## 1idnea2024001-print-pdf - 5.0 and 5.1 percent in 2024 and 2025 respectively, with dynamic domestic demand offsetting

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### Outlook and risks
- Real GDP growth projections:
  - 2024: 5.0 percent
  - 2025: 5.1 percent
  - 2026: 5.1 percent
  - 2027: 5.1 percent
- Domestic demand and composition (percent):
  - Domestic demand growth: 2024: 5.0; 2025: 5.2; 2026: 5.1; 2027: 5.1
  - Private consumption (includes NPISH consumption): 2024–2027: 5.1 percent each year
  - Government consumption: 2024: 5.5; 2025: 4.2; 2026: 3.0; 2027: 3.0
  - Gross fixed investment: 2024: 5.0; 2025: 5.7; 2026: 5.7; 2027: 5.7
- External sector projections and balances:
  - Current account balance (US$ billions): 2022: 13.2; 2023: -1.9; 2024: -12.3; 2025: -20.5; 2026: -24.2; 2027: -25.5
  - Current account balance (percent of GDP): 2022: 1.0; 2023: -0.1; 2024: -0.9; 2025: -1.3; 2026: -1.4; 2027: -1.4
  - Trade balance (US$ billions): 2022: 62.7; 2023: 46.5; 2024: 34.8; 2025: 30.1; 2026: 29.4; 2027: 32.8
  - Inward direct investment (US$ billions): 2022: 25.4; 2023: 21.8; 2024: 26.0; 2025: 29.6; 2026: 33.5; 2027: 36.1
  - Gross reserves (end period, US$ billions): 2022: 137.2; 2023: 146.4; 2024: 147.2; 2025: 153.9; 2026: 163.5; 2027: 177.3
  - Gross reserves (months of prospective imports): 2022: 6.2; 2023: 6.1; 2024: 5.5; 2025: 5.2; 2026: 5.1; 2027: 5.2
- Inflation projections and readings:
  - Consumer prices (end period, 12-month percent change): 2022: 5.4; 2023: 2.8; 2024: 2.8; 2025: 2.7; 2026: 2.6; 2027: 2.5
  - Consumer prices (period average, 12-month percent change): 2022: 4.1; 2023: 3.7; 2024: 2.9; 2025: 2.8; 2026: 2.6; 2027: 2.6
  - Recent readings: headline inflation June 2024: 2.5 percent; core inflation June 2024: 1.9 percent
- Risk assessment:
  - External downside risks: commodity price volatility; slowdown in trading partners (notably China and the U.S.); spillovers from high-for-longer policy rates in AEs.
  - Domestic downside risk: weakening of long-standing macro-fiscal frameworks harming policy credibility.
  - Upside scenarios: stronger trading-partner growth; earlier monetary easing in AEs; deeper structural reforms raising medium-term growth.
- Growth-at-Risk findings:
  - A China severe slowdown (two-standard-deviations growth shock) implies a 5 percent probability Indonesia’s growth falls to -2.7 percent over the next year.

### Fiscal policy, public finances, and fiscal risks
- Key fiscal aggregates (percent of GDP):
  - General government revenue: 2023: 15.0; 2024: 14.8; 2025: 14.9; 2026: 15.0; 2027: 15.0
  - General government expenditure: 2023: 16.6; 2024: 17.1; 2025: 17.6; 2026: 17.5; 2027: 17.4
  - General government balance: 2022: -2.2; 2023: -1.6; 2024: -2.3; 2025: -2.6; 2026: -2.5; 2027: -2.4
  - Primary balance: 2022: -0.2; 2023: 0.5; 2024: -0.3; 2025: -0.6; 2026: -0.3; 2027: -0.1
  - General government debt: 2022: 40.1; 2023: 39.6; 2024: 39.5; 2025: 39.4; 2026: 39.3; 2027: 39.1
- Recent fiscal developments:
  - Overall deficit narrowed from 2.4 percent of GDP in 2022 to 1.61 percent of GDP in 2023.
  - First primary surplus in about a decade: 0.5 percent of GDP (2023).
  - Public debt-to-GDP ratio declined to 39.6 percent by end-2023 (below fiscal rule ceiling of 60 percent).
- Fiscal stance and projections:
  - 2024 deficit projected at 2.3 percent of GDP; fiscal impulse estimated at 0.8 percentage points of GDP.
  - Staff projects 2025 deficit at 2.6 percent of GDP (fiscal impulse of 0.3 percentage points of GDP); staff recommends slightly narrower deficits in 2024 and 2025 to preserve fiscal space.
- Revenue mobilization and tax reform potentials (percent of GDP):
  - Current tax-to-GDP ratio: 13 percent of GDP
  - Total Revenue Gains from Pending Tax Policy: 6.1 (percent of GDP)
  - Tax Policy component: 3.5
    - VAT: 1.8 (with components: remove exemptions 0.2 (done); reduce registration threshold 0.2 (pending) — potential 0.2; replace STLG with VAT and vehicle excise 0.6 (pending) — potential 0.6; increase standard rate by 2 percentage points: 0.8 (+1ppt in 2022 — 0.4))
    - Excises: 0.5 (introduce new excises on fuel 0.5 (pending))
    - Reform of tobacco taxation: 0.7
    - Non-tobacco reforms (excluding fuels): 0.8
    - CIT: 0.4 (reduce SME threshold 0.1 (pending) — potential 0.1; introduce alternative minimum tax 0.3 (pending) — potential 0.3)
    - PIT: 0.4 (broaden base/increase progressivity 0.4)
    - Property tax: 0.3
  - Tax Administration potential: 1.5
- Fiscal risks and contingent liabilities:
  - Reported outstanding public guarantees on infrastructure programs: US$22 billion (1.6 percent of GDP) as of 2023Q3; guarantees for PPPs: US$6.5 billion.
  - Actual stock of PPPs estimated at US$22 billion (1.3 percent of GDP).
  - Debt-service: about 2 percent of GDP.
  - Recommendation: enhance fiscal risk management, strengthen MOF ‘gatekeeping’ on PPPs and guarantees, record and consolidate SOE-related flows per GFSM 2014.

### Monetary policy, exchange rate, and reserve management
- Policy rate and stance:
  - BI policy rate: hiked by 25 bps in October 2023 and by 25 bps in April 2024 to 6.25 percent.
  - Real policy rate: above estimated neutral level of 1-2 percent.
  - Recommendation: retain a data-driven monetary stance; with inflation softening in May-June 2024, gradually easing the monetary policy stance would seem appropriate absent significant shocks.
- Exchange rate and FX intervention:
  - Indonesia’s de facto exchange rate arrangement: floating.
  - BI used FXI in spot and derivatives markets during external stress episodes of October 2023 and April 2024.
  - Staff view: ER should play shock-absorbing role; FXI is appropriate under certain shocks but should preserve reserve buffers and be judiciously deployed.
  - Staff recommends exploiting risk-on episodes to replenish reserves and gradually phasing out the 2023 export repatriation regulation (assessed by staff as a Capital Flow Measure) given modest macroeconomic impact (~½ percent of GDP in GIR).
- Reserves and market instruments:
  - Gross international reserves (GIR): US$137 billion (2022) → US$146 billion (2023) → US$139 billion by end-May 2024 (remained within adequacy range).
  - GIR adequacy: 123 percent of the ARA metric; GIR in 2023: 10.7 percent of GDP; months of prospective imports: 2023: 6.1.
  - BI short-term local currency instrument (SRBI) outstanding: about IDR 558 trillion (US$34 billion) as of end-May 2024; about 73 percent held domestically.
- Market development guidance:
  - Further develop money and FX markets to strengthen price discovery and market-determined term structure; benefit of restrained FXI to raise incentives for private hedging.

### Financial sector resilience, vulnerabilities, and policy guidance
- System-wide assessment:
  - 2024 FSAP: financial system broadly resilient and well-capitalized; systemic risk moderate and broadly unchanged.
  - Banks dominant, profitable, with capital buffers and liquidity coverage ratios well above regulatory minima.
  - Nonperforming loans (NPLs): 2.3 percent of total loans (April 2024); NPLs: 2.1 (2022), 2.0 (2023), 2.0 (Q1) in alternative table.
- Credit and liquidity:
  - Private sector credit growth: 10.4 percent y/y in 2023; 13.1 percent y/y in April 2024.
  - Rupiah M2 (end of period, 12-month percent change): 2022: 8.4; 2023: 3.5; 2024 (Proj.): 9.9; 2025 (Proj.): 10.0; 2026 (Proj.): 9.8; 2027 (Proj.): 9.8
  - Base money (end of period): 2022: 23.9; 2023: -1.5; 2024 (Proj.): 4.0; 2025 (Proj.): 6.0; 2026 (Proj.): 7.0; 2027 (Proj.): 7.4
  - Claims on private sector (end of period): 2022: 10.1; 2023: 9.2; 2024 (Proj.): 10.5; 2025 (Proj.): 11.3; 2026 (Proj.): 9.5; 2027 (Proj.): 9.6
- Financial sector recommendations:
  - Make Liquidity Coverage Ratios (LCRs) mandatory for all banks; enhance FX risk monitoring.
  - Strengthen supervision to ensure timely and full recognition of NPLs after forbearance removal.
  - Clarify primacy of financial system resilience within macroprudential policy; gradually tighten MPP stance as credit gap closes.
  - Bolster financial safety net, crisis management, resolution frameworks, and AML/CFT improvements.
  - Expand data coverage on bank cross-border exposures, NBFI-bank linkages, and bank-NFC linkages.
- Non-bank financial institutions and households:
  - NBFI sector size: about 24 percent of financial system assets (2023); insurance sector risks rising due to premium management concerns.
  - Household leverage: debt-to-GDP at 16.3 percent (2023Q3); about 30 percent of bank lending is to households, about 2 percent of which are NPLs.
  - Recommendation: expand monitoring (LTV, DSTI) and assess distributional risks as credit expands.

### External sector assessment and sustainability
- External position (selected 2023/2024 figures):
  - NIIP (end-2023): –19.0 percent of GDP
  - Gross external assets (2023): 35.3 percent of GDP
  - Gross external liabilities (2023): 54.3 percent of GDP
  - Gross external debt (end-2023): 29.8 percent of GDP
- Current account and REER:
  - CA: –0.1 percent of GDP (2023); staff CA gap: 0.8 percent of GDP (2023)
  - Staff assesses REER gap midpoint: –5.0 percent (range –7.9 to –2.1 percent)
- External financing and vulnerabilities:
  - Net capital and financial flows: 0.7 percent of GDP (2023)
  - Net FDI inflows: 1.1 percent of GDP (2023)
  - High dependence on foreign portfolio investment: 20.1 percent of GDP (2023) increases vulnerability to sentiment swings
  - Recommendation: continue exchange rate flexibility, structural reforms to promote productivity and FDI, and preserve reserve buffers.

### Debt sustainability and SRDSF assessment
- SRDSF and DSA conclusions:
  - Overall risk of sovereign stress: "low"
  - Public debt (percent of GDP): 2023: 39.6; projected trajectory: 2024: 39.5; 2025: 39.4; 2026: 39.3; 2027: 39.1; 2028: 38.8; 2029: 38.3; 2030: 37.9; 2031: 37.4; 2032: 36.9; 2033: 36.3
  - Gross financing needs (GFN) baseline: 2023: 4.5; 2024: 5.3; 2025: 5.9; 2026: 5.5; 2027: 5.2; medium-term GFN ≈ 5 percent of GDP
  - Stress-test sensitivities: a 30 percent depreciation in 2024 would raise external debt to 41 percent of GDP in 2025
- Medium-term risks and long-term caveats:
  - Long-term climate adaptation costs estimated at about 0.8 percent of GDP per year; fiscal reforms needed to finance adaptation.

### Industrial policy, structural reforms, and climate transition
- Industrial Policy (IP) and NTMs:
  - IP used successfully in nickel ore (boosted refined nickel exports and FDI into e-battery/e-vehicle chain); authorities plan potential expansion to up to 21 commodities.
  - Risks of IP: high fiscal costs, rent-seeking, resource misallocation, competition and innovation distortions, adverse cross-border spillovers.
  - NTMs are relatively high; transitioning away from NTMs is critical to support global integration.
  - Staff recommendations for IP: target well-identified market failures, be time-bound and cost-effective, and minimize trade and investment distortions.
- Green transition and climate policies:
  - CIPP for on-grid power generation published; plan needed for off-grid transition under JETP.
  - Climate targets: reduce GHG emissions in 2030 by 32 percent; achieve Net Zero by 2060.
  - JETP financing and market figures: grants/TA US$215 million; ~US$800 million loans signed/approved; additional US$2 billion under negotiation; ETS covers 99 power plants (~86 percent of national coal-fired capacity); 7 million tons CO2e allowances traded (~US$5 million); around 570.000 tons CO2e carbon units amounting to US$2.2 million sold on IDX Carbon as of end-April 2024.
  - Policy tools recommended: energy subsidy reform, carbon pricing, phase out related NTMs, protect vulnerable groups during transition.
- Structural reform priorities to reach high-income by 2045:
  - Required: sustained real growth of about 6-7 percent per year to reach high-income by 2045 (staff: major “first-generation” reform package could raise output levels by around 1.5-2 percent after two years and help bring annual growth to around 6 percent from current 5 percent).
  - Horizontal reforms: governance and anti-corruption, education and skills, health and social protection, logistics and infrastructure, openness and business environment, insolvency frameworks, labor market flexibility, credit infrastructure, and improved financial markets.
  - MSMEs: contribute over 60 percent of GDP and absorb 97 percent of workforce; reforms to boost MSME productivity are essential.

### Financial digitalization, DFS, and inclusion
- Payments and digital infrastructure:
  - QRIS standardized QR codes (2019); BI-FAST real-time payments launched in 2021; SNAP payment API standard.
  - SRBI outstanding: IDR 558 trillion (US$34 billion) as of end-May 2024.
- DFS diffusion and regional disparities:
  - Internet penetration national: 2019: 47.7 percent → 2022: 66.5 percent
  - Financial literacy national: 2019: 38.0 → 2022: 49.7
  - P2P lending regional patterns: top five provinces outstanding P2P rose on average by 0.32 percentage points of GRDP (last three years); bottom five provinces rose by 0.04 percentage points
  - Regression determinants: Digitalization positive and significant; one-standard-deviation increase in digitalization → 0.06-percentage point increase in P2P-to-GRDP ratio.
  - Club convergence: four clubs identified with group averages (P2P in percent of GRDP) as of December 2023: Group A: 0.35; Group B: 0.18; Group C: 0.11; Group D: 0.07
- Policy implications:
  - Reduce inter-regional gaps in digitalization and financial literacy to foster DFS diffusion and P2P lending growth.
  - Strengthen regulation and supervision of fintech/P2P lending; OJK’s new guidelines welcomed.

### Key policy recommendations (summary)
- Fiscal:
  - Preserve longstanding fiscal prudence and maintain the 3 percent of GDP deficit cap.
  - Aim for slightly narrower deficits in 2024 and 2025; enhance MTFF with well-defined operational targets to allow systematic countercyclical policy within the fiscal rule.
  - Prioritize revenue mobilization via tax policy and administration reforms; contain tax incentives; improve targeting of energy subsidies.
  - Strengthen fiscal risk management for PPPs, guarantees, and SOE-related contingent liabilities.
- Monetary and FX:
  - Retain a data-dependent monetary stance; allow gradual easing if inflation softens and absent shocks.
  - Let exchange rate play shock-absorbing role; use FXI judiciously in risk-off episodes while preserving reserve buffers.
  - Further develop money and FX markets, deepen hedging instruments, and improve price discovery.
- Financial sector and macroprudential:
  - Clarify macroprudential objective prioritizing financial system resilience; gradually shift MPP stance to neutral as credit gap closes.
  - Make LCRs mandatory for all banks; strengthen supervision, crisis management, resolution, and AML/CFT frameworks.
  - Expand data coverage on financial interlinkages and develop credit infrastructure and consumer protection in DFS.
- Structural reforms and IP:
  - Pursue horizontal structural reforms (governance, education, health, logistics, trade openness) to raise potential growth and reach Golden Vision 2045.
  - Design IP to target market failures, be time-bound, cost-effective, and minimize trade/investment distortions; transition away from NTMs.
  - Implement climate-related policies: energy subsidy reform, carbon pricing, off-grid transition planning under JETP, and measures to protect vulnerable groups.
- Crisis preparedness and buffers:
  - Preserve fiscal and reserve buffers; use buffers in a targeted way when needed; ensure FXI and fiscal responses are temporary and well-calibrated.
  - Continue implementation of FSOL-related safeguards and align central bank crisis roles with international best practices.

*Source: IMF Staff Report for the 2024 Article IV Consultation (Indonesia).*

### 5.0 and 5.1 percent in 2024 and 2025 respectively, with dynamic domestic demand offsetting

### 1idnea2024001-print-pdf - 5.0 and 5.1 percent in 2024 and 2025 respectively, with dynamic domestic demand offsetting

### Outlook and Risks
- Real GDP growth projections:
  - 2024: 5.0 percent
  - 2025: 5.1 percent
  - 2026: 5.1 percent
  - 2027: 5.1 percent
- Domestic demand projected to offset softer commodity prices:
  - Domestic demand growth: 2024: 5.0, 2025: 5.2, 2026: 5.1, 2027: 5.1 (percent)
  - Private consumption (includes NPISH consumption): 2024–2027: 5.1 percent each year
  - Government consumption: 2024: 5.5, 2025: 4.2, 2026: 3.0, 2027: 3.0 (percent)
  - Gross fixed investment: 2024: 5.0, 2025: 5.7, 2026: 5.7, 2027: 5.7 (percent)
- External sector and balance of payments:
  - Current account balance (in billions of U.S. dollars): 2022: 13.2; 2023: -1.9; 2024: -12.3; 2025: -20.5; 2026: -24.2; 2027: -25.5
  - Current account balance (in percent of GDP): 2022: 1.0; 2023: -0.1; 2024: -0.9; 2025: -1.3; 2026: -1.4; 2027: -1.4
  - Trade balance (in billions of U.S. dollars): 2022: 62.7; 2023: 46.5; 2024: 34.8; 2025: 30.1; 2026: 29.4; 2027: 32.8
  - Inward direct investment (in billions of U.S. dollars): 2022: 25.4; 2023: 21.8; 2024: 26.0; 2025: 29.6; 2026: 33.5; 2027: 36.1
  - Gross reserves (end period, billions of U.S. dollars): 2022: 137.2; 2023: 146.4; 2024: 147.2; 2025: 153.9; 2026: 163.5; 2027: 177.3
  - Gross reserves (months of prospective imports): 2022: 6.2; 2023: 6.1; 2024: 5.5; 2025: 5.2; 2026: 5.1; 2027: 5.2
- Inflation and prices:
  - Consumer prices (end period): 2022: 5.4; 2023: 2.8; 2024: 2.8; 2025: 2.7; 2026: 2.6; 2027: 2.5 (12-month percent change)
  - Consumer prices (period average): 2022: 4.1; 2023: 3.7; 2024: 2.9; 2025: 2.8; 2026: 2.6; 2027: 2.6 (12-month percent change)
- Risks described as broadly balanced:
  - External downside risks: commodity price volatility (e.g., from geopolitical shocks); slowdown in Indonesia’s key trading partners; spillovers from high-for-longer policy rates in advanced economies (AEs).
  - Domestic downside risk: weakening of long-standing sound macro-fiscal frameworks harming policy credibility.
  - Upside scenarios: stronger-than-anticipated growth in trading partners; earlier-than-expected monetary policy easing; deeper-than-envisaged structural reforms raising medium-term growth.

### Executive Board Assessment and Staff Views
- Executive Directors’ summary:
  - Welcomed Indonesia’s strong economic performance, substantial buffers, and track record of prudent policies.
  - Concurred that risks are broadly balanced in the near term, noting significant uncertainties from tighter global financial conditions, geopolitical tensions, and commodity price volatility.
  - Welcomed authorities’ commitment to fiscal discipline and supported slightly narrower deficits in 2024 and 2025 to support growth while preserving fiscal space.
- Fiscal framework guidance from Directors:
  - Saw scope to strengthen the fiscal framework to allow more countercyclical policies within the budget cap.
  - Supported efforts to strengthen revenue mobilization and streamline energy subsidies to create room for development spending within the fiscal rule.
- Monetary and FX guidance from Directors:
  - Welcomed reduction of inflation to the target range; recommended data-dependent monetary stance with a flexible exchange rate as shock absorber.
  - Agreed that foreign exchange market interventions should be judiciously deployed to preserve reserve buffers; a few Directors encouraged providing FX intervention data.
  - Supported deepening financial markets and strengthening monetary policy transmission.
- Financial sector and macroprudential recommendations:
  - Welcomed the 2024 FSAP’s assessment that the financial system is broadly resilient and well-capitalized.
  - Encouraged progress in supervisory and regulatory frameworks, the financial safety net, crisis management, and monitoring pockets of vulnerabilities.
  - Saw merit in clarifying primacy of financial system resilience as objective of macroprudential policy and encouraged a gradual tightening of macroprudential stance as the credit gap closes.
  - Emphasized further strengthening of the AML/CFT framework.

### Key Indicators and Country Facts (selected)
- Nominal GDP (2023): Rp 20,892 trillion or US$1,371 billion
- Population (2023): 277 million
- Main exports (percent of total, 2023): coal (16.5), base metal (15.6), palm oil (8.7), oil and gas (6.2), electrical apparatus (5.5), textile and products (4.5)
- GDP per capita (2023): US$4,942
- Unemployment rate (September 2023): 5.3 percent
- Poverty headcount ratio at national poverty line (March 2022): 9.5 percent of population
- Public finances (in percent of GDP, selected):
  - General government revenue: 2023: 15.0; 2024: 14.8; 2025: 14.9; 2026: 15.0; 2027: 15.0
  - General government expenditure: 2023: 16.6; 2024: 17.1; 2025: 17.6; 2026: 17.5; 2027: 17.4
  - Energy subsidies (percent of GDP): 2022: 0.9; 2023: 0.8; 2024: 0.8; 2025: 0.6; 2026: 0.5; 2027: 0.4
  - General government balance: 2022: -2.2; 2023: -1.6; 2024: -2.3; 2025: -2.6; 2026: -2.5; 2027: -2.4
  - Primary balance: 2022: -0.2; 2023: 0.5; 2024: -0.3; 2025: -0.6; 2026: -0.3; 2027: -0.1
  - General government debt: 2022: 40.1; 2023: 39.6; 2024: 39.5; 2025: 39.4; 2026: 39.3; 2027: 39.1 (percent of GDP)
- Money and credit (12-month percent change; end of period):
  - Rupiah M2: 2022: 8.4; 2023: 3.5; 2024: 9.9; 2025: 10.0; 2026: 9.8; 2027: 9.8
  - Base money: 2022: 23.9; 2023: -1.5; 2024: 4.0; 2025: 6.0; 2026: 7.0; 2027: 7.4
  - Claims on private sector: 2022: 10.1; 2023: 9.2; 2024: 10.5; 2025: 11.3; 2026: 9.5; 2027: 9.6
- External debt:
  - Total external debt (in billions of U.S. dollars): 2022: 396.5; 2023: 408.5; 2024: 419.0; 2025: 439.4; 2026: 461.6; 2027: 482.8
  - Total external debt (percent of GDP): 2022: 30.1; 2023: 29.8; 2024: 29.4; 2025: 28.3; 2026: 27.5; 2027: 26.6

### Main Policy Recommendations
- Fiscal policy:
  - Preserve Indonesia’s longstanding fiscal prudence; aim for a slightly narrower deficit in 2024 and 2025 to support growth and balance policy mix.
  - Maintain the fiscal rule’s budget cap of 3 percent of GDP; enhance the medium-term fiscal framework (MTFF) with well-defined operational targets to allow systematic countercyclical policy within the fiscal rule.
  - Prioritize revenue mobilization through ambitious tax administration and policy reforms to create fiscal space for development spending while meeting the fiscal rule.
  - Closely monitor fiscal risks and avoid buildup of contingent liabilities.
- Monetary and FX policy:
  - Retain a data-driven monetary policy stance; policy rate described as above neutral.
  - Use the exchange rate as a shock absorber; judicious Foreign Exchange Intervention (FXI) may be appropriate under certain shocks but should preserve reserve buffers.
  - Encourage market development for greater price discovery and a more market-determined interest rate term structure.
- Financial sector and macroprudential policy:
  - Continue reforms to deepen financial markets and strengthen monetary policy transmission.
  - Clarify primacy of financial system resilience as the objective of macroprudential policy and consider gradual tightening as the credit gap closes.
  - Strengthen supervision, regulation, financial safety net, crisis management, systemic liquidity, and resolution frameworks.
  - Develop credit infrastructure to foster sound financial access, including digital financial services; address gaps in AML/CFT framework.
- Structural reforms to reach high-income status by 2045:
  - Implement horizontal reforms: governance and anti-corruption, education and skills, health and social protection, logistics and infrastructure, openness, and business environment improvements.
  - Design Industrial Policy (IP) to target market failures and minimize trade and investment distortions.
  - Transition away from non-tariff trade measures to support inclusive growth and global economic integration.
  - Climate-related policies: plan for off-grid power generation, energy subsidy reforms, carbon pricing, and phasing out related non-tariff measures to achieve net-zero by 2060.

### Context and Recent Developments (summary)
- Indonesia’s strong performance credited to prudent macroeconomic policies; decisive policy actions supported recovery from global shocks since 2020.
- The economy ranks among the twenty largest globally, supported by steady growth, natural resources, strategic location, and a large young population, but GDP per capita remains relatively low.
- Indonesia’s Golden Vision 2045 aims for high-income status by the centennial of independence; achieving it requires broad structural reforms while maintaining macroeconomic stability.
- Recent developments: resilient growth and inflation within the central bank’s target range; policies focused on preserving buffers.

*Source: IMF Staff Report for the 2024 Article IV Consultation (Indonesia).*

### 3.      Economic growth was strong in 2023 despite external headwinds. Real GDP growth

### 3.      Economic growth was strong in 2023 despite external headwinds. Real GDP growth

### Economic activity and growth in 2023–2024Q1
- Real GDP growth reached 5.0 percent in 2023, led by resilient private consumption and investment.
- Net exports lost momentum driven by falling commodity prices and trading partner demand.
- Economic activity indicators were robust in 2024Q1 as spending toward the February Presidential election and Ramadan fostered domestic demand.
- Growth was broad-based: mining, transportation, communication, and accommodation and food services sectors performed above historical average; agricultural production weakened due to El Niño droughts.

### Slack, labor market, and utilization
- Output gap estimated at -0.3 percent of potential GDP in 2023 (high uncertainty on size and speed of closing).
- Capacity utilization: 73.9 percent in 2023 vs. 75.6 percent in 2019.
- Unemployment: 5.3 percent by end-2023 (5.2 percent in late 2019).
- Other labor-market indicators:
  - Share of workers in full-time or formal employment is lower than pre-pandemic.
  - Rate of under-employed workers remains higher.
  - Vulnerable employment has steadily increased since 2015 (ILO definition: own-account workers + contributing family workers).
- Real and nominal wages have continued to recover; most wages now exceed their 2019 levels.
- Core inflation inched up slightly to 1.9 percent year-on-year in May and June (relative to 1.8 percent in April).

### Inflation and policy settings
- December 2023 core and headline inflation were 1.7 percent and 2.8 percent respectively, within Bank Indonesia’s (BI) target band (3±1 percent).
- Updated 2024 target range: 2.5±1 percent.
- June 2024 readings: headline inflation 2.5 percent; core inflation 1.9 percent.
- Recent pressures were from volatile components—food, beverages, and tobacco—including due to El Niño shock; volatile food inflation softened in May-June.
- Inflation expectations remain well-anchored.
- Administrative measures to stabilize food prices involve: (i) monitoring of food prices, (ii) signed and monitored agreements on ceiling prices for key foodstuffs; (iii) improvement and subsidy support of ports and ship routes to relieve bottlenecks.

### External position, balance of payments, and reserves
- Current account balance: surplus of 1 percent of GDP in 2022 to a narrow deficit of 0.1 percent of GDP in 2023, driven by broad-based decline in commodity prices (especially coal, palm oil, and mining-related exports). Partially offset by lower import values of oil, gas, and raw materials.
- Services account improved slightly as foreign tourist arrivals nearly doubled relative to 2022.
- Capital and financial account surplus in 2023: 0.7 percent of GDP.
- Overall BoP surplus in 2023; portfolio outflows reemerged in early-2024.
- Gross International Reserves (GIR): US$137 billion in 2022 → US$146 billion (10.7 percent of GDP) in 2023.
- GIR at 123 percent of the Assessing Reserve Adequacy (ARA) metric.
- GIR declined to US$139 billion by end-May 2024 (remained within adequacy range).
- Net international reserves (NIR) strengthened by US$4.8 billion year-on-year in 2023.
- BI’s short positions on FX derivatives nearly doubled to US$14.3 billion by end-2023.
- Indonesia’s de facto exchange rate arrangement classified as floating.
- Policy responses to volatility included policy rate hikes of 25 bps in October 2023 and April 2024; foreign exchange intervention (FXI) in spot and derivatives markets; issuance of new BI short-term securities (local and foreign currency); changes to export repatriation requirements for commodity producers (Government Regulation No.36 of 2023).

### Financial conditions and credit
- Overall financial conditions remain accommodative.
- Private sector credit by banks expanded by 10.4 percent y/y in 2023, and by 13.1 percent y/y in April 2024.
- Bank lending interest rates and equity prices broadly unchanged since 2023; house prices declined in real terms; sovereign and corporate spreads gradually narrowed.
- Authorities phased out the last remaining pandemic-forbearance measures end-March 2024.

### Outlook and projections
- Baseline: Real GDP growth projected at 5.0 percent in 2024, supported by increase in public consumption and investment growth; output gap remains negative and fully closes by 2026.
- Growth projected to pick up to 5.1 percent in 2025 on the back of a fiscal expansion.
- Headline inflation projected to stabilize around the midpoint of its updated target range.
- Real exports to expand at a slower pace while import growth recovers, leading to moderate current account deficits in 2024-25.
- BoP surplus expected to increase gradually, reflecting pickup in FDI and portfolio inflows and supporting further buildup of reserve buffers.
- Medium-term growth estimated at about 5 percent, driven by strong private consumption and investment and supported by the authorities’ Golden Vision public investment in connectiveness.

### Risks to the outlook
- Near-term risks broadly balanced:
  - Downside risks:
    - Persistent commodity price volatility due to supply/demand disruptions (e.g., conflicts or trade restrictions).
    - Abrupt global slowdown or recession in key trading partners (China, the U.S.).
    - Slower-than-envisaged AE disinflation resulting in higher-for-longer global interest rates.
    - Systemic financial instability causing spikes in interest rates, risk premia, and asset repricing, triggering capital outflows and disorderly markets.
    - Domestic weakening of macro-fiscal frameworks harming policy credibility.
  - Upside risks:
    - Stronger-than-anticipated growth in China and other trading partners.
    - Faster-than-expected disinflation in AEs leading to frontloaded policy rate cuts by central banks.
    - Faster/deeper implementation of horizontal structural reforms.
- Authorities’ assessment: expect growth ranges of 4.7-5.5 percent in 2024 and 4.8-5.6 percent in 2025; output gap expected to close by end-2025; medium-term objective of 6-7 percent via 2045 Golden Indonesia Vision.
- Structural global risks highlighted: natural disasters and climate shocks, risks from green transition, deepening geoeconomic fragmentation (GEF), and deployment of AI-based technologies.

### Fiscal policy stance, projections, and recommendations
- Fiscal consolidation continued in 2023:
  - Overall deficit narrowed from 2.4 percent of GDP in 2022 to 1.61 percent of GDP in 2023.
  - First primary surplus in about a decade: 0.5 percent of GDP.
  - Public debt-to-GDP ratio declined to 39.6 percent of GDP by end-2023 (below fiscal rule ceiling of 60 percent of GDP).
  - Total spending moderately above budget (0.2 percent of GDP); social assistance at 0.8 percent of GDP; energy subsidy bill fell slightly relative to 2022.
- 2024 fiscal stance projected to be expansionary:
  - 2024 deficit projected at 2.3 percent of GDP (still within fiscal rule guardrail).
  - Fiscal impulse estimated at 0.8 percentage points of GDP.
  - Staff notes containing spending to budgeted levels and enhanced targeting of energy subsidies to achieve recommended stance.
- 2025 fiscal stance:
  - Draft 2025 Government Work Plan proposes deficit of 2.45-2.8 percent of GDP.
  - Staff projects a deficit of 2.6 percent of GDP, implying fiscal impulse of 0.3 percentage points of GDP.
  - Staff recommends a slightly narrower fiscal stance as output gap closes and to preserve fiscal space.
  - Revenue mobilization and spending reallocation (including better-targeted energy subsidies) suggested to offset campaign pledges; implementation of measures identified by Fund technical assistance expected to bring revenue yields.
- Medium-term fiscal path: authorities expect deficit to narrow from 2026 onwards and public debt to remain under 40 percent of GDP; importance of concrete tax measures and improved compliance enforcement emphasized.
- Budget and central government operations highlights (percent of GDP unless otherwise indicated):
  - Revenues and grants: 13.5 (2022 MoF outlook), 11.7 (Final Budget 2022), 12.5 (2023), 13.3 (2024 MoF outlook), 12.3 (2024 Final Budget proj.), 13.1 (2025).
  - Oil and gas revenues: 1.2, 0.9, 0.8, 0.9, 0.8, 0.8.
  - Non-oil and gas revenues: 12.3, 10.8, 11.7, 12.4, 11.5, 12.2.
  - VAT: 3.5, 3.5, 3.5, 3.7, 3.6, 3.7.
  - Expenditure and net lending: 15.8, 14.7, 14.9, 14.9, 14.7, 15.4.
  - Current expenditure: 9.6, 9.0, 9.1, 8.5, 9.1, 9.3.
  - Energy subsidies: 0.9, 1.0, 0.9, 0.8, 0.8, 0.8.
  - Development expenditure: 2.1, 1.7, 1.9, 2.2, 1.8, 2.1.
  - Capital spending: 1.2, 1.0, 1.2, 1.5, 1.1, 1.4.
  - Social assistance spending: 0.8, 0.7, 0.7, 0.8, 0.7, 0.7.
  - Transfers to local governments: 4.2, 3.9, 3.9, 4.2, 3.8, 4.1.
  - Overall balance: -2.4, -2.9, -2.3, -1.6, -2.3, -2.3.
  - Primary balance: -0.4, -0.8, -0.2, 0.5, -0.1, -0.3.
  - Cyclically-adjusted primary balance: -0.2, 0.5, -0.3.
  - General government debt: 40.1, 39.6, 39.5.
- Policy guidance: preserve a sound and prudent macro-fiscal framework; anchor development spending priorities for 2025+ by ambitious revenue mobilization and within fiscal rule guardrails; monetary policy appropriate and should remain data-driven with exchange rate as shock absorber; use of FXI appropriate under certain shocks and conditions; bridge structural gaps to lift potential growth.

### Fiscal and debt risks
- Sovereign Risk and Debt Sustainability Framework (SRDSF) indicates overall “low” risk of sovereign stress; staff assess Indonesia to have some fiscal space.
- Public debt sustainability supported by favorable interest rate-growth differential.
- Budget financing largely domestic; external loans and FX-denominated government securities meet about a quarter of public gross financing needs (GFNs ≈ 5 percent of GDP).
- Share of local currency public debt held by domestic entities (excluding BI): 67 percent as of end-January (limits rollover risks but exposes banks and NBFIs to sovereign repricing shocks).
- Banks appear broadly resilient.
- PPPs and below-the-line operations with state-owned enterprises expected to rise (e.g., financing for new capital city, Nusantara); preventing buildup of actual and contingent liabilities related to these operations is key.

*Source: IMF staff report (chapter section).*

### 17.      Indonesia’s current fiscal rules are well-suited to support its ambition, especially if

### 17.      Indonesia’s current fiscal rules are well-suited to support its ambition, especially if complemented with further fiscal structural reforms to open further fiscal space.

### Fiscal framework and fiscal rules
- The deficit rule (3 percent ceiling) provides a sound guardrail and an important policy anchor that has contributed to macro-stability.
- Recommendation: Complement the deficit rule with an enhanced Medium-Term Fiscal Framework (MTFF), articulated with the annual budget and long-term fiscal plans, supporting a well-calibrated medium-term objective (MTO) set up on a (multi-year) rolling basis to support more systematic counter-cyclical policymaking that is also compliant with the rule.
- Risk: Bringing the fiscal deficit close to its ceiling on a protracted basis could erode fiscal space through rising debt service payments, highlighting the importance of securing upfront tax revenue mobilization.
- Debt cap: 60 percent of GDP is broadly appropriate; Indonesia’s debt-to-GDP ratio is low, but debt-service is high (at about 2 percent of GDP), and the share relative to public revenues is higher than peers.

### Fiscal statistics and contingent liabilities
- Reported outstanding public guarantees on infrastructure programs: US$22 billion (1.6 percent of GDP) as of 2023Q3, including US$6.5 billion in guarantees for PPPs (BI, Feb 2024).
- Comparable earlier stock: US$23 billion including PPPs for US$6.4 billion as of 2022Q3 (BI, Feb 2023).
- Actual stock of PPPs is estimated at US$22 billion (1.3 percent of GDP).
- Debt-service: about 2 percent of GDP.

### Revenue mobilization
- Current tax-to-GDP ratio: 13 percent of GDP (persistently low and lags EM peers).
- Administration pledge: elected administration has pledged to raise total revenue by 10 ppts from 13 percent of GDP; detailed measures and timelines are yet to be specified.
- Proposed institutional change: establishing a new National Revenue Agency (NRA) and improving collection processes through digitalization.
- Caution: Plans to establish NRA should be carefully designed, as restructuring may prove costly; net gains in tax collections will require tackling fundamental tax administration gaps.
- Key administrative reforms recommended (Annex V II): compliance risk management (CRM), the use of third-party data, digitalization, broadening taxpayer bases, and securing appropriate staffing.
- Tax policy recommendations: fully implement the 2021 Tax Harmonization Law; update the Medium-Term Revenue Strategy (MTRS) including further strengthening direct and indirect taxes, and minimizing leakages from tax incentives.
- Tax expenditures: currently estimated at 1.7 percent of GDP; revisiting existing tax expenditures and ensuring tax holidays and incentives remain limited is critical to prevent erosion of the tax base.

### Tax reform measures (estimated potential revenue gains in percent of GDP)
- Total Revenue Gains from Pending Tax Policy: 6.1
- Tax Policy: 3.5
  - VAT: 1.8
    - Remove certain exemptions: 0.2 (done)
    - Reduce registration threshold: 0.2 (pending) — potential 0.2
    - Replace STLG with VAT and vehicle excise: 0.6 (pending) — potential 0.6
    - Increase in the standard rate by 2 percentage points: 0.8 (+1ppt in 2022 — 0.4)
  - Excises: 0.5
    - Introduce new excises on fuel: 0.5 (pending) — potential 0.5
    - Add excises on plastic: some progress (no numeric value shown)
    - Reform of tobacco taxation: 0.7 (0.7)
  - Non-tobacco reforms (excluding fuels): 0.8 (0.8)
  - CIT: 0.4
    - Reduce SME threshold: 0.1 (pending) — potential 0.1
    - Introduce alternative minimum tax: 0.3 (pending) — potential 0.3
    - Reform small business regime and incentives: 1.4 (1.4)
  - PIT: 0.4
    - Broaden base (include middle class, increase progressivity): 0.4 (new PIT bracket 0.4)
    - Reduce basic allowance; reduce top income tax bracket: 0.4
  - Property tax: 0.3
    - Reduce transaction tax and increase property tax: 0.3 (pending) — potential 0.3
  - Carbon tax: IDR 30 or higher/kgCO2
- Tax Administration: 1.5 (some progress)
  - Compliance improvement programs (VAT, high income individuals)
  - Institutional reforms (organization, IT)

Notes on table: potential revenue gains over the medium term in percent of GDP; estimated as sum of pending tax policy measures from the 2017 MTRS (i.e., not implemented yet in the 2021 Tax Reform) and measures from the 2024 Fund TA (forthcoming).

### Expenditure policy
- Priorities to help achieve the Golden Vision:
  - Broaden coverage and adequacy of social protection programs (which are low compared to peers).
  - Move from commodity- to people-based assistance.
  - Boost quality of health and education spending and address infrastructure gaps.
- Energy subsidy reform: including via a more automatic alignment of retail fuel prices with international prices would open space to attend these needs.
  - A semi-automatic pricing formula was introduced in 2015, based on an international oil price index, exchange rate and other tax and distribution costs; adjustments ceased in 2017-18.
  - Stated plans by the elected administration to enhance efficiency via better targeting of subsidies are welcome.

### Fiscal and debt risk management
- Growing PPP and public guarantees portfolio warrants enhanced fiscal risk management consistent with recent Fund TA advice.
- Short-term: PPPs may reduce immediate budget outlays but have long-term fiscal implications and can affect fiscal and debt sustainability.
- Recommendation: Enhance the currently fragmented process to evaluate PPPs and issue fiscal guarantees by providing the MOF a stronger ‘gatekeeping’ role.
- Strengthen fiscal accounts to provide a comprehensive view of general government (GG) activities and implicit liabilities.
- Recording guidance: Investments to SOEs in the form of equity injections should be recorded as below-the-line financing; transfers to SOEs to cover losses should be classified above the line as capital transfers if the receiving SOE is a market entity, or as capital grants if a government unit (non-market SOE) under GFSM 2014, and reflected in deficit and debt levels.
- Consolidation guidance: If a statutory body or SOE is determined to be a non-market unit then it needs to be consolidated as part of the GG (as an extrabudgetary unit) according to GFSM 2014.

### Decentralization and subnational fiscal issues
- Fiscal decentralization has steadily gained momentum since 2000; 2022 legislation seeks to strengthen SNG taxation and spending outcomes, minimize vertical and horizontal fiscal imbalances, and optimize public service delivery.
- Public financial management (PFM) weaknesses remain, including execution gaps (e.g., SNGs often carry forward unspent resources from inter-governmental transfers).
- SNG tax bases are narrow, limiting scope to raise local revenues.
- Tackling these gaps will be critical for SNGs to support Indonesia’s goals soundly and effectively.

### Authorities’ views on fiscal policy
- Authorities stated fiscal policy would remain prudent in the near term and broadly shared staff’s baseline assessment on the fiscal stance in 2024-25.
- They have flexibility for adjustment via built-in automatic spending adjustment mechanisms and budget contingencies.
- Draft 2025 budget priorities: prioritize capital expenditure to support durable growth.
- Potential new spending priorities (e.g., “Nutritious Meal for Kids”) expected to be rolled out gradually and accommodated within the 3 percent deficit limit via expenditure reprioritization, including enhancements in targeting of energy subsidies.
- Authorities agree strengthening tax revenues is crucial; they are analyzing a menu of tax measures based on economic and distributional impact and enhancing revenue administration.
- Financing and debt management strategy: viewed as flexible and has served well; may opportunistically tap into cheaper foreign financing.
- Authorities remain committed to preserving fiscal policy credibility and to keeping fiscal risks contained through enhanced management, including in context of PPPs and below-the-line equity injections to compensate SOEs for quasi-fiscal operations.
- Authorities argue that tax incentives support development of higher value-added activity under the growth agenda and see priority in developing a credible roadmap to identify and address tax administration gaps.

---

### B. Monetary Policy: Securing Price Stability — stance and recent actions
- Policy rate: Bank Indonesia (BI) hiked the policy rate by 25 bps in April 2024 to 6.25 percent — following a 25 bps off-cycle hike in October 2023.
- Real policy rate: above its estimated neutral level of 1-2 percent.
- Rationale for hikes: fend off possible imported inflation pressures from rupiah depreciation amid geopolitical tensions and higher-for-longer policies in AEs.
- Monetary policy recommendation: MP path should remain data-driven and supported by a flexible ER serving as a shock absorber. With inflation softening in May and June, and absent significant shocks, gradually easing the monetary policy stance would seem appropriate.
- Conditionality: A tighter-than-baseline MP path may be warranted if upside inflation risks materialize, including because of a more expansionary fiscal policy stance than currently expected; if inflation falls faster than envisaged due to a larger output gap, a faster pace of interest cuts may be warranted.
- Communication: Continued clear communication of the outlook for monetary policy and the overall policy mix will help anchor inflation expectations.

### Exchange rate (ER) and FX intervention (FXI)
- ER should continue to play its role as a shock absorber given well-anchored inflation expectations and low FX balance sheet mismatches.
- BI used FXI in spot and derivatives markets during external stress episodes of October 2023 and April 2024.
- Indonesia’s reserves are within the ARA range; NIR has declined somewhat since end-2023; BI has appropriately unwound FX derivatives following strain episodes.
- Recommendation: Exploit risk-on episodes to further replenish reserve buffers; staff recommends gradually phasing out the 2023 export repatriation regulation (assessed as a Capital Flow Measure), noting its macroeconomic impact has been modest (at around ½ percent of GDP in GIR).

### Market development and reserve management instruments
- In 2023, BI introduced a short-term local currency instrument (SRBI) and mirroring FX-denominated open market instruments to facilitate money market development and attract capital flows into the short-end of the curve.
- Outstanding stock of the SRBI stands at about IDR 558 trillion (US$34 billion) as of end-May 2024; about 73 percent held domestically.
- Outstanding stock of SRBI has grown significantly larger than the stock of T-Bills (about IDR 17 trillion).
- Markets remain segmented (domestic money, government securities, and FX), calling for BI’s relatively frequent and broad presence.
- Recommendation: Further develop markets while preserving stability by allowing strengthened price discovery and an increasingly market-determined term structure of rupiah interest rates.
- Benefit of restrained FXI: would further raise incentives for private sector hedging and FX market deepening.

### BI’s crisis role and institutional safeguards
- BI phased out pandemic-era primary market purchases of government securities; the Financial Sector Omnibus Law (FSOL) restricts such purchases to crisis episodes.
- Recommendation: Ensure implementing regulations are in line with international best practices to maintain central bank independence and price stability; safeguards include ensuring any purchases are voluntary at the initiative of the central bank.
- Authorities will manage maturing pandemic bonds gradually and orderly to avoid market disruptions.

### Authorities’ views on monetary policy
- Authorities view the monetary policy stance as broadly neutral; it has maintained inflation and Rupiah exchange rate stability.
- BI’s Policy Mix framework: policy stance determined not only by policy rate but also by policy settings to maintain adequate liquidity — including macroprudential policy (MPP).
- Monetary liquidity conditions are loose, reflecting ample liquidity that supports conducive lending rates and intermediation.
- MPP stance, in context of a negative credit gap and contained financial risks, has supported intermediation to high-priority sectors.
- BI pursues a pro-market strategy for deepening liquidity in both rupiah and FX markets, further portfolio inflows, and strengthening policy transmission effectiveness; this includes the SRBI and aligns with the Blueprint for Money Market Development (BPPU) 2025.
- Views on FSOL: seen as building adequate safeguards to limit primary market purchases by BI to crisis conditions; implementing regulations will be prepared under the principle of 3T (targeted, temporary, and transparent).
- Regarding maturing pandemic-era bonds: authorities will ensure unwinding is conducted in a gradual and orderly manner to avoid market disruptions.

*Source: IMF staff report excerpt.*

### 26.      The authorities disagreed with the classification of the export repatriation regulation

### 26.      The authorities disagreed with the classification of the export repatriation regulation

### Authorities' position on export repatriation regulation
- The authorities disagreed with staff’s classification of the export repatriation regulation as an outflow capital flow measure (CFM).
- Purpose of the regulation (authorities’ view):
  - Not aimed at managing cyclical capital flows.
  - Aimed at addressing structural issues by ensuring earnings from Indonesia’s natural resource exports are available as part of the FX liquidity in the banking system to support the country’s economic resilience, economic growth and welfare.
- Design features intended to limit disruptions:
  - Applies to FX earnings net of FX obligations.
  - Several financial instruments and fiscal incentives have been introduced to make repatriating funds attractive.
- Expected effects emphasized by authorities:
  - Instrumental in shifting exporters’ perspectives and incentives to place FX export proceeds onshore.
  - Contribute to deepening the domestic financial market.
- Implementation approach:
  - The measure will be periodically assessed and refined as needed.

### Financial Sector Policies: Preserving Stability and Supporting Growth (major findings and recommendations)
- Overall assessment:
  - Financial system is broadly resilient; systemic risk assessed as moderate and broadly unchanged from last year (2024 FSAP).
  - Banks dominate the financial system, are profitable, and capital buffers and liquidity coverage ratios remain well above regulatory minima.
  - Credit growth has recovered to pre-pandemic rates.
  - The financial system is broadly resilient to solvency risks from contagion and to system-wide liquidity stress.
- Key risks and monitoring needs:
  - Tightened “bank-sovereign nexus”—due to holdings of sovereign bonds and SOE lending—poses risks, though banks appear resilient.
  - Authorities should expand data coverage of key interlinkages to enhance monitoring as the financial system develops, including:
    - banks’ cross-border exposures,
    - institution-level NBFI-bank exposures,
    - bank-NFC linkages.
- Progress noted:
  - There has been progress in implementing the 2017 FSAP recommendations (Table 12 referenced).

### Banking sector (findings and recommended actions)
- Resilience basis:
  - Overall resilience rests on strong capital and liquidity buffers.
- Vulnerabilities:
  - Pockets of vulnerability for small banks in adverse scenarios.
- Recommendations:
  - Liquidity Coverage Ratios (LCRs) should be made mandatory for all banks.
  - FX risk monitoring should be further enhanced.
  - Strengthen guidance and supervision to ensure NPLs are recognized timely and in full, including following the phasing out of pandemic forbearance, to help contain risks of zombification.
- Key statistic:
  - Non-Performing Loans (NPLs) are low at 2.3 percent of total loans (April 2024).

### NFCs (non-financial corporations)
- Resilience:
  - NFCs appear resilient and overall vulnerability indicators have strengthened (Annex VIII).
- Remaining weaknesses:
  - Sectors hard-hit by the pandemic and smaller publicly listed firms remain weak.
  - Persistence of unproductive and unviable (zombie) firms may delay creative destruction and negatively affect long-term productivity growth.
  - The share of listed zombie firms has declined recently but remains above pre-pandemic levels and somewhat above other regional peers.
- External indebtedness improvement:
  - NFCs’ external debt exposures have fallen from 16.8 in 2015Q3 to 8.5 percent of GDP at end-2023.
- Policy recommendation:
  - Expand granular data coverage of large firms (listed and non-listed) as well as small and medium enterprises (SMEs) to support monitoring and risk assessment.
- Prudential measures noted:
  - Authorities’ prudential FX and liquidity policies have helped contain FX exposures, which are closely monitored.

### Households
- Leverage and lending:
  - Household leverage is low, with debt-to-GDP at 16.3 percent (2023Q3).
  - About 30 percent of bank lending is to households, about 2 percent of which are NPLs.
- Recommendations:
  - Strengthen monitoring of loans to households by expanding indicators (e.g., LTV and DSTI for origination and outstanding stocks of household debt).
  - Assess risks across the income distribution to identify emerging vulnerabilities as the sector expands, including via mortgages.

### NBFIs (non-bank financial institutions)
- Size and risk profile:
  - Sector is small (about 24 percent of the financial system’s assets in 2023), with limited interconnectedness.
  - Risks are rising for the insurance sector due to inadequate premium management and risk transfer practices.
- Recommendation:
  - Develop a framework to understand and reduce future systemic risks as the NBFI sector and its interconnections could grow rapidly with financial deepening.

### Financial sector reform priorities and institutional safeguards
- Reform areas to strengthen:
  - Enhance independence of the financial supervisor (OJK) and the resolution authority and deposit insurer (LPS).
  - Provide clarity on OJK’s primary supervisory objectives.
  - Further enhance supervisory effectiveness by improving risk assessment methodology, better integrating supervisory activities, and intensifying scrutiny of corporate governance and risk management practices.
  - Bolster financial safety net, crisis management, and systemic liquidity frameworks.
  - Further align the resolution framework with the Financial Stability Board’s (FSB) Key Attributes.

### BI’s MPP toolkit and stance
- Current stance and strategy:
  - BI actively relies on a broadly defined MPP toolkit reflecting three-pronged objectives: financial system resilience, balanced and sustainable intermediation, and financial inclusion.
  - BI’s current accommodative MPP stance is intended to foster sustainable credit and economic growth in the context of contained financial risks, and help counterbalance a monetary policy rate setting geared towards safeguarding rupiah stability.
- Recommendations:
  - Clarify that financial system resilience is prioritized when calibrating the broad toolkit, including whenever the three objectives may compete.
  - Separate elements of the current toolkit that do not have financial resilience as their main focus (e.g., into a sustainable and balanced-growth toolkit) to strengthen effectiveness and foster clear communication.
  - Gradually shift MPPs towards a more neutral stance as the credit gap closes to help contain the build-up of risks and support the banking system’s strong capital and liquidity positions.
  - Combine these steps with recommended narrower-than-projected fiscal deficits and gradual reductions to the monetary policy rate to support rebalancing of the overall policy mix.

### Financial digitalization and supervision
- Progress and initiatives:
  - BI established the Indonesia Payment System Blueprint (BSPI) 2025.
  - Standardized QR codes (QRIS) introduced in 2019.
  - Modernized real-time payment system (BI-FAST) introduced in 2021.
- Observations:
  - Expansion of financial digitalization has been broad (e-money, mobile banking, fintech P2P lending and digital investment), albeit from a small scale.
- Recommendations:
  - Continue efforts to narrow digitalization and financial literacy gaps to support P2P lending growth.
  - OJK should continue strengthening regulatory and supervisory approach to new financing models to ensure business resilience and consumer/investor protection.
  - Authorities should develop adequate cooperation arrangements for regulation and supervision of information technology-based financial services, consistent with the FSOL.

### AML/CFT framework
- Assessment:
  - 2023 Mutual Evaluation Report by FATF found the legal framework is strong and broadly effective.
- Key gaps to address:
  - Improve risk-based supervision for non-financial sectors.
  - Impose effective and dissuasive sanctions in all sectors.
  - Apply targeted financial sanctions for terrorist financing-related activities.
  - Ensure accurate information on ultimate beneficial owners of legal persons is available to law enforcement.
- Authorities’ stance:
  - Authorities underlined the importance of continuing to strengthen the AML/CFT regime.

### Authorities’ views on systemic risks and policies
- Agreement with staff:
  - Authorities agreed systemic risks are well contained and that risks from cross-sectoral and cross-border exposures are contained.
  - Banks continue timely and complete monthly reporting of financial positions, including NPLs, aiding accurate asset quality reflection as forbearance measures were removed.
- Actions taken:
  - OJK has taken steps to resolve risk management practices in the insurance sector.
  - Authorities stressed efforts to enhance financial literacy and inclusion, close the digital divide, and enhance regulatory and supervisory frameworks.
- Macroprudential policy objective:
  - Authorities emphasized safeguarding financial stability as the ultimate objective of MPP and noted BI’s three-pronged MPP strategies complement each other in maintaining financial stability.

### Policies to Manage Near- and Medium-Term Risks (findings and guidance)
- External environment and shock risks:
  - Indonesia will need to navigate a more shock-prone world with potential adverse shocks from China and the U.S. affecting trade, commodity prices, and financial markets.
- Buffers and policy space:
  - Indonesia has strong fiscal and financial buffers and robust policy frameworks to respond to adverse shocks.
  - Available fiscal space can be used in a targeted way to preserve priority development spending, including support to the vulnerable.
  - Inflation is well-anchored and financial sector risks contained, leaving scope for monetary policy to balance risks to inflation, output, and financial stability.
- Role of exchange rate (ER) and FX intervention (FXI):
  - Allowing the ER to play a shock absorbing role will be key in an integrated policy framework (IPF).
  - Key frictions remain centered on the persistence of shallow FX markets.
  - FXI may be warranted in response to risk-off episodes and large shocks that trigger severe depreciation which, if not moderated, could cause non-linear responses for inflation and threaten financial stability.
- Model-based analysis:
  - Analysis focuses on adverse growth shocks in China or policy shocks in the U.S., affecting Indonesia through worsening terms of trade and potential risk-off shocks.
  - Appropriate policy response must be calibrated to nature and duration of shock and supported by enhanced communication, with FXI appropriate in risk-off episodes.
- Preserving buffers:
  - Use of fiscal and reserve buffers should keep future needs in mind; preserving buffers and keeping some powder dry is important given likely more frequent and volatile external shocks under GEF.

### Authorities’ views on policy responses
- Authorities agreed with staff on need for carefully designed policy responses and underscored Indonesia’s track record of prudently navigating shocks and strong policy buffers.
- Authorities’ preferences and views:
  - BI’s policy mix, combined with fiscal efforts if needed, provides necessary instruments to address external stress while protecting domestic stability.
  - FXI is also warranted based on early pressures on the FX market given uncertainties in real time and risks of non-linearities affecting expectations.
  - Integrating MPPs as part of the toolkit to sustain optimal intermediation while safeguarding financial stability should be considered in staff’s analysis.

### Structural reform agenda to achieve high income by 2045
- Growth target:
  - Reaching high-income status by 2045 requires an annual nominal GNI growth rate of 8 to 9 percent, roughly equivalent to 6-7 percent real annual growth (assuming annual inflation around 2 percent), sustained over two decades.
- Role of horizontal structural reforms:
  - Comprehensive horizontal structural reforms are essential to bridge gaps in governance, infrastructure, human capital, labor resilience, export complexity, and economic openness.
  - Historical evidence: prolonged high-growth and fast income convergence episodes were underpinned by sound structural initial conditions and improvements in horizontal structural areas.
- Quantified reform impact (regression analysis):
  - A major “first-generation” structural reform package could raise output levels by around 1.5-2 percent after two years relative to baseline (i.e., would help bring annual growth up to around 6 percent from the current 5 percent).
- Private sector and MSMEs:
  - Facilitating private sector activity is essential to lifting potential output growth and mitigating GEF risks by attracting FDI through transparent, simple, and predictable investment and business frameworks.
  - MSMEs are estimated to contribute over 60 percent of Indonesia’s GDP and absorb 97 percent of Indonesia’s workforce; boosting their performance and productivity is essential to achieve the Golden Vision.
- Operational constraints and reform priorities:
  - Constraints include business, labor market, and credit market regulations and credit infrastructure that hamper private sector activity and competitiveness.
  - Only 76 percent of small firms have a checking or saving account versus 91 percent of large firms.
  - Trade barriers, particularly non-tariff measures (NTMs), impose burdens and discourage FDI.
  - Recommended reforms include:
    - Bolstering logistics performance and infrastructure.
    - Fostering greater economic openness and improving regulatory frameworks (product market regulation, trade facilitation).
    - Lowering NTMs.
    - Improving insolvency frameworks to stimulate private investment from healthy firms.
    - Continuing to strengthen governance (rule of law, contract enforcement, protection of property rights) and anti-corruption frameworks (institutional effectiveness of anti-corruption agency, judiciary, asset declaration system) to support accountability and business certainty.

*Source: 1idnea2024001-print-pdf - 26.      The authorities disagreed with the classification of the export repatriation regulation*

### 43.      Indonesia’s growth acceleration strategy rests on enhancing the value-added down the

### Indonesia’s growth acceleration strategy rests on enhancing the value-added down the chain from raw commodities through Industrial Policy (IP).

### Industrial Policy (IP) and growth implications
- IP was first deployed on nickel ore, where Indonesia has a commanding global market share.
- The strategy was supported by fiscal incentives and NTMs, and has helped increase exports of refined nickel and FDI into the e-battery/e-vehicle value chain.
- The authorities plan on extending the strategy to a further range of commodities, with discussions on up to 21 commodities in total (including metals, crude palm oil and fisheries), though specific plans and toolkits are yet to be detailed.
- Simulations suggest that reaching a real GDP growth rate of 7 percent in the next five years will require:
  - leading sectors to grow consistently well above their five-year moving average growth, and
  - the rest of the economy to continue growing at some 5 percent in real terms throughout the period.
- Given Indonesia’s diversified economic structure, expanding IP to other commodities and relying only on a group of sectors to drive real GDP growth to 6-7 percent could prove challenging.

### Risks, design considerations, and trade-offs of IP
- IP can be beneficial if targeting well-identified market failures in a time-bound and cost-effective way, but it comes with:
  - potentially high fiscal costs,
  - risks of rent-seeking and resource misallocation,
  - risks to competition and innovation,
  - adverse cross-border spillovers.
- NTMs comprise a broad set of measures, including import and export restrictions, import licensing, and local content requirements; NTMs add up to an average tariff equivalent that is relatively higher than peers in the region, and trade facilitation in Indonesia is below OECD country median.
- Transitioning away from the use of NTMs will be critical to supporting global economic integration and avoiding limitations to firms’ growth opportunities and nimbleness.

### Green transition, energy policy, and climate commitments
- The recently published Comprehensive Investment and Policy Plan (CIPP) for on-grid power generation is an important step; complementing the CIPP with a plan to transition off-grid power generation under the Just Energy Transition Partnership (JETP) would help meet climate goals.
- National climate mitigation strategy appropriately focuses on forestry and land use (FOLU) where abatement costs are low; strong enforcement and monitoring are critical given risks of illegal deforestation and enforcement gaps.
- Off-grid power generation is heavily reliant on coal and is currently under expansion to meet IP deployment needs in remote locations.
- Key policy tools identified to achieve Indonesia’s NDC and Net Zero goals include:
  - energy subsidy reform,
  - carbon pricing,
  - gradually phasing out related NTMs,
  - measures to support those most vulnerable during the transition,
  - efforts to boost generation and access to renewable energy.
- Indonesia’s target: reduce GHG emissions in 2030 by 32 percent and achieve Net Zero emissions by 2060.
- Relevant JETP and market figures:
  - Grants and TA programs under the JETP initiative launched for a total of US$215 million and around US$800 million loans already signed or approved, with additional US$2 billion undergoing negotiations.
  - The mandatory emission trading system (ETS) involves 99 power plants as of 2023 and covers around 86 percent of the total national coal-fired power plant capacity, with 7 million tons of CO2e allowances having been traded so far (for a value of around US$5 million).
  - Around 570.000 tons of CO2e carbon units amounting to US$2.2 million have been sold in this Carbon Exchange market (IDX Carbon) as of end-April 2024, most of it to banking companies.

### Structural reform gaps and priorities
- A granular benchmarking exercise shows Indonesia has significant structural gaps vis-à-vis peers: relatively less open to trade, least sophisticated exports within ASEAN, lower labor productivity and human capital.
- Foundational priorities include strengthening governance and anti-corruption frameworks, improving the legal system for accountability and business certainty, enhancing infrastructure and logistics, and improving education, health, and social protection.
- Cross-country analysis suggests reforms in governance, external sector regulation, credit market regulation, and human development have positive, significant effects on output; effects are stronger when reforms are implemented simultaneously.
- Suggested sequencing and priority areas (illustrative):
  - Near-term: governance and anti-corruption combined with business regulation improvements and external sector reforms to support FDI.
  - Supportive public spending areas: education, social services, infrastructure—may require expanding fiscal space via revenue mobilization (e.g., increase the VAT rate and excises in a first wave of tax reforms).
  - Follow-up reforms: credit market regulation to deliver stronger output effects once initial reforms are in place.

### Authorities’ views and commitments
- The authorities’ 2045 Golden Indonesia Vision centers on transformational reforms to enhance social protection, improve productivity, and foster new sources of growth.
- First-stage priorities: increasing quality of education, health and social protection, and infrastructure (longer compulsory education, wider delivery of secondary education, nutrition programs to reduce stunting, new Capital, new sea and air hubs, stronger digital infrastructure, energy transition infrastructure).
- The authorities view their IP strategy as consistent with insertion into global value chains (GVCs), seeing IP as needed to increase value-addition and attract investment flows amid geopolitical fragmentation. They report strong results from nickel ore IP and plan to expand to copper by end-2024.
- The authorities are committed to achieving Net-Zero Emission by 2060 or sooner; the National Long-Term Development Plan for 2024-2025 incorporates this. The authorities expect to release the 2024 CIPP around end-2024.

### Staff appraisal and policy recommendations
- Macro outlook and fiscal stance:
  - Indonesia’s growth remains strong; output gap expected to fully close in 2026.
  - The fiscal deficit has stayed within the fiscal rule limit; public debt is declining.
  - The fiscal position is projected to become expansionary in 2024 and 2025 amid a negative (albeit gradually closing) output gap; slightly narrower deficits would support a more balanced policy mix and preserve policy space.
  - Preserve fiscal prudence and the 3 percent of GDP deficit cap, complemented with an enhanced medium-term fiscal framework (MTFF).
  - Forceful tax reform, keeping tax incentives well-contained, and bolstering revenue administration are essential for revenue mobilization.
  - Prioritize high-quality spending and gradually reduce energy subsidies.
  - Closely monitor fiscal risks from SOEs, PPPs and public guarantees to avoid buildup of contingent liabilities.
- Monetary and financial sector guidance:
  - Monetary policy stance remains broadly adequate and should remain data dependent; absent significant shocks, a gradual reduction of the policy rate would be appropriate.
  - Align implementing regulations for future primary market purchases of government bonds by BI to international best practices to safeguard central bank independence.
  - Unwind pandemic bonds carefully to avoid market disruptions.
  - Refine the macroprudential framework, clarifying BI’s prioritization of financial system resilience and distinguishing tools for resilience; gradually shift macroprudential stance towards neutral as the credit gap closes.
  - Further financial sector reforms per the 2024 FSAP include bolstering the financial safety net, crisis management and resolution, systemic liquidity frameworks, developing credit infrastructure, and addressing remaining AML/CFT gaps.
- Specific reform and financial sector operational recommendations (selected):
  - Increase domestic tax revenue to bolster fiscal space and ensure endurance beyond the short-term.
  - Prioritize high-quality spending supportive of development and closely monitor fiscal risks.
  - Increase coverage and adequacy of the social safety net and improve targeting of subsidies.
  - Enhance the strategic direction of MTFF and its articulation with the annual budget and long-term plans; ensure General Government accounts comprehensively reflect fiscal activities.
  - Strengthen SNG own-revenue sources and PFM, including current and investment spending execution and service delivery capacities.
  - Boost health and education spending quality, tackle gender inequality, and improve learning outcomes to enhance productivity and economic sophistication.
  - Avoid intensifying restrictive trade policies (including in the IP context) and transition away from NTMs that distort trade and investment decisions and risk international spillovers.
  - Foster openness in trade and FDI, and increase trade facilitation to reduce time, cost and uncertainty of crossborder transactions.
  - Reduce regulatory uncertainty, bureaucracy costs and administrative hurdles; strengthen infrastructure and logistics.
  - Develop credit score regulation and oversight for Credit Reporting Systems; enhance capital market development; expand access to fast payment systems (BI-FAST) and open banking approaches; foster institutional investors; improve financial literacy and reduce digitalization gaps; introduce a regulatory green taxonomy and update reporting; explore scaling domestic banking to mobilize climate finance.
  - Enhance labor market flexibility on hiring and firing, tackle informality and duality while protecting workers.

*Source: IMF staff analysis and appraisal in the provided content.*

### 54.      In line with the Integrated Policy Framework (IPF), the exchange rate should continue

### In line with the Integrated Policy Framework (IPF), the exchange rate should continue

### Exchange rate, foreign exchange intervention, and buffers
- The exchange rate should continue to play its shock-absorbing role in line with the Integrated Policy Framework (IPF).
- Foreign exchange intervention (FXI) is appropriate under certain shocks and conditions, particularly when shocks trigger spikes in market premia in the context of shallow FX markets.
- Preserving buffers is emphasized as particularly important for future eventual urgencies in a shock-prone global environment.
- Judicious use of FXI combined with an emphasis on exchange rate (ER) flexibility would support greater market development.

### Structural reforms to reach high-income status by 2045
- Reaching high-income status by 2045 requires bridging gaps via horizontal structural reforms to lift potential growth inclusively.
- Key reform areas identified:
  - Strengthening governance and anti-corruption.
  - Leveling up learning outcomes.
  - Investing in logistics and infrastructure.
  - Reducing restrictions to trade.
  - Enhancing social protection.
- Objective: create a more attractive business environment, absorb and support stronger economic activity, generate new job opportunities, lift output sustainably, and ensure growth gains are evenly shared.

### Industrial policy (IP) and non-tariff measures (NTMs)
- Transitioning away from the use of Non-tariff Measures (NTMs) and carefully designing Industrial Policy (IP) to minimize trade and investment distortions would support potential growth.
- Recommendations for expanding IP to new sectors:
  - Precede expansion with cost-benefit analyses.
  - If implemented, accompany with regular reassessments of trade-offs.
- Principles of sound IP design:
  - Target well-identified market failures.
  - Be time-bound and cost-effective.
  - Be anchored by strong governance.
  - Avoid hindering competition and innovation.
  - Minimize adverse cross-border spillovers.
- Transitioning away from NTMs is described as critical to sustain strong and inclusive growth while supporting global economic integration.

### Green transition and climate-related policy measures
- The Comprehensive Investment and Policy Plan (CIPP) for on-grid power generation is highlighted as an important step.
- The national climate mitigation strategy appropriately focuses on forestry and land use (FOLU), where abatement costs are low.
- Finalizing plans to transition coal-based off-grid power generation under the Just Energy Transition Partnership (JETP) would help set a path to meet climate goals.
- Policy measures recommended to support Indonesia’s climate objectives:
  - Energy subsidy reform.
  - Carbon pricing.
  - Gradually phasing out related NTMs.
- Targeted climate goals:
  - Achieve Indonesia’s Nationally Determined Contribution (NDC) by 2030.
  - Achieve Net Zero emissions by 2060.

*INTERNATIONAL MONETARY FUND*

### 58.      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.

### Recent economic developments and outlook
- Real GDP growth remained strong in 2023 and 2024Q1, supported by robust domestic demand.
- Private consumption has been resilient after the post-pandemic recovery; manufacturing sentiment has remained expansionary.
- Consumer sentiment strong throughout 2023 and into 2024, albeit with income disparities.
- Volume of merchandise exports normalized after gaining momentum as of end-2023.
- Projections (Selected from Table 1 and Table 4):
  - Real GDP (percent change): 2022: 5.3; 2023: 5.0; 2024: 5.0; 2025: 5.1; 2026: 5.1; 2027: 5.1.
  - Domestic demand: 2022: 3.8; 2023: 5.1; 2024: 5.0; 2025: 5.2; 2026: 5.1; 2027: 5.1.
  - Output gap (in percent): 2022: -1.1; 2023: -0.3; 2024: -0.2; 2025: -0.1; 2026: 0.0; 2027: 0.0.
  - Nominal GDP (2023): Rp 20,892 trillion or US$1,371 billion.
  - GDP per capita (2023): US$4,942.
  - Population (2023): 277 million.

### Inflation and capacity
- Inflation trends:
  - Consumer prices (end period): 2022: 5.4 percent; 2023: 2.8 percent; 2024 (Proj.): 2.8 percent; 2025 (Proj.): 2.7 percent; 2026 (Proj.): 2.6 percent; 2027 (Proj.): 2.5 percent.
  - Consumer prices (period average): 2022: 4.1 percent; 2023: 3.7 percent; 2024 (Proj.): 2.9 percent.
- Inflation came down since early 2023 to well within BI’s target band, reflecting declines in core and administered price goods, despite spikes in volatile food inflation in early 2024.
- Transportation and housing inflation declined; remaining inflation driven by food prices.
- Capacity utilization increased but remains well below pre-pandemic levels.
- PPI inflation saw a broad-based decline since early 2023.

### Capital flows, markets, and external sector
- Capital flows and market developments:
  - Portfolio investment recorded positive debt inflows in 2023, concentrated at end-year, partly offset by equity outflows.
  - Rupiah government bonds held by foreign investors edged up slightly in 2023 in US$ and as a percent of the debt stock.
  - Market interest rates broadly flat since 2023; sovereign premium volatility declined overall; stock market indices lost some ground over 2024.
- External sector key figures and developments:
  - Current account balance (billions of U.S. dollars): 2022: 13.2; 2023: -1.9; 2024 (Proj.): -12.3; 2025 (Proj.): -20.5; 2026 (Proj.): -24.2; 2027 (Proj.): -25.5.
  - Current account (in percent of GDP): 2022: 1.0; 2023: -0.1; 2024 (Proj.): -0.9; 2025 (Proj.): -1.3; 2026 (Proj.): -1.4; 2027 (Proj.): -1.4.
  - Lower commodity prices led to broad-based decline in export growth in 2023, particularly coal.
  - Import growth moderated, mainly reflecting weaker imports of raw materials.
  - Gross reserves (end period, US$ billion): 2022: 137.2; 2023: 146.4; 2024 (Proj.): 147.2; 2025 (Proj.): 153.9; 2026 (Proj.): 163.5; 2027 (Proj.): 177.3.
  - Gross international reserves adequacy: In months of prospective imports of goods and services—2022: 6.2; 2023: 6.1; 2024 (Proj.): 5.5; 2025 (Proj.): 5.2; 2026 (Proj.): 5.1; 2027 (Proj.): 5.2.
  - Total external debt (in billions of U.S. dollars): 2022: 396.5; 2023: 408.5; 2024 (Proj.): 419.0; 2025 (Proj.): 439.4; 2026 (Proj.): 461.6; 2027 (Proj.): 482.8.
  - Total external debt (in percent of GDP): 2022: 30.1; 2023: 29.8; 2024 (Proj.): 29.4; 2025 (Proj.): 28.3; 2026 (Proj.): 27.5; 2027 (Proj.): 26.6.
  - External financing needs projected to increase in 2024 mainly due to a widening current account deficit.

### Fiscal sector and public finances
- Fiscal outcomes and projections:
  - General government revenue (percent of GDP): 2022: 15.2; 2023: 15.0; 2024 (Proj.): 14.8; 2025 (Proj.): 14.9; 2026 (Proj.): 15.0; 2027 (Proj.): 15.0.
  - General government expenditure (percent of GDP): 2022: 17.4; 2023: 16.6; 2024 (Proj.): 17.1; 2025 (Proj.): 17.6; 2026 (Proj.): 17.5; 2027 (Proj.): 17.4.
  - General government balance (percent of GDP): 2022: -2.2; 2023: -1.6; 2024 (Proj.): -2.3; 2025 (Proj.): -2.6; 2026 (Proj.): -2.5; 2027 (Proj.): -2.4.
  - Primary balance (percent of GDP): 2022: -0.2; 2023: 0.5; 2024 (Proj.): -0.3; 2025 (Proj.): -0.6; 2026 (Proj.): -0.3; 2027 (Proj.): -0.1.
  - General government debt (percent of GDP): 2022: 40.1; 2023: 39.6; 2024 (Proj.): 39.5; 2025 (Proj.): 39.4; 2026 (Proj.): 39.3; 2027 (Proj.): 39.1.
- Fiscal developments summarized:
  - The primary balance turned into a surplus in 2023, reflecting mostly stronger-than-expected revenue performance.
  - Indonesia’s tax-to-GDP ratio lags behind EM peers.
  - Public debt-to-GDP ratio is lower than peers, but the debt service to revenue ratio is higher.
  - Non-resident holdings of rupiah government securities stabilized at a lower level compared to pre-pandemic.
  - General government debt as share of GDP expected to decrease gradually over the medium term.
- Central government operations (Table 5 highlights, selected levels in trillions of rupiah):
  - Revenues and grants: 2022: 2,636; 2023: 2,784; 2024 (Proj.): 2,956; 2025 (Proj.): 3,224; 2026 (Proj.): 3,478; 2027 (Proj.): 3,755.
  - Expenditure and net lending: 2022: 3,096; 2023: 3,121; 2024 (Proj.): 3,474; 2025 (Proj.): 3,867; 2026 (Proj.): 4,140; 2027 (Proj.): 4,441.
  - Net issuance of government securities (trillions of rupiah): 2022: 504; 2023: 446; 2024 (Proj.): 554; 2025 (Proj.): 674; 2026 (Proj.): 693; 2027 (Proj.): 716.

### Monetary sector and financial conditions
- Monetary policy and market operations:
  - Monetary policy tightening since August 2022, along with Operation Twist and new short-term instruments, have flattened the yield curve.
  - BI ended pandemic-era primary market government bond purchases in 2022; total holdings of government bonds stabilized in 2024.
  - BI hiked the policy rate by 25 bps in October 2023 to 6 percent, and further to 6.25 percent in April 2024; has stayed on hold since then.
  - One-month interbank rate (period average): 2022: 4.2; 2023: 6.4.
- Money and credit (12-month percent change; end of period):
  - Rupiah M2: 2022: 8.4; 2023: 3.5; 2024 (Proj.): 9.9; 2025 (Proj.): 10.0; 2026 (Proj.): 9.8; 2027 (Proj.): 9.8.
  - Base money: 2022: 23.9; 2023: -1.5; 2024 (Proj.): 4.0; 2025 (Proj.): 6.0; 2026 (Proj.): 7.0; 2027 (Proj.): 7.4.
  - Claims on private sector: 2022: 10.1; 2023: 9.2; 2024 (Proj.): 10.5; 2025 (Proj.): 11.3; 2026 (Proj.): 9.5; 2027 (Proj.): 9.6.
- Macrofinancial developments:
  - Credit growth returned to pre-pandemic rates and continued to pick up in 2024.
  - Commercial banks’ loan-to-deposit ratios have only partly bounced back.
  - Credit gap remains negative but has been narrowing since 2023.
  - Financial conditions eased since end-2022 despite higher interest rates, amid lower sovereign and corporate spreads.
  - Recovery in credit growth to MSMEs moderating; real estate loan growth moderating; non-performing loans ratio ticked up in 2024.

### Financial soundness and vulnerabilities
- Banking system soundness (selected indicators, latest observations noted as Q1 or Apr):
  - Regulatory capital to risk-weighted assets: 24.1 (2022), 25.8 (2023), 24.3 (Q1).
  - Nonperforming loans to total gross loans: 2.1 (2022), 2.0 (2023), 2.0 (Q1).
  - Return on equity: 12.4 (2022), 14.4 (2023), 15.3 (Q1).
  - Liquid assets to total assets: 18.3 (2022), 16.1 (2023), 14.9 (Q1).
  - Foreign currency denominated loans to total loans: 13.2 (2022), 13.1 (2023), 13.7 (Q1).
  - Household debt (in percent of GDP): 2020: 17.7; 2021: 17.3; 2022: 16.1; 2023: 16.5; 2024 (Q1): 15.4.
- Selected vulnerability indicators (Table 2 highlights):
  - Real GDP growth (in percent): 2020: -2.1; 2021: 3.7; 2022: 5.3; 2023: 5.0; 2024 (Proj.): 5.0.
  - CPI inflation (in percent, e.o.p): 2020: 1.7; 2021: 1.9; 2022: 5.4; 2023: 2.8; 2024 (Proj.): 2.8.
  - Gross international reserves (in US$ billion): 2020: 135.9; 2021: 144.9; 2022: 137.2; 2023: 146.4; 2024 (Proj.): 147.2.
  - Gross external financing requirement (in US$ billion): 2020: 69.5; 2021: 55.9; 2022: 53.4; 2023: 71.8; 2024 (Proj.): 86.5.
  - Public sector gross debt (PSGD) (in percent of GDP): 2020: 36.6; 2021: 41.4; 2022: 42.8; 2023: 42.9; 2024 (Proj.): 42.7.

### Structural policies, reforms, and capacity development
- Implementation of past Article IV recommendations (selected actions since 2023 Article IV Consultation):
  - Fiscal: Overall deficit narrowed to 1.7 percent of GDP in 2023; authorities stated plans to enhance energy subsidy efficiency via better targeting.
  - Monetary: BI tightened policy as recommended; policy rate actions recorded (6 percent in Oct 2023; 6.25 percent in Apr 2024); rupiah depreciated by an average of 2.6 percent in 2023; exchange rate regime classified as floating.
  - Financial sector: Macroprudential policies kept loose to avoid drag on growth; regulatory forbearance measures discontinued in March 2024 as envisaged; authorities largely implemented 2017 FSAP Recommendations.
  - Structural policies and climate: Authorities increased 2024 budgets for education, social protection, infrastructure, and health; export restrictions maintained with extensions to some new commodities; published a Comprehensive Investment and Policy Plan (CIPP) including phase out of on-grid coal-fired power plants under the JETP; plan to transition off-grid power generation needed.
- Status of key 2017 FSAP recommendations (summary of implementation status—selected items):
  - Institutional and legal arrangements: Omnibus law (FSOL) Law 4/2023 issued 12 January 2023 revising 17 laws related to the financial sector; partially implemented recommendations on primacy of OJK objectives and legal protection for supervisors.
  - Financial sector oversight: Joint Stress Test (JST) implemented regularly since 2017; bottom-up stress tests for D-SIBs coordinated by OJK implemented.
  - Governance of FCs and financial holding companies: POJK 45/2020 and FSOL introduced requirements for financial holding companies; licensing and regulatory steps in progress with certain FSOL requirements to be implemented by January 2025.
  - Crisis management and resolution: Emergency liquidity assistance (ELA) framework adjusted and implemented; recovery plans and resolution planning frameworks implemented (POJK No. 14/POJK.03/2017 and IDIC Regulation Number 1/2021).
  - Financial integrity and inclusion: Risk-based AML/CFT supervision implemented; National Strategy for Financial Inclusion (SNKI) in place; financial market deepening initiatives and market infrastructure developments implemented.
- Fund capacity development and technical assistance (selected areas and recent actions):
  - Monetary policy communication, monetary and exchange rate modeling, repo market and interest rate benchmark reform technical assistance provided.
  - Statistics: TA on big data for property price index, integrated sectoral accounts and balance sheets, Financial Soundness Indicators, producer price index expansion, macro-relevant climate change statistics (July 2023), and Government Finance Statistics (February 2024).
  - Fiscal: TA on medium-term revenue strategy, fiscal rules workshop (November 2023), tax diagnostics TA (April 2024).
  - Public financial management: PIMA (February 2019), public sector balance sheet analysis (October 2019), TA on fiscal risks, cash management, PPPs and government guarantees (January 2024).
  - Financial sector: TA on financial conglomerate supervision, risk-based supervision, crisis management, stress testing, systemic risk analysis, and fintech regulation workshops.

### Key policy recommendations (drawn from surveillance and implementation records)
- Maintain a broadly neutral fiscal stance below the 3 percent deficit ceiling, while pursuing revenue mobilization and efficiency in energy subsidy targeting.
- Continue BI’s tightening bias as needed and let the exchange rate play its role as a shock absorber.
- Move macroprudential stance toward neutral as the credit gap narrows; tighten regulatory forbearance measures and ensure expiration of relaxation of loan classification rules.
- Advance structural reforms: reduce labor market restrictions, improve investment climate, develop human capital, increase infrastructure investment, and deepen financial markets.
- Continue implementation of FSOL- and POJK-related measures to strengthen oversight, crisis management, supervisory legal protections, and licensing/oversight of financial holding companies, with priority actions to meet January 2025 FSOL timetables.
- Further develop plans to phase out on-grid coal-fired power plants and design transition plans for off-grid generation within the Comprehensive Investment and Policy Plan (CIPP).

*Source: IMF staff report excerpts and tables as provided in the supplied content.*

### Annex I.  External Sector Assessment

### Annex I. External Sector Assessment

### Overall Assessment
- The external position in 2023 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 are expected to contain the CA deficit.
- External financing needs appear sustainable, but reliance on foreign portfolio investment exposes the economy to sharp swings in market sentiment, risk premia, and fluctuations in global financial conditions.

### Potential Policy Responses
- Maintain external balance through structural reforms to enhance productivity and facilitate post-COVID-19 sectoral adjustments, including:
  - Higher infrastructure investment, higher social spending to foster human capital development and strengthen the social safety net.
  - A reduction of restrictions on inward FDI and external trade, including by moving away from non-tariff barriers (as discussed in the 2023 Article IV consultation).
  - Promotion of greater labor market flexibility.
- Continue exchange rate flexibility to support external stability during structural transformation.

### Foreign Asset and Liability Position and Trajectory
Background:
- NIIP remained unchanged at –19.0 percent of GDP at the end of 2023.
- Gross external assets increased to 35.3 percent of GDP and gross external liabilities to 54.3 percent of GDP, each up by 1.1 percentage points.
- Increase in gross external assets was supported by higher FDI abroad, portfolio investment, and reserve assets.
- Increase in gross external liabilities reflected fully the increase in FDI inflows.
- Gross external debt was 29.8 percent of GDP at end-2023, down from 30.1 percent of GDP in 2022.
- Short-term external rollover risks are contained due to a large share of long-term debt.

Assessment:
- The level and composition of the NIIP and gross external debt indicate a sustainable external position with limited rollover risk.
- High dependence on foreign portfolio investment (20.1 percent of GDP in 2023) increases vulnerability to global financial market sentiment swings.
- NIIP as percent of GDP is projected to stabilize at current levels in the medium term as robust nominal GDP growth offsets projected small CA deficits.

Key 2023 figures (% GDP):
- NIIP: –19.0
- Gross Assets: 35.3
- Res. Assets: 10.7
- Gross Liab.: 54.3
- Debt Liab.: 29.8

### Current Account
Background:
- CA balance posted a small deficit of 0.1 percent of GDP in 2023, after surpluses of 1.0 percent in 2022.
- 2023 deficit driven by the non-oil and gas trade balance, weaker growth in major trading partners, and a broad-based decline in commodity prices.
- Resilient domestic demand led to a smaller decline in imports relative to exports.
- On savings-investment: higher government revenue was broadly offset by lower private savings and higher private investment.
- CA deficit expected to widen moderately in 2024 due to lower commodity prices and robust domestic demand supporting import growth.
- CA deficit expected to remain close to the norm throughout the projection horizon.

Assessment and metrics (2023, % GDP):
- CA: –0.1
- Cycl. Adj. CA: –0.3
- EBA Norm: –0.8
- EBA Gap: 0.5
- Staff Adj.: 0.3
- Staff Gap: 0.8

Additional assessment:
- Staff estimates a CA gap of 0.8 percent of GDP for 2023, consistent with a cyclically adjusted CA deficit of −0.3 percent of GDP, a staff assessed norm of −0.8 percent of GDP, and an adjustor of 0.3 percentage points for demographics.
- Considering uncertainty, the CA gap for 2023 is in the range of 0.3 to 1.3 percent of GDP.
- EBA-identified policy gaps estimated at 1.7 percent of GDP, driven by a tighter fiscal stance than in other countries (1.3) and underspending on healthcare (0.6).

### Real Exchange Rate
Background:
- Average REER depreciated by 3.7 percent in 2023 compared to 2022 average (or 3.2 percent relative to the pre-COVID 2016-19 average).
- Depreciation driven by rapid tightening in global monetary policy and high global financial market volatility.
- Rupiah recovered some losses toward end-2023 due to easier global financial conditions and BI’s policy responses (including a one-off interest rate hike).
- As of end-April 2024, the REER was 2.4 percent below its 2023 average.

Assessment:
- Staff CA gap estimate of 0.8 percent of GDP implies a REER gap of –5.0 percent (applying an estimated elasticity of 0.16).
- REER index and level models point to REER gaps of 0.8 percent and –15.9 percent, respectively.
- Staff assesses the REER gap in the range of –7.9 to –2.1 percent, with a midpoint of –5.0 percent.

### Capital and Financial Accounts: Flows and Policy Measures
Background:
- Net capital and financial flows were 0.7 percent of GDP in 2023, after −0.7 percent of GDP in 2022.
- Recovery driven by portfolio investment, concentrated in Q4 2023, reflecting BI’s introduction of open market instruments to attract capital flows and support reserves.
- Net FDI inflows declined to 1.1 percent of GDP in 2023 (1.4 percent in 2022 and 1.5 percent in 2021).
- Nonresident holdings of rupiah-denominated government bonds increased by 0.6 percentage points to 14.9 percent in 2023, below the 39 percent share in 2019.

Assessment:
- Recovery in portfolio investment helped support the small negative CA deficit in 2023.
- Continued policies safeguarding the fiscal position, advancing financial deepening, and easing broad-based structural reforms to promote an enabling business environment should help sustain capital inflows in the medium term, especially during high market volatility.

### FX Intervention and Reserves Level
Background:
- Since mid-2013, Indonesia has operated a more flexible exchange rate policy framework.
- Official foreign reserves increased to US$146 billion in 2023 from US$137 billion in 2022, reflecting increased deposits abroad and withdrawal of government foreign loans, more than offsetting the decline in securities from FX intervention.

Assessment:
- Current reserves: 10.7 percent of GDP, 123 percent of the IMF’s reserve adequacy metric, and 6.1 months of prospective imports.
- This reserve level should provide a sufficient buffer against external shocks.
- Predetermined drains are manageable, though increased related to short positions on financial derivatives.
- In line with the IPF, FX intervention (FXI) remains appropriate under certain shocks and circumstances—particularly when shocks trigger spikes in market premia in shallow FX markets—while preserving reserve buffers.

### Public Debt Sustainability (excerpt)
- General government debt reached 39.6 percent of GDP in 2023 from 30.6 percent in 2019 due to exceptional fiscal measures in 2020-22 and temporary suspension of the fiscal rule.
- Public debt is projected to gradually decline to around 38.3 percent of GDP over the medium-term, mainly driven by a negative cumulative interest rate-growth differential.
- Gross financing needs 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.

*International Monetary Fund — Annex I. External Sector Assessment (selected content).*

### 2.      The SRDSA suggests an overall low risk of sovereign stress. Medium-term risks are

### 2.      The SRDSA suggests an overall low risk of sovereign stress. Medium-term risks are

### Overall assessment
- The aggregate MTI produces a mechanical “low” signal.
- Final DSA summary assessment: Indonesia is at a "low" overall risk of sovereign stress and debt is sustainable.
- Near-term: Low.
- Medium-term: Low (in line with the mechanical signal from the SRDSF).
- Commentary: The overall risk of sovereign stress is assessed as "low", reflecting debt stabilization under the baseline and low levels of vulnerability in both the near and medium-term modules.
- Long-term caveat: There are long-term risks from climate change adaptation needs. Adaptation costs are estimated at about 0.8 percent of GDP per year over the long-term. Fiscal reforms to create fiscal space to finance adaptation needs are critical over the longer run.

### External debt trajectory and projections
- External debt path:
  - 2021: 34.9 percent of GDP (end-2021).
  - 2022: 30.1 percent of GDP.
  - End-2023: 29.8 percent of GDP.
- Drivers of recent decline:
  - External debt declined across all sectors; the general government accounted for more than half of the decline, standing at 14.1 percent of GDP in 2022.
  - The end-2023 decline was driven mainly by a decline in debt of other nonbanking sectors.
- Medium-term baseline projection:
  - External debt is projected to gradually decline to 26 percent of GDP in the medium term.
  - Rationale: Strong projected growth in nominal GDP more than offsets rising external financing needs as the current account widens somewhat.

### External debt stress test sensitivities
- Resilience and vulnerabilities:
  - External debt sustainability is robust to interest rate, current account, and growth shocks.
  - External debt is sensitive to exchange rate shocks.
- Quantified impacts:
  - A one-standard deviation widening of the current account would increase external debt to 29 percent of GDP by 2029.
  - A 30 percent depreciation in 2024 would raise external debt to 41 percent of GDP in 2025; debt would decline only slightly by the end of the forecasting horizon.

### Medium-term Risk Analysis (MTI components and signals)
- Debt Fanchart Module:
  - Fanchart width: 35.9.
  - Probability of debt non-stabilization: 23.8 percent.
  - Terminal debt-to-GDP x institutions index: 19.4.
  - Debt Fanchart Index (DFI): 1.1 → Risk Signal: Moderate.
  - Commentary: Indicates an adequate balance of risks around the projected debt baseline.
- Gross Financing Needs (GFN) Financeability Module:
  - Average baseline GFN: 5.3 percent of GDP.
  - Initial banks' claims on the general government: 12.3 percent of bank assets.
  - Change in banks' claims in stress: 11.3 percent of bank assets.
  - GFN Financeability Index (GFI): 9.6 → Risk signal: Moderate.
  - Commentary: 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 Medium-Term Index:
  - Medium-term index final assessment: Low.
  - Prob. of missed crisis, 2024-2029, if stress not predicted: 9.1 pct.
  - Prob. of false alarms, 2024-2029, if stress predicted: 48.9 pct.

### Public debt baseline and dynamics (Figure 4 / baseline table)
- Public debt level and projection (percent of GDP):
  - Actual 2023: 39.6
  - 2024: 39.5
  - 2025: 39.4
  - 2026: 39.3
  - 2027: 39.1
  - 2028: 38.8
  - 2029: 38.3
  - 2030: 37.9
  - 2031: 37.4
  - 2032: 36.9
  - 2033: 36.3
- Annual change in public debt (percent of GDP):
  - 2023: -0.6
  - 2024: -0.1
  - 2025: -0.1
  - 2026: -0.1
  - 2027: -0.2
  - 2028: -0.3
  - 2029: -0.4
  - 2030: -0.4
  - 2031: -0.5
  - 2032: -0.5
  - 2033: -0.6
- Contributions to change in public debt (selected items, percent of GDP):
  - Contribution of identified flows (2024–2033): -0.3, -0.3, 0.1, 0.0, -0.1, -0.2, -0.3, -0.4, -0.4, -0.4, -0.4
  - Primary deficit (2023–2033): -0.5, 0.3, 0.6, 0.3, 0.1, 0.0, -0.1, -0.1, -0.1, -0.1, -0.1
  - Noninterest revenues (percent of GDP): 15.0, 14.8, 14.9, 15.0, 15.0, 15.0, 15.1, 15.1, 15.1, 15.1, 15.1
  - Noninterest expenditures (percent of GDP): 14.5, 15.2, 15.5, 15.2, 15.1, 15.0, 15.0, 15.0, 15.0, 15.0, 15.0
  - Automatic debt dynamics (percent of GDP): -0.1, -0.9, -0.8, -0.6, -0.5, -0.4, -0.4, -0.5, -0.5, -0.5, -0.5
- Gross financing needs (GFN) and composition (percent of GDP):
  - Gross financing needs (2023–2033): 4.5, 5.3, 5.9, 5.5, 5.2, 4.7, 5.0, 4.6, 4.3, 4.1, 3.8
  - Of which: debt service (2023–2033): 5.0, 4.9, 5.4, 5.2, 5.0, 4.7, 5.1, 4.7, 4.4, 4.2, 3.9
  - Local currency (percent of GDP): 3.3, 3.7, 4.0, 4.0, 3.7, 3.4, 4.0, 3.6, 3.4, 3.2, 3.0
  - Foreign currency (percent of GDP): 1.7, 1.2, 1.3, 1.2, 1.3, 1.2, 1.1, 1.1, 1.0, 1.0, 0.9
- Macro assumptions and projections (selected):
  - Real GDP growth (percent): 5.0 (2023), then 5.0, 5.1, 5.1, 5.1, 5.1, 5.1, 5.1, 5.1, 5.1, 5.1
  - Inflation (GDP deflator; percent): 1.5 (2023), 2.9, 2.8, 2.6, 2.6, 2.5, 2.5, 2.5, 2.5, 2.4, 2.3
  - Nominal GDP growth (percent): 6.7, 8.0, 8.0, 7.8, 7.8, 7.7, 7.7, 7.7, 7.7, 7.7, 7.7
  - Effective interest rate (percent): 5.6, 5.4, 5.7, 6.1, 6.3, 6.4, 6.3, 6.2, 6.1, 6.0, 5.9
- Commentary: Public debt is expected to decrease gradually from 39.6 percent of GDP in 2023 to 38.4 percent of GDP over the medium-term, mostly due to a favorable interest-growth differential. Gross financing needs are expected to remain manageable at around 5 percent of GDP over the medium-term.

### Realism and stress-testing observations
- Realism analysis:
  - Does not point to major concerns.
  - Forecast errors show some signs of past optimism in underlying debt-creating flows, largely influenced by unexpected COVID outcomes.
  - 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.
- Stress-test triggers and outcomes:
  - Triggered stress tests highlighted exchange rate depreciation as the most impactful shock in external debt sensitivity analysis.
  - Financing provided by banks and the evolution of bank holdings are shown in stress scenarios (figures), consistent with moderate GFI signal.

### Long-term risks and climate adaptation
- Climate change adaptation:
  - Adaptation cost estimates used: about 0.8 percent of GDP per year over the long-term (sources cited in text: Aligishiev, Bellon and Massetti (2022) and ESCAP (2019)).
  - Types of adaptation investments considered: strengthening physical assets and investing in coastal protection.
  - Commentary: Fiscal reforms to create fiscal space to finance adaptation needs will be critical over the longer run for Indonesia.

*Prepared by Raju Huidrom (APD), Amr Hosny (FAD) and Bruno Albuquerque (SPR).*

### Annex IV. Growth at Risk

### Annex IV. Growth at Risk

### Methodology and data
- Growth at Risk (GaR) framework quantifies the impact of macro-financial conditions on the probability distribution of future real GDP growth for Indonesia.
- Quarterly data coverage: q1:1990-q4:2023.
- Large set of variables aggregated into three main regressors (partitions) using principal component analysis.
- Financial conditions partition includes: various measures of domestic and external financial market returns, bond spreads, the real long-term interest rate, the VIX, the exchange rate and foreign reserves.
- Macro-financial vulnerabilities include: credit conditions, debt metrics, house price growth, the current account balance, and bank indicators (liquid-assets, capital adequacy, and equity-to-assets ratio).
- Other factors include: trading-partner growth, commodity prices, and consumer confidence.
- Noted evolution: despite some recent accommodation, financial conditions have tightened since 2015, while macro-financial vulnerabilities have recently started to creep up from a low base.

### Key findings on vulnerabilities and horizons
- Indonesia’s near-term growth is most vulnerable to financial conditions.
- Tighter financial conditions weaken growth 4-quarters ahead, especially if initial growth is weak.
- The impact of tighter financial conditions is not statistically significant over a two-year horizon.
- Looser macro-financial conditions support activity, but only if initial growth is at average (4-quarters ahead) or relatively strong (8-quarters ahead).

### Downside risk evolution and stress scenario
- q4:2022: the post-pandemic recovery indicated a 5 percent chance of real GDP contracting by at least 1.5 percent in the following year.
- One year later (q4:2023): this risk declined as the improvement in macro-financial vulnerabilities and the improvement in financial conditions more than offset the weakening of external factors.
- China severe slowdown simulation: with a two-standard deviations growth shock in China's economy, there is a 5 percent probability that Indonesia’s growth falls to -2.7 percent over the next year.

### Implications
- Near-term downside risks have declined relative to late 2022, but external shocks—particularly a severe slowdown in China—could materially jeopardize the outlook.
- Financial conditions remain an important channel for downside risk to Indonesia’s near-term growth.

*Prepared by Akbar Dachlan, Putri Fadilah, Dessy Kusumawardani, Wantrijan Naibaho, Florischa Tresnatri, and Rifat Pasha (RRO).*

### Annex V II. Determinants of Effective Tax Administrations: The

### Annex V II. Determinants of Effective Tax Administrations: The International Experience

### Overview and objective
- The elected administration has pledged to raise the total revenue by 10 ppts from 13 percent of GDP, including by establishing a new National Revenue Agency (NRA) and enhancing revenue collection processes.
- Raising revenue collection would also require sustained revenue administration reforms and modernization.
- Key factors to effective revenue administrations include compliance risk management, use of third-party data, digitalization, appropriate staffing, and broader taxpayer bases.
- ISORA covers 155 countries representing around 90 percent of world GDP.

### Institutional arrangements and Indonesia’s current setup
- Tax institutional arrangements are typically grouped into:
  - directorate(s) within the Ministry of Finance or its equivalent, or
  - semi-autonomous bodies with varying degrees of autonomy (including Revenue Authorities).
- Two basic types by responsibility area:
  - tax and customs administrations are separate organizational entities, or
  - tax and customs administrations are co-managed in the same organization.
- Indonesia’s arrangement: the Directorate General of Taxes (DGT) is a single directory within the Ministry of Finance, covering only tax administration.
- Comparable statistics:
  - Single-directory arrangements are the majority worldwide (40 percent) and in ASEAN (above 50 percent).
  - Semi-autonomous structures are more common in Africa and South America than in Asia.

### Considerations before creating independent or integrated revenue authorities
- Independent revenue systems are not a panacea; a diagnostic is advised to determine which features may be most beneficial.
- Establishing an independent agency must be coupled with a serious commitment to and plan for reform; political commitment is vital.
- Comparative studies note difficulty in providing systematic or quantifiable cost-benefit analysis of revenue system integration due to disentangling effects from other modernization efforts and macroeconomic/structural factors.

### Modernization and integration: timing and expectations
- Modernizing tax and customs administrations—even if integrated—is a long-term process requiring persistent effort even after integration.
- Rationale for merging: administrative synergy and economies of scale to improve revenue collection and services.
- Modernization ultimately results from improvements in organizational structures, systems, and processes; a governance model change can be, at best, a first step.
- Empirical evidence suggests tax administration reforms may lead to initial gains, but full results can take time to be realized.

### Efficiency metric and scope for improvement
- “Cost of collection” is used as a proxy for tax administration efficiency: annual operating expenditures as a share of total net revenues collected.
- Caveats: the ratio is influenced by tax policy, macroeconomic changes, tax structures, and range of functions administered.
- Indonesia’s ratio was about 1.2 percent in 2017, somewhat higher than ASEAN and EM averages, and higher than for advanced markets (AMs).

### Operational strengths and key practices associated with better tax performance
- Operational strength comprises: compliance risk management (CRM), use of third-party data (TPD), digitalization of services, service orientation, public accountability, and autonomy.
- Empirical findings link these factors tightly to tax collections.
- Lessons and practices:
  - Autonomy: revenue bodies should have adequate autonomy in organization design, plans and objectives, budgets, and human resource matters. Stronger autonomy can reduce management impediments while maintaining accountability and transparency.
    - ISORA 2018 indicates DGT does not independently design its own structure, operating budget, and capital budget, but does have autonomy to set performance standards and prepares/publishes an annual report.
  - Digitalization: digital tax administration operations are strongly associated with improved revenue collection outcomes; realization of revenue gains is contingent on accompanying policies, legislative and administrative reforms, adequate digital connectivity, and capable tax administration staff.
    - ISORA 2018: the share of tax returns filed online in Indonesia is quite high, performing notably better than peers.
  - CRM and use of TPD are particularly important:
    - Priority reforms: (i) strengthen CRM including automated risk profiling and electronic audits; (ii) utilize TPD by adopting computer systems for processing the data and prefilling returns.
    - Indonesia has a formal CRM approach covering return filing, payment processing, collection enforcement, verification/audit and taxpayer services, but does not publish key risk areas or results publicly.
  - Staffing: empirical evidence finds increased staffing of a tax agency is associated with improved revenue performance up to a threshold of 0.25 percent of the labor force.
  - Integrated approach: benefits derive from strategic integration of multiple components rather than implementation of isolated measures (e.g., effective operation of a large taxpayers office matters more than merely establishing one).
    - Data from ISORA: around 85 percent of countries have a Large Taxpayer Office (LTO).
    - In Indonesia, the LTO share is estimated at around 30 percent, lower than peers.

### Broadening the taxpayer base
- Broadening the taxpayer base is important in economies with relatively high labor and output informality.
- The number of active taxpayers relative to the labor force or total population matters for tax collection.
- Indonesia: the share of registered and active taxpayers of personal income taxes (PIT) to total population is around 10 percent.
  - This is lower than the shares in ASEAN and EMs of around 15 and 17 percent, respectively.

*Source: Annex V II. Determinants of Effective Tax Administrations: The International Experience (content unit provided).*

### 5.      International evidence shows that the negative spillovers from zombification can be

### 5.      International evidence shows that the negative spillovers from zombification can be

### Zombification and policy implications
- International evidence shows that the negative spillovers from zombification can be mitigated by:
  - limiting lenders’ incentives to engage in zombie lending practices, and
  - improving insolvency frameworks.
- Historical and empirical findings cited:
  - Japan early-90s: low-capitalized banks had incentives to continue lending to zombie firms to avoid breaching regulatory capital requirements (Caballero et al. 2008).
  - Post-GFC in some European countries: relationship between low-capitalized banks and zombie lending (Acharya et al. 2019).
  - Strengthening the banking sector and tightening supervision appeared to help tackle zombification.
  - Strong banks alone may not be sufficient if insolvency frameworks are not well-prepared (Andrews and Petroulakis 2019, Becker and Ivashina 2022, Albuquerque et al. 2023).
- Resolving financially distressed firms quickly and at low cost can mitigate zombie lending incentives.
- Crisis-preparedness indicator (Araujo et al. 2022) measures countries' preparedness to handle a large-scale restructuring of corporates; Indonesia ranks considerably lower in crisis preparedness relative to regional peers.
- Policy implication:
  - By limiting zombie lending incentives and improving insolvency frameworks, Indonesia may yield considerable benefits for economic growth and productivity.

### Definitions and measurement (from source)
- Firms with high leverage and low liquid assets in each year fall in:
  - the top quartile of the debt-to-asset distribution, and
  - the bottom quartile of the net liquid asset ratio.
- Net liquid asset ratio = current assets net of current liabilities over total assets.
- Definition of zombie firms follows Albuquerque and Iyer (2023):
  - Three balance sheet indicators that must persist for at least two consecutive years:
    1. ICR below one,
    2. leverage ratio above the median firm in the same industry,
    3. negative real sales growth.

### Indonesia: overall financial performance of listed NFCs relative to ASEAN peers
- Regression analysis (quarterly data 2000Q1 to 2022Q4; sample of six ASEAN countries; 3,319 firms) controlling for time-varying sectoral shocks indicates listed Indonesian NFCs tend to underperform ASEAN peers on several balance sheet metrics.
- Empirical findings:
  - Firms in Indonesia invest less in both tangible and intangible assets.
  - Weaker employment growth.
  - More signs of financial distress indicated by:
    - lower ICR,
    - higher probability of default (in 24 months),
    - higher leverage,
    - higher cost of debt.
  - The estimates indicate that the average firm in Indonesia has a cost of debt of around 0.4 standard deviations above the ASEAN firm.
- Policy implication:
  - Continue implementing structural reforms that promote an enabling business environment and create conditions for healthy firms in Indonesia to prosper.

### Financial digitalization (DFS) developments and comparative position
- DFS growth and drivers:
  - Value of e-money transactions increased over 30 percent per year since 2019, reducing the dominance of cash-based payments.
  - Value and volume of digital banking transactions have grown fast, especially for mobile banking.
  - Fintech P2P lending and digital investment have expanded rapidly, though scale remains relatively small.
- Authorities’ initiatives enabling transformation:
  - Indonesia Payment System Blueprint (BSPI) 2025, including standardized QR codes (QRIS) introduced in 2019.
  - BI-FAST real-time payment system initiated in December 2021; offers faster, safer, scaled 24/7 fund transfer services compared to RTGS and SKNBI.
  - SNAP (payment API standard) supports adoption of innovative financial services.
  - OJK initiatives: Digital Financial Innovation Road Map and Action Plan 2020-2024 and 2020-2025 Indonesian Banking Development Roadmap.
- Comparative gaps:
  - Indonesia’s digital payment transactions value (relative to economy size) is below the G20 average and lags Philippines, Thailand, and Vietnam among ASEAN-6.
  - Mobile banking penetration significantly lags behind G20 and ASEAN-6 countries.
  - Indonesia appears to lead digital lending for business but size is still small relative to economy size.

### P2P lending: regional disparities and determinants
- Inter-regional disparity in outstanding values of P2P lending (percent of GRDP) widened:
  - Bottom five provinces: outstanding P2P rose on average by 0.04 percentage points of GRDP in the last three years.
  - Top five provinces: outstanding P2P increased by 0.32 percentage points of GRDP in the last three years.
- Cross-provincial empirical specification (variables in logs except P2P-to-GRDP ratio) includes:
  - Financial Literacy (OJK 2019 index),
  - Financial Inclusion (OJK 2019 index),
  - Digitalization (East Ventures’ DCI, adjusted for financial literacy and inclusion),
  - GRDP per capita (controls for income level).
- Digitalization adjustment:
  - DCI consists of three sub-indexes: input, output, support.
  - Financial inclusion embedded in support; financial literacy correlated with output.
  - Adjusted digitalization indicator = residual orthogonal to both financial literacy and inclusion.
- Key estimation results:
  - One-standard-deviation increase in digitalization is associated with a 0.06-percentage point increase in the P2P-to-GRDP ratio.
  - Financial literacy has a positive and significant role in P2P lending growth.
  - Financial inclusion is insignificant for P2P expansion in these regressions.
  - GRDP per capita has a negative coefficient, suggesting less demand for alternative lending in high-income regions.
- Regression table summary (Determinants of P2P Lending, Dependent variable: P2P Lending Growth (2020-2023)):
  - Financial Literacy: 0.18* (0.10)
  - Financial Inclusion: 0.08 (0.09)
  - Digitalization: 0.31*** (0.06)
  - GRDP per capita: -0.10*** (0.02)
  - Observations: 34
  - R-squared: 0.539
  - White standard errors in parentheses. Constant not reported.
  - Significance: *** p<0.01, ** p<0.05, * p<0.1

### Convergence dynamics and club analysis for P2P lending
- Classical beta-convergence testing:
  - Inter-regional gaps in P2P lending activities generally widen over time; unconditional test shows statistically significant positive coefficient on initial level of P2P lending.
  - Model: P2P_i,2023 – P2P_i,2020 = α + β P2P_i,2020 + γ X_i + e_i.
  - Beta-convergence test results (Dependent variable: P2P growth (2020-23, percentage points)):
    - Initial P2P level (2020): 1.784*** (0.213) unconditional; 1.569*** (0.313) conditional.
    - Observations: 34 (both).
    - White standard errors in parentheses. *** p<0.001.
- Club convergence (Philip and Sul 2007, 2009; Schnurbus et al. 2017):
  - Four convergence clubs identified:
    - Group A: 14 provinces (including most Java provinces).
    - Group B: 10 provinces.
    - Group C: 3 provinces.
    - Group D: 7 provinces.
  - As of December 2023, group averages (P2P lending in percent of GRDP):
    - Group A: 0.35 percent
    - Group B: 0.18 percent
    - Group C: 0.11 percent
    - Group D: 0.07 percent
  - Each group appears to converge to a group-specific level; convergence rate larger in group B and D than group A and C.
- Determinants of convergence club membership (Ordered Logit/Probit, Binary Logit/Probit):
  - Financial Literacy: positive and significant (e.g., 5.989* (3.449) in Ordered Logit).
  - Digitalization: positive and significant (e.g., 6.369*** (1.947) in Ordered Logit).
  - Financial Inclusion: statistically insignificant across specifications.
  - GRDP per capita: negative and significant (e.g., -2.549*** (0.930) in Ordered Logit).
  - Observations: 34 in each specification.
  - Significance markers: * p<0.10, ** p<0.05, *** p<0.01.

### Policy implications for deepening DFS and reducing disparities
- Findings underscore that reducing digitalization and financial literacy gaps across provinces is crucial to foster DFS and P2P lending diffusion.
- Internet penetration improvements (2019 to 2022):
  - National: from 47.7 percent to 66.5 percent of population (above 5 years old).
  - Lowest province: from 21.7 percent to 26.3 percent.
  - Highest province: from 64.9 percent to 74.3 percent.
  - Widening of provincial gap between highest and lowest by 6.6 percentage points.
- Financial literacy (2019 to 2022):
  - National financial literacy strengthened from 38.0 in 2019 to 49.7 in 2022.
  - Lowest subnational level rose by 2.6 for 2019-22, while the highest increased by 8.1.
- Recommended focus areas:
  - Reduce inter-regional gaps in digitalization and financial literacy to clear constraints to DFS expansion.
  - Address structural barriers in provinces with low DFS activity to enhance financial access and inclusion.

*Source: IMF staff estimates and chapter content.*

### 12.      Efforts to strengthen regulation and supervision framework to address potential risks

### 12.      Efforts to strengthen regulation and supervision framework to address potential risks

### Strengthening regulation and supervision in DFS
- 2024 FSAP findings indicate a rapid market expansion of P2P lending quickly outpaced regulation, leading to the increasing need for policies preventing fraud and other misconduct.
- OJK’s new guidelines for fintech lending—promoting transparency and sustainability and ensuring the protection of consumer interests—are welcome.
- Authorities should strengthen cooperation for regulation and supervision, given the presence of large technology conglomerates and cross-cutting services.

### Technical Annex — methods for testing club convergence
- Log t convergence test (PS model):
  - Panel variable: yit is the P2P-to -GRDP ratio of province i at time t.
  - Log-transformation: unity added (yit = P2Pit + 1) to prevent log yit from being negative.
  - PS model decomposes yit into common and idiosyncratic components and estimates a relative transition path (hit); if convergence holds, hit converges to unity.
  - Quadratic distance measure for transition differential: Ht = N−1 ∑(hit −1)^2.
  - Full convergence: Ht → 0 as t → ∞. Club convergence: Ht typically converges to a positive constant.
  - Log t regression model for testing:
    - F F D D H 1 H F − P lnt(lntF) = a + β lntF + uF
    - Null hypothesis of convergence: δit = δ and α ≥ 0 such that β = 2α.
    - Alternative (non-convergence): δit ≠ δ or α < 0.
  - Implementation uses HP-filtered trend of log yit, as suggested by PS (2007).
- Clustering algorithm (PS, 2007):
  - Step i: Order provinces decreasingly by last observation.
  - Step ii: Choose a core group Gk of k provinces; compute test statistic tk = t(Gk) from log t regression. Choose k to maximize tk subject to min tk > -1.65. If min test statistic not met with k = 2, drop the first province and proceed to maximize tk.
  - Step iii: Add provinces one at a time to Gk; include a province if test statistic > critical value c = 0 (set conservatively given small T).
  - Step iv: Form group of remaining provinces; perform log t test. If test statistic > -1.65, algorithm ends with two convergence groups. Otherwise repeat steps i–iii. Algorithm can end with provinces not included in any convergence club if remaining provinces are divergent.
- Club merging (Schnurbus et al., 2017):
  - Merge clubs iteratively by testing adjacent two clubs jointly; continue merging until joint test rejects convergence.

*Italicized source attribution line.*

### 12.      Hypothetical fiscal and monetary policy shocks in a representative major economy.

### 12.      Hypothetical fiscal and monetary policy shocks in a representative major economy.

### Shock description and transmission
- Fiscal expenditures in the representative foreign economy surprise on the upside, raising output by about 0.5 percent relative to baseline.
- Expansionary foreign fiscal policy, combined with supply side shocks, leads to a spike in inflation, which rises by about 1.1 percent even as the foreign central bank tightens monetary policy by 0.6 percent.
- The expansionary fiscal policy and heightened uncertainty are assumed to cause a persistent rise in the foreign economy’s bond yields, transmitting to higher EM borrowing costs of a similar magnitude (i.e., about 100 bps) and persistence.
- The shocks trigger a risk-off period, modeled as a further rise in Indonesia’s UIP premium, as investors retrench from EM exposures amidst policy shocks and higher policy uncertainty.
- Exchange rate and trade effects:
  - Depreciation pressures on the Rupiah boost net exports.
  - Core inflation rises above the central bank’s target.

### Policy response scenarios (Figure 5 summary)
- Monetary policy only
  - The central bank raises the policy rate by about 1.8 percent.
  - Peak core inflation is kept at about 0.5 percent.
  - Cumulative impact of external shocks leads to an abrupt 8 percent decline in the real exchange rate, which then gradually recovers.
  - Domestic demand falls below trend by about 1 percent at its trough due to tighter credit conditions.
  - Output fall below trend is marginal because higher net exports—reflecting higher foreign demand and exchange rate depreciation—largely offset the decline in domestic demand.
- Monetary policy and fiscal stimulus
  - Authorities tighten monetary policy and use fiscal stimulus via targeted transfers to households over eight quarters.
  - The fiscal intervention has a cumulative cost of about 0.5 percent of GDP.
  - The boost to domestic demand reduces the deviation of output from trend during the intervention period, without significantly changing the dynamics of inflation or trade.
- Monetary policy and FX intervention (FXI)
  - The central bank uses FXI of about 2 percent of GDP to reduce the excessive rise in UIP premium and to reduce exchange rate depreciation.
  - Reduced inflationary pressures permit a similar path for core inflation with less monetary policy tightening.
  - Output rises above trend as lower borrowing costs (and a less depreciated exchange rate) significantly reduce the decline in domestic demand.
  - Net exports of both commodities and non-commodities decline, implying a pivot away from external demand relative to the other two options.
- Combined assessment
  - Using FXI alongside monetary policy in the face of large non-fundamental and speculative shocks appears to achieve internal and external balance most prudently.
  - Adding fiscal stimulus to the FXI-plus-monetary-policy mix would only marginally improve the moderate domestic demand shortfall and may be best avoided to preserve fiscal buffers.
  - FXI should be judicious: a fundamental rise in borrowing costs should be accommodated through exchange rate flexibility (for example, if rising costs reflect a persistent shift in major economies’ financing needs).

### Comparative outcomes and key statistics
- Foreign-output impact: about 0.5 percent above baseline.
- Foreign inflation spike: about 1.1 percent.
- Foreign central bank tightening: 0.6 percent.
- Transmitted EM borrowing-cost increase: about 100 bps.
- Indonesia UIP premium: modeled further rise (no single numeric value provided beyond description).
- Domestic policy responses:
  - Policy-rate increase under “monetary only”: about 1.8 percent.
  - Peak core inflation under “monetary only”: about 0.5 percent.
  - Real exchange rate abrupt decline: 8 percent.
  - Domestic demand trough deviation: about 1 percent below trend.
  - Fiscal stimulus cumulative cost: about 0.5 percent of GDP over eight quarters.
  - FXI size considered: about 2 percent of GDP.

### Policy recommendations and concluding remarks
- Policymakers will need to act under substantial uncertainty, often before the full nature or duration of shocks is observable.
- Interventions should be:
  - Temporary.
  - Targeted to short-term distortions to prices and quantities that may emerge in shallow markets.
  - Designed with attention to available reserves, the cost of rebuilding reserves, and the need to maintain sufficient buffers against future shocks.
- Preserve fiscal buffers where possible; fiscal stimulus adds limited additional benefit when combined with FXI and monetary tightening in the scenarios considered.
- Use FXI judiciously; accommodate fundamental, persistent increases in global borrowing costs through exchange rate flexibility rather than reserve depletion.

### Annex XI. Trade policy (summary)
- Indonesia’s average Most-Favored Nation tariffs amount to 8 percent in 2022 (WTO data).
- Duties on international trade accounted for around 3 percent of total tax revenue in 2020 (2.6 percent from import tariffs, 0.4 percent from export duties).
- Tariffs are relatively high compared to regional peers.
- Indonesia has relatively high non-tariff measures (NTMs) on trade, and trade in services is highly restricted (including export restrictions on minerals and local content requirements linked to import tariff exemptions, domestic tax reductions, market access and government procurement).
- Indonesia’s NTMs are above global average (MATR database, Estefania-Flores et al., 2022), and Services Trade Restrictiveness is among the highest within countries.
- Recommendation: Gradually phase out restrictive trade policies to increase economic openness, support investment and FDI, and improve attractiveness to foreign investors.

*Source: Chapter 12 and Annex XI from the provided IMF PDF.*

### Annex XII. Data Issues

### Annex XII. Data Issues

### Data Adequacy Assessment — Key Findings
- Overall assessment: Data provision is broadly adequate for surveillance, but shortcomings remain in national accounts, external, and fiscal statistics.
- Median Rating (heatmap excerpt): BBABABB.
- Sectoral notes:
  - National Accounts: absence of breakdown of investment between public and private; absence of seasonally adjusted quarterly national accounts; base year outdated (currently 2010).
  - External sector: inconsistencies between national accounts and BOP trade data remain, albeit declining; small negative net errors and omissions in BOP averaging -0.1 percnet of GDP in the last 5 years suggesting possible under-coverage of imports or accumulation of assets in the financial account.
  - Government Finance Statistics (GFS): need for strengthened fiscal accounts and greater granularity.
  - Labor data: frequency and timeliness could be strengthened—published only twice a year; quarterly or monthly data recommended to better monitor output gap and structural impacts.
- Use of alternative data: For nominal and real effective exchange rate (NEER and REER) staff uses Fund calculated data instead of authorities' because the Fund methodology is consistent across member countries.
- CPI: rebased to 2022=100 and first released in early February 2024.
- Inflation expectations survey has been resumed but remains for internal use of Bank Indonesia.

### Data Gaps, Corrective Actions, and Priorities
- Corrective actions underway:
  - Authorities working to reduce the gap between National Accounts and BoP data.
  - Strengthening fiscal accounts (GFS).
  - Further work could expand external sector statistics improvements.
- Priority data improvements recommended:
  - Provide breakdown of investment between public and private in national accounts.
  - Produce seasonally adjusted quarterly national accounts.
  - Update national accounts base year (currently 2010).
  - Increase frequency/timeliness of labor data (from biannual to quarterly/monthly).

### Data Standards and Dissemination
- Indonesia subscribes to the Special Data Dissemination Standard (SDDS) since September 1996 and publishes data on its National Summary Data Page.
- Note on questionnaire methodology:
  - Overall data adequacy assessment based on staff's assessment for policy analysis (see IMF Review of the Framework for Data Adequacy Assessment for Surveillance, January 2024, Appendix I).
  - Granularity cells for GFS and MFS indicate both operations/public debt and MFS/Financial Soundness indicators respectively.

*Source: Annex XII. Data Issues (from 1idnea2024001-print-pdf).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1idnea2024001-print-pdf.pdf_