Concluding model considerations and limits
- The linearized model used in scenario analysis:
  - Does not capture non-linear or threshold effects.
  - Assumes away the possibility of hitting the external debt limit discussed in Adrian et al (2021).
- While Indonesia’s FX currency mismatch is relatively modest, severe currency market stress and a large exchange rate depreciation could have adverse balance sheet effects (e.g., due to partial hedging) and affect policy tradeoffs.
- The decision to use FXI must weigh potential near-term stabilization benefits against non-negligible longer-term costs and reserve-loss risks.

### Practical challenges in real time identification of shocks
- Distinguishing between real (fundamental) shocks and financial (non-fundamental) shocks can be difficult in real time.
  - FXI would not be justified in response to a fundamental shock from normal demand- and supply-side conditions.
  - FXI may be warranted to counter a non-fundamental UIP premium shock depending on size and underlying frictions.
- Shocks are often correlated and hard to assess in real time, complicating the determination of optimal exchange rate adjustment.
- Some financial shocks can materialize unexpectedly (e.g., sharp spike in intraday FX volatility), requiring intervention even before comprehensive assessment.

### Annex VI — Global Bank Stress Testing Tool: Application to Indonesia (selected findings)
- GST coverage and methodology:
  - Excel-based solvency stress test using publicly available, individual bank data in 33 banking systems.
  - Covers 14 largest banks in Indonesia, roughly 75 percent of commercial banking sector assets.
  - Methodology links bank income and expense dynamics to key macro and financial variables via country-specific panel econometric models.
- Scenario construction (baseline and adverse):
  - In the adverse scenario:
    - Inflation surprises on the upside prompting more aggressive monetary policy.
    - Central bank tightens monetary policy with an additional 200bps hike in the policy rate relative to the baseline in 2023.
    - GDP growth slows sharply to 2 percent.
    - Long-term interest rates rise by 250bps higher than the baseline as term premia increases.
    - Corporate bond spreads widen.
    - Stock market index sees no growth.
- GST aggregate results:
  - Compared to baseline, CET1 ratio would fall by 4.3 percentage points due to higher loan impairments, lower net interest income, and reduction in other comprehensive income.
  - Some mitigating factors (e.g., lower dividend payouts) could lessen capital decline.
  - Reduction in aggregate bank capital is likely to be around 2.2 percentage points in the adverse scenario.
  - Impact across individual banks: reduction in CET1 ratio ranges from -8.9 to -0.4 percentage points.
- Scenario assumptions and exact comparisons (baseline / adverse / difference):
  - Real GDP growth: 5.0 / 2.0 / -3.0
  - Unemployment rate: 5.3 / 6.8 / 1.5
  - Short-term interest rate: 6.2 / 8.2 / 2.0
  - Long-term interest rate: 7.8 / 10.3 / 2.5
  - Stock price growth: 10.0 / 0.0 / -10.0
  - Corporate bond spreads: 5.6 / 8.6 / 3.0
  - VIX: 30.0 / 35.0 / 5.0
- GST limitations:
  - Does not explicitly capture sector-specific policy effects on banks’ balance sheets due to lack of granularity.
  - Does not account for endogenous policy actions likely to be introduced to mitigate severe shocks (e.g., regulatory forbearance, delayed loss recognition, loan restructuring).

*Source: 1idnea2023002 - 14.      Under large shocks, price and financial stability considerations could become*

### 2000. Indonesia uses the SDDS flexibility options for the periodicity

### 1idnea2023002 - 2000. Indonesia uses the SDDS flexibility options for the periodicity

### SDDS flexibility and data reporting
- Indonesia uses the SDDS flexibility options for the periodicity and timeliness of the labor market indicators (employment, unemployment, and wages/earnings) and a timeliness flexibility option for general government operations data.
- Indonesia’s latest SDDS Annual Observance Report is available on the Dissemination Standards Bulletin Board.
- A Report on Observance of Standards and Codes—Data Module; Response by the Authorities, and Detailed Assessments Using the Data Quality Assessment Framework was published in July 2005.

### Table of Common Indicators Required for Surveillance (As of May 2, 2023) — key entries and frequencies
- Exchange rates: Date of Latest Observation 5/2/2023; Date Received 5/2/2023; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D.
- International reserve assets and reserve liabilities of the monetary authorities: Date of Latest Observation 2/2023; Date Received 3/2023; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Reserve/base money: Date of Latest Observation 2/2023; Date Received 3/2023; Frequency of Data W/M; Frequency of Reporting W/M; Frequency of Publication W/M.
- Broad money: Date of Latest Observation 2/2023; Date Received 3/2023; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Central bank balance sheet: Date of Latest Observation 2/2023; Date Received 3/2023; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Consolidated balance sheet of the banking system: Date of Latest Observation 2/2023; Date Received 4/2023; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Interest rates: Date of Latest Observation 5/2/2023; Date Received 5/2/2023; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D.
- Consumer price index: Date of Latest Observation 4/2023; Date Received 5/2023; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Revenue, expenditure, balance and composition of financing—general government: Date of Latest Observation 2021; Date Received 10/2022; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A.
- Revenue, expenditure, balance and composition of financing—central government: Date of Latest Observation 3/2023; Date Received 4/2023; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Stocks of central government and central government–guaranteed debt: Date of Latest Observation Q4/2022; Date Received 2/2023; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
- External current account balance: Date of Latest Observation Q4/2022; Date Received 2/2023; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
- Exports and imports of goods and services: Date of Latest Observation Q4/2022; Date Received 2/2023; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
- GDP/GNP: Date of Latest Observation Q4/2022; Date Received 2/2023; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
- Gross external debt: Date of Latest Observation Q4/2022; Date Received 3/2023; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
- International investment position: Date of Latest Observation Q4/2022; Date Received 3/2023; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.

### Statement and macroeconomic assessment (Statement by Rosemary Lim et al., May 22, 2023) — key findings
- 2022 GDP growth: 5.31% (year-on-year), the highest since 2013; returned to the pre-pandemic growth path.
- 2022 inflation: 5.51% (year-on-year); higher than the upper-bound target range but on a significant downward path.
- External stability supported by a surplus BOP and adequate international reserve position.
- Financial system: remained sound with sustained resilience and strong credit growth.
- Digital economy and finance: rapid development contributed to strong economic recovery.

### Outlook and projections
- 2023 GDP growth: predicted with an upward bias towards the top end of the range of 4.5-5.3%, with potential gains from improving domestic demand and solid exports.
- Q1 2023 GDP growth: 5.03%.
- Inflation expectation: expected to descend within the 3.0%±1% target range.
- Current account projection: projected to remain in the range of a 0.4% surplus to a 0.4% deficit of GDP.
- Capital and financial account: expected to record a larger surplus.
- Credit growth projection: projected to remain at the 10-12% (year-on-year) range.
- Medium-term: economy expected to improve further and return to its long-term trajectory, contingent on progressing structural reform and acceleration of digitalization.

### Policy responses — coordination and main components
- Authorities strengthened fiscal-monetary policy synergy during the COVID-19 pandemic through three types of Joint Agreement mechanisms between Minister of Finance and Governor of Bank Indonesia (BI).
- Five interrelated components of the policy mix:
  - (i) fiscal and monetary coordination;
  - (ii) accelerate transformation of the financial sector;
  - (iii) accelerate transformation of the real sector;
  - (iv) digitalization of the economy and finance;
  - (v) green economy and finance.

### Fiscal policy — outcomes and 2023 design
- 2022 fiscal deficit: 2.38% of GDP (preliminary outturn), lower than target of 4.85% and returned to the 3% ceiling one year earlier than planned.
- 2022 revenue growth: 30.6% compared to the previous year.
- 2022 government spending growth: 10.9%.
- Government debt ratio: declined to 39.70% of GDP at end-2022 from 40.74% in 2021.
- 2023 state budget: designed conservatively with fiscal deficit to be maintained below 3% of GDP.
- Allocation commitments:
  - education: 20% of total spending;
  - health: 5% of total spending;
  - social protection: around 15,5% of total budget;
  - infrastructure: around 12,8% of total budget.
- Q1 2023 budget outturn: revenue increasing by 29% from 2022.

### Monetary and exchange rate policy
- Policy actions: exchange rate stabilization, liquidity normalization, and policy rate hikes while maintaining adequate FX reserves.
- Exchange rate interventions: FX market intervention, spot and DNDF transactions, buying/selling SBN in secondary market, and a “twist operation” selling short-term SBN in secondary market.
- Policy rate history and stance:
  - historically low at 3.50% for 18 months since August 2022;
  - policy rate kept unchanged at 5.75% since February 2023;
  - authorities view 5.75% as sufficient to direct core inflation within 3.0%±1% and CPI inflation within the 3.0%±1% target range.
- Additional measures: foreign currency term deposit instruments consistent with market mechanisms to manage foreign exchange proceeds of exports.

### Macroprudential and financial sector policy
- Macroprudential stance: kept accommodative to facilitate credit intermediation and support recovery.
- Macroprudential Inclusive Financing Ratio (RPIM) refined to facilitate inclusive lending aligned with banks’ expertise.
- Macroprudential incentives: reserve requirement reductions up to 280bps to facilitate lending to targeted sectors including inclusive and green finance.
- Corporate prudential FX regulation: aims to ensure macrofinancial stability via prudential principles on corporate foreign borrowing; hedging and liquidity requirements first introduced in 2014 and strengthened in 2016.
- OJK actions: unwound forbearance measures for loan/financing restructuring except for targeted sectors (mostly MSMEs); extension to March 31, 2024 for previously restructured pandemic-time loans.
- 2023 macroprudential stance: maintain accommodative policy and gradually return to pre-pandemic setting when financial cycle is predicted to enter expansionary phase in second quarter of 2024.
- OJK microprudential priorities:
  - strengthen financial service sector (including promoting bank consolidation and strengthening accountability in managing investments in NBFI capital market);
  - optimize role of financial sector to support recovery, including accelerating financial access for MSMEs;
  - improve services and strengthen capacity of OJK in enhancing Financial Information Service.

### Financial market deepening and money market development
- BI Blueprint for Money Market Development (BPPU) 2025 initiatives:
  - (i) digitalization and strengthening of financial market infrastructure;
  - (ii) strengthening effectiveness of monetary policy transmission;
  - (iii) developing financial instruments as a source of economic financing and strengthening risk management.
- Repo market development: standardize repo transactions among market participants and under BI Open Market Operations to strengthen monetary policy transmission and diversify SBN investor base to mitigate 'sovereign-bank nexus' risks.

### Payment system policy and digitalization
- Indonesia Payment System Blueprint (BSPI) 2025 focus: regulatory reform, retail payment infrastructure development, and payment standardization.
- BI-FAST: new settlement system operating 24/7 in real time.
- QRIS usage as of Q1 2023: accepted by 25.4 million merchants and utilized by more than 32 million users.
- SNAP (National Open API Payment Standard): application strengthened to accelerate digital economy and finance ecosystem.
- 2023 payment system strategies:
  - national standards as ‘One Language’ for payment services;
  - regulatory reform and industry consolidation as ‘One Nation’;
  - develop payment infrastructure as ‘One Country’ to support national integration and Digital Rupiah issuance;
  - promote safe, efficient and fair pricing policy and market practices;
  - further development of the Digital Rupiah (CBDC) including conceptual design, business models, access arrangement, and technology platforms.

### Structural reforms and green transition
- Four reform milestones achieved: Omnibus Law on Job Creation; Harmonized Tax Regulations Law; Intergovernmental Fiscal Transfer Law; Omnibus Law on Financial Sector Development and Strengthening (P2SK).
- Downstreaming policy objectives: increase added value of commodity exports, revitalize manufacturing, improve balance of payments structure, strengthen external position, and create jobs and attract FDI.
- Nickel ore downstreaming: stimulated domestic nickel processing and refining industry; empirical data show boost to exports and current account performance.
- FDI: foreign direct investment in 2022 recorded a new high, supported mainly by downstreaming policy (according to BKPM).
- Green economy steps:
  - roadmap for just and affordable transition under preparation, with supporting policies, infrastructure, legislation, and social impact mitigation plan;
  - September 2022 Enhanced NDC: emission reduction target increased from 29% to 31.89% within own capacity, or 41% to 43.20% with international support;
  - Energy Transition Mechanism Country Platform announced to mobilize international and private participation in financing;
  - Just Energy Transition Partnership (JETP) represents largest partnership supporting new targets for Indonesia's just energy sector transition;
  - support for ASEAN Taxonomy for Sustainable Finance (ATSF) Version 2;
  - development of roadmap for carbon pricing, vehicle industry, and basis for establishing a blue economy.

### Conclusion — policy emphasis
- Key elements to strengthen resilience and sustain recovery: consistency, innovation, and synergy.
- Government commitments:
  - continue consistent policy formulation and implementation;
  - pursue creative policy innovations to address dynamic challenges;
  - strengthen synergy between authorities and stakeholders to optimize social welfare outcomes.
- Regional engagement: policy synergy emphasized in Indonesia’s ASEAN Chairmanship in 2023 with theme ‘ASEAN Matters: Epicentrum of Growth’.

*Source: 1idnea2023002 - 2000. Indonesia uses the SDDS flexibility options for the periodicity*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1idnea2023002.pdf_