## CONTEXT: PURSUING THE GOLDEN VISION IN A SHOCK-PRONE ENVIRONMENT

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### Context and strategic objective
- Indonesia’s economic performance has been strong for over twenty-five years, supported by decades of prudent macroeconomic policy implementation and improved living standards.
- Productivity growth remains weak, with a shrinking middle class.
- Key priority: establish a dynamic and diversified formal private sector to generate high-quality jobs for the large and young population.
- Authorities remain firm on the “Golden Vision” of becoming a high-income country by 2045, pursuing higher real growth via a supportive macro policy mix and expanded government-led initiatives (including Industrial Policy to downstream commodities, self-sufficiency in food and energy, and human capital investment).
- Policy efforts include proactive engagement with trading partners to reduce trade barriers and facilitate FDI.

### Mission and structural coverage
- Mission comprised Ms. Maria Gonzalez (Head), Ms. Anne-Charlotte Paret, Messrs. Ashique Habib, Raju Huidrom, Akshat Singh, and Dennis Botman (Resident Representative) (all APD), supported by additional APD, OED and resident office staff.
- Major sections covered: Recent Developments; An Uncertain Outlook with Downside Risks; Policies (Fiscal, Monetary and Exchange Rate, Financial Sector, Risk Management, Structural Reforms); Staff Appraisal.
- Boxes and Annexes include policy initiatives, adverse global scenarios, middle class evolution, External Sector Assessment, Risk Assessment Matrix, Public Debt Sustainability Analysis, BI’s toolkit, and Monetary Policy Transmission in Indonesia.

### Recent developments: growth, inflation, external position, and financial conditions
- Growth and labor market
  - Growth: 5.0 percent in 2025 (projected to remain at 5.0 percent in 2025).
  - Unemployment: declined to around pre-pandemic rates; informality and underemployment still exceed pre-pandemic levels; job losses in labor-intensive manufacturing.
- Inflation
  - Headline inflation: dropped early in 2025; projected end-2025 headline inflation: 2.8 percent.
  - Core inflation: around mid-point of target (2.5 ±1 percent) range; core inflation rising from earlier low levels.
- External position and reserves
  - Preliminary 2025 external position: broadly in line with fundamentals and desirable policies.
  - Current account deficit: projected −0.5 percent of GDP by end-2025.
  - Gross international reserves: US$150.1 billion (5.7 months of prospective imports) as of November 2025.
  - De facto ER arrangement: floating.
  - SRBI outstanding stock: peaked ~IDR 900 trillion end-January 2025; lowered to ~IDR 700 trillion (~US$43 billion) as of end–October 2025.
  - Net International Reserves: softened by about US$1 billion from end-2024 as of end-October 2025.
- Financial conditions and credit
  - Financial conditions: turned accommodative after tightening in March/April 2025.
  - Bank credit growth: 7.4 percent y/y in October.
  - Undisbursed loans: 23.0 percent in October.
  - Lending rates: sticky due to high deposit rates offered to large depositors.
- Policy responses and social measures
  - Policy actions included foreign exchange intervention (onshore and offshore), equity share buy-backs, and a targeted fiscal package (“8+5+4”).
  - Social measures: targeted fiscal package, labor and gig worker legislation, and enhanced communication on domestic policy objectives.

### Near-term outlook and risks
- Staff near-term projections
  - GDP growth: 5.1 percent in 2026.
  - Headline inflation: 2.8 percent by end-2025; 2.6 percent by end-2026.
  - Current account deficit: -0.6 percent of GDP in 2024; around -0.5 percent of GDP in 2025; -1.0 percent of GDP in 2026.
  - Reserves: remain adequate in 2025 and 2026 (~6 months of imports).
- Trade negotiations and assumptions
  - Projections reflect a new tariff of 19 percent in line with recent trade negotiations with the US.
  - Exports to the US: 10 percent of total exports (~2 percent of GDP).
  - Other commitments beyond base tariff: not yet available and not reflected in projections.
- Risks
  - Downside risks: escalating trade policy shocks and prolonged uncertainty; global financial market volatility and corrections; exchange rate and capital flow volatility; spikes in sovereign yields; domestic large policy adjustments without robust guardrails.
  - Upside risks: sound and bolder-than-envisaged structural reforms; stronger-than-expected growth in main trading partners.
- Medium-term projections and reform impact
  - Medium-term growth: projected to average 5.2 percent under current policies.
  - Ambitious horizontal structural reforms could raise output levels by 2-3 ppts over the medium term if carefully packaged and implemented.
- Authorities’ views
  - Authorities expect GDP growth between 4.7-5.5 percent yoy in 2025 and around 5.4 percent yoy in 2026.
  - Authorities project growth rising to 8.0 percent by 2029 under accelerated public spending with Danantara and private sector acting as growth engines.

### Illustrative adverse global scenario (staff)
- Based on 2025 October WEO adverse scenario with higher US tariffs (implies 32 percent US tariff for Indonesia).
- No discretionary policy reactions assumed in the “no policy reaction” variant.
- Key quantitative impacts in the no-policy-reaction scenario:
  - Global GDP: −1.2 percent vs baseline in 2026; around −1¾ ppts vs baseline in 2027.
  - Indonesia: cumulative real output decline of 1.8 ppt in 2027 relative to baseline (growth ~4.1 percent in 2026 and 2027).
  - Inflation: lower than baseline by 20 bps in 2026 and further 20 bps in 2027.
  - Fiscal: deficit could slightly exceed 3 percent of GDP by around 2028 without compensating measures.
  - Public debt-GDP ratio: would rise over the medium term but remain below the 60 percent ceiling.
  - Gross reserves: bottom at around 102 percent of the ARA metric in 2027 (vs. 122 percent in baseline), remaining adequate.

### Growth-at-Risk and sensitivity
- Growth-at-Risk (data as of 2025: Q3)
  - 5 percent probability that real GDP would contract by at least 2.9 percent the following year (as of 2025: Q3).
  - At end-2023: 5 percent probability of contraction of at least 1.7 percent.
  - A severe downturn in China (two-standard deviations growth shock) would produce a fall of 3.5 percent in Indonesia growth the following year with 5 percent probability.

### Middle class dynamics and labor insights
- Middle class: shrunk by 5.4 percentage points from its 2018 peak over the last five years.
- Middle-class labor indicators:
  - Unemployment rate: ~3 percent (vs below 2 percent pre-pandemic).
  - Under-employment (<35 hours): 22.6 percent (vs 20 percent pre-pandemic).
  - NEET share: 2 percent (vs ~1.4 percent in 2019).
  - Employment composition: >50 percent blue-collar (2016–24), <20 percent white-collar.
  - Occupations threatened by AI: ~20–25 percent of middle-class workers (sales and services).
  - AI-complementary roles: <10 percent of middle-class employment (professional and technical).

### Strategic policy priorities (staff appraisal summary)
- Preserve buffers, policy space, and credibility given near-term downside tilt to risks.
- Priorities:
  - Prudent and credible fiscal stance anchored by revenue mobilization.
  - Carefully paced and data-dependent monetary easing when warranted, mindful of fiscal impulse and exchange rate shock-absorption role.
  - Strengthen macro policy transmission and implement bold structural reforms (human capital, infrastructure, business climate, trade openness, governance).
  - Calibrate industrial policy (IP) to target market failures, preserve competition, and complement horizontal reforms.

---

### Fiscal policy: recent stance, stimulus, and medium-term framework

- Fiscal stance and recent developments
  - Fiscal deficit: 2.3 percent of GDP in 2024 (in line with budget target and within fiscal rule cap of 3 percent of GDP).
  - 2025 fiscal deficit: about 2.8 percent of GDP.
  - Drivers of 2025 widening:
    - Loss of SOE dividends (~0.4 ppt of GDP) now accruing to Danantara.
    - Weaker-than-budgeted tax collections.
    - Robust public spending execution in H2 2025.
    - Stimulus initiatives to address social demands (~0.4 percent of GDP).
  - Widening implies an expansionary fiscal impulse (~0.4 ppt of GDP).
  - Ministry of Finance transferred IDR 276 trillion (1.2 percent of GDP) from central bank account to public banks since September to support credit growth (about two-thirds of its cash reserves (SAL)).

- 2025 fiscal stimulus package (In trillions of Rupiah)
  - Social assistance: food aid, direct cash assistance — 50.4
  - Utility and transportation subsidies: electricity and transportation discounts — 11.8
  - Labor and employment support: wage subsidy, support for laid-off workers, cash for work — 19.3 (2025) and 1.5 (2026)
  - Urban program: improve housing quality, support gig economy — 2.7
  - Other tax incentives: MSMEs, home purchase, automotives — 20.6
  - Miscellaneous: acceleration of deregulation — 0.2 (2025) and 1.1 (2026)
  - Total — 104.9 (2025) and 2.6 (2026)
  - Percent of GDP — 0.44 (2025) and 0.01 (2026)
  - Sources: Indonesian authorities; and IMF staff estimates.
  - Note: package includes measures deployed in 2025H1, measures after the tariff shock, the "8+5+4" measures announced in September 2025, and measures announced in October.

- 2026 budget and staff recommendations
  - Approved 2026 budget targets a deficit of 2.7 percent of GDP and assumes growth of 5.4 percent for 2026.
  - Staff project a wider deficit of 2.9 percent of GDP for 2026 under conservative revenue/growth and full expenditure execution—implying a moderately expansionary stance.
  - Staff recommend securing a fiscal deficit around the approved target (2.7 percent of GDP); with below-the-line measures this would imply a broadly neutral fiscal stance.
  - Achieving the target with revenue underperformance feasible through careful spending execution and managing non-allocated spending buffers in the 2026 budget.

### Below-the-line and quasi-fiscal operations; budget baselines and projections
- 2026 budget envisages below-the-line investment financing of around 0.8 percent of GDP for food security, social housing and village cooperative programs.
- BI-MOF remuneration agreement: BI will share financing cost of housing and cooperatives program, equally splitting interest costs on realized budget allocations, net of returns on government placements.
- Danantara expected to invest in public priorities beginning late 2025 through 2026.
- Staff project deficit path broadly flat at around 2.8 percent of GDP over the medium term supporting stable public debt just above 40 percent of GDP.
- Budget table highlights (selected entries preserved exactly for 2023–2026 sequence and beyond where shown):
  - Revenues and grants: 13.3 / 12.9 / 12.3 / 12.0 / 12.0 / 12.3 / 12.0
  - Oil and gas revenues: 0.9 / .8 / 0.8 / 0.7 / 0.7 / 0.7 / 0.7
  - Non-oil and gas revenues; and grants: 12.4 / 12.1 / 11.6 / 11.3 / 11.3 / 11.6 / 11.3
  - of which VAT: 3.7 / 3.7 / 3.9 / 3.7 / 3.7 / 3.9 / 3.7
  - Expenditure and net lending: 14.9 / 15.2 / 14.9 / 14.8 / 14.8 / 14.9 / 14.9
  - Current expenditure: 8.5 / 9.0 / 9.7 / 9.1 / 8.9 / 10.3 / 10.4
  - Development expenditure: 2.2 / 2.3 / 1.5 / 2.1 / 2.2 / 1.7 / 1.7
  - Transfers to local governments: 4.2 / 3.9 / 3.8 / 3.6 / 3.6 / 2.7 / 2.7
  - Overall balance: -1.6 / -2.3 / -2.5 / -2.8 / -2.8 / -2.7 / -2.9
  - Primary balance: 0.5 / -0.1 / -0.3 / -0.5 / -0.5 / -0.3 / -0.6
  - Cyclically-adjusted primary balance: 0.6 / 0.0 / -0.5 / -0.6
  - General government debt: 39.6 / 40.2 / 41.0 / 41.3
- Staff projection: deficit path around 2.8 percent of GDP over medium term; stable public debt just above 40 percent of GDP.

### Sovereign risk assessment and fiscal rules
- SRDSF signal: overall low risk of sovereign stress, anchored by contained medium-term deficit and favorable interest-growth differential.
- Caveats:
  - Borrowing costs and debt-service to tax ratio remain high relative to peers.
  - Interest bill represents nearly half of public gross financing needs (GFNs).
  - Budget financing largely domestic; external funding meets about a quarter of public GFNs (GFNs moderate at 5-6 percent of GDP).
- Fiscal rules: continue adherence to deficit cap of 3 percent of GDP and 60 percent of GDP public debt ceiling.
- Recommendations:
  - Deficit rule appropriate anchor; accommodate priority spending if supported by domestic revenue mobilization.
  - Limit below-the-line investments and gradually bring them on-budget to provide fuller fiscal footprint.
  - Enhance Medium-Term Fiscal Framework (MTFF) and set a medium-term objective (MTO).
  - Preemptively manage risks via revenue mobilization and strengthened public expenditure management.

### Danantara: scale, objectives, risks, and governance priorities
- Overview and scale
  - Established: February 2025; operations started October 2025.
  - Assets: Estimated at US$900 billion (63 percent of GDP).
  - Initial Funding: US$20 billion (1½ percent of GDP) redirected from government budget and SOE dividends.
  - Initial Investments: US$10 billion (0.7 percent of GDP) in 2025Q4, with 80 percent allocated domestically and the rest overseas.
  - Danantara recently raised ~US$3 billion (0.2 percent of GDP) through low-coupon “patriot bonds.”
- Objectives and tools
  - Purpose: Consolidate and manage SOEs (including public banks) and drive strategic national investments.
  - Financing tools: leverages SOE assets and dividends, collateralized and uncollateralized debt, and co-investment models.
  - Structure: Danantara holds 99 percent of its own shares; BP BUMN holds 1 percent “A shares” with privileges; both report to the President.
- Risks
  - Quasi-fiscal activity and contingent liabilities could rise if investments are leveraged, underperform, or accumulate public liabilities.
  - Illustrative adverse scenario: one-off contingent liability shock of 3.2 percent of GDP realized in 2026 (assumed twice outstanding public guarantees as of 2025 Q1 on infrastructure programs of US$22.7 billion (1.6 percent of GDP) per BI (2025)).
  - Inclusion of five largest public banks in the holding needs careful management to prevent financial sector risks; limit public bank exposures to Danantara investments.
- Governance and mitigation
  - Robust governance and accountability aligned with best practice standards.
  - Well-balanced risk-sharing with private/foreign investors; run SOEs/public banks on commercial practices.
  - Santiago Principles for SWFs and OECD SOE Governance Guidelines referenced as helpful frameworks.

### Revenue mobilization and tax reform potential
- Revenue objective: raise tax-to-GDP ratio above current ~10 percent of GDP.
- Tax policy and administration potential (percent of GDP figures preserved)
  - Tax Policy total potential: 3.5
    - VAT: 1.8 (remove certain exemptions 0.2 done; reduce registration threshold 0.2 pending; replace STLG with VAT and vehicle excise 0.6 pending; increase standard rate by 2 percentage points 0.8 with note: VAT hike in 2025 limited to luxury goods)
    - Excises: 0.5 (introduce new excises on fuel 0.5 pending; add excises on plastic—some progress; reform of tobacco taxation 0.7 noted)
    - CIT: 0.4 (replace special regimes by a single CIT 0.2 pending; introduce alternative minimum tax 0.2 pending)
    - PIT: 0.4 (broaden base 0.4; new PIT bracket 0.4; reduce basic allowance; reduce top income tax bracket)
    - Property tax: 0.3 (reduce transaction tax and increase property tax 0.3 pending)
    - Non-tobacco reforms (excluding fuels): 0.8
  - Tax Administration potential: 1.5
  - Total Revenue Gains from Pending Tax Policy: 6.1 (percent of GDP)
- Public spending priorities: roll out new spending gradually, improve public investment management, strengthen social protection, boost quality of health and education spending, and rationalize non-priority outlays.

### Selected policy initiatives (scale and challenges)
- Nutritious Meal Program:
  - Budgeted for 2025: IDR 71 trillion (0.3 percent of GDP).
  - Fully deployed potential: IDR 450 trillion (1.9 percent of GDP annually).
  - Implementation faced high costs, targeting, logistical, quality and governance challenges.
- “Red and White” Cooperatives:
  - Authorities establishing 80 thousand village cooperatives.
  - Maximum lending per cooperative: IDR 3 billion; total IDR 240 trillion (~1 percent of GDP) over next five years, subsidized lending via public financial intermediaries.
- Public Housing:
  - Supported by public banks, MPP-related incentives and below-the-line fiscal financing.

---

### Monetary policy, exchange rate, FX intervention, and market development

- Monetary policy actions and guidance
  - BI reduced policy rate by 25 bps six times between September 2024 and September 2025 to 4.75 percent amid soft credit growth.
  - BI imposed an asymmetric cut of 50 bps to the overnight deposit facility rate (to 3.75 percent) in September and paused rate cuts since October.
  - Staff view: some space may remain for further cuts toward the upper-end of staff’s estimate of the real neutral rate, 1-2 percent; pace/extent should be data dependent given fiscal impulse and lagged effects.
- Exchange rate, FX interventions, and reserves
  - De facto exchange rate arrangement: floating, with significant ER movements during stress episodes.
  - BI FX interventions use FX spot, domestic DNDF and offshore NDF markets.
  - Reserves: adequate; staff advise judicious FXI per IPF to avoid excessive tightening of financial conditions in risk-off shocks and to preserve buffers.
  - Authorities revised export repatriation: raised domestic holding requirements for export profit earnings from commodities to 100 percent for 12 months (post-deductions); staff recommend gradual phasing out.
- BI market operations and toolkit
  - SRBI introduced in late 2023 attracted short-end inflows; 2024 primary dealer system supported this.
  - Continue gradual tapering of SRBI to boost liquidity and strengthen monetary policy credit channel.
  - BI introduced BI-FRN in 2025: Q4 to support OIS development and money-market based interest rate structure.
  - MOF-BI remuneration agreement described as well ringfenced; limiting further use would bolster perception of central bank independence.
- Money and FX market deepening (results 2025: Q3)
  - Daily MM transactions: ~IDR 53.5 trillion.
  - Daily FX market turnover: approached USD 10 billion.
  - Participant/infrastructure actions: Primary Dealers, Self-Regulatory Organization (APUVINDO), CCP preparations, expanded electronic-trading platforms.

### Financial sector resilience, macroprudential stance, and supervision
- Financial system: broadly resilient; banking sector dominates with strong capital and liquidity buffers.
- Key indicators:
  - NPLs: (2.2) percent of gross loans as of September 2025 (reported elsewhere as 2.25% gross in Oct 2025).
  - Banks’ deposit growth: 11.2 percent in September.
  - Net equity outflows: cumulative ~US$2.5 billion as of end-October 2025.
- Macroprudential policy (MPP)
  - MPPs broadly accommodative; loosened tools in near term given negative credit gap.
  - Recommendation: shift toward neutral stance as credit growth recovery builds to safeguard bank capital and liquidity.
  - Clarify that financial resilience is prioritized in calibrating MPP tools.
  - Public banks’ participation in growth initiatives should be gradual, ringfenced, targeted, and subject to cost-benefit and due diligence.
- Regulatory and supervisory priorities
  - Implement liquidity coverage and net stable funding ratios across all banks.
  - Enhance stress-testing, strengthen rules on related-party transactions, improve FMIs and payments safety.
  - Preserve and enhance autonomy of OJK and LPS; place strict safeguards on recapitalization in resolutions.
  - Provide explicit legal protection for OJK staff costs while discharging duties in good faith.

### AML/CFT and data
- 2025 FATF Mutual Evaluation: legal framework strong and broadly effective; key areas for progress include dissuasive sanctions and targeted sanctions for terrorist financing.
- Need accurate ultimate beneficial owner information for law enforcement, tax and procurement.
- Data initiatives: GDP rebasing expected in early 2027 (2025 base year); adopt SNA 2025 and BPM7 over medium term; more frequent labor statistics from early 2026.

---

### External Sector Assessment and external financing metrics

- Overall assessment
  - External position in 2025: preliminarily broadly in line with medium-term fundamentals and desirable policies.
  - External financing needs: appear sustainable.
  - Vulnerability: reliance on foreign portfolio investment exposes Indonesia to swings in market sentiment given still-deepening domestic markets.
- Key projections and metrics (projected 2025, % GDP)
  - NIIP: -17.5
  - Gross Assets: 37.9
  - Res. Assets: 10.5
  - Gross Liab.: 55.4
  - Debt Liab.: 29.9
  - CA: -0.5
  - Cycl. Adj. CA: -0.7
  - EBA Norm: -0.7
  - EBA Gap: 0.0
  - Staff Adj.: 0.5
  - Staff Gap: 0.5
  - REER: projected to fall by 4.7 percent relative to 2024 average by end-2025; REER gap assessed range: -6.0 to 0.3 percent with mid-point -2.9 percent.
- Capital and financial accounts
  - Net capital and financial flows: projected to worsen to 0.1 percent of GDP in 2025 from 1.0 percent in 2024.
  - Portfolio investment: turned negative in 2025; SRBI non-resident holdings fell from 1.0 percent of GDP end-2024 to 0.4 percent of GDP by end-October 2025.
  - Net FDI inflows: 0.6 percent of GDP in 2025 (from 1.1 percent in 2024).
  - Share of nonresident holdings of rupiah bonds: 13.6 percent at end-October 2025 (down from 14.5 percent end-2024; vs 39 percent in 2019).
- FX intervention and reserves
  - Official foreign reserves projected at US$150 billion in 2025, equal to 10.5 percent of GDP, 116 percent of the IMF’s reserve adequacy metric, and 5.7 months of prospective imports.
  - In line with IPF, FXI appropriate under certain shocks but should be judicious to preserve buffers.

---

### Public debt, DSA, and financing risks

- Debt coverage and baseline assumptions
  - Coverage: consolidated General Government (GG) debt; general government public debt source: BI’s SUSPI.
  - Public debt projected (percent of GDP):
    - 2024: 40.24
    - 2025: 41.04
    - 2026: 41.34
    - 2027: 41.64
    - 2028: 41.74
    - 2029: 41.84
    - 2030–2034: ~41.94–41.9
  - Staff commentary: public debt expected to increase modestly in 2025 and then stabilize due to favorable interest-growth differential.
- Gross financing needs (GFN) and debt service (percent of GDP)
  - GFN: 5.5 (2024); 6.5 (2025); 6.4 (2026); 6.0 (2027); 5.5 (2028); 5.2 (2029); 5.9 (2030); 5.7 (2031); 5.5 (2032); 5.3 (2033); 5.1 (2034).
  - Debt service component: 5.4 (2024); 6.0 (2025); 5.8 (2026); 5.4 (2027); 4.9 (2028); 4.6 (2029); 5.3 (2030); 5.2 (2031); 5.0 (2032); 4.7 (2033); 4.5 (2034).
- DSA risk signals and medium-term assessment
  - Debt Fanchart index (DFI): 1.3 (Moderate signal).
  - GFI: 10.7 (Moderate signal).
  - MTI aggregate mechanical signal: "low" (just below threshold).
  - Final assessment probabilities (2025–2030):
    - Prob. of missed crisis if stress not predicted: 9.1 percent.
    - Prob. of false alarms if stress predicted: 42.0 percent.
- Long-term modules triggered: Pensions; Health; Large Amortization; Climate (Adaptation and Mitigation); Natural Resources.
  - Climate adaptation investment need: about 0.8 percent of GDP per year over the long-term.

---

### BI’s toolkit, central bank securities, and market development

- BI’s monetary policy toolkit
  - Mix includes policy rate and liquidity management tools using LC-denominated official securities; instruments reshaped over last five years.
- BI liabilities: SRBI and other short-term securities
  - Late 2023: four short-term BI-issued securities introduced (two LC, two FC; conventional and Islamic versions).
  - SRBI purpose: manage short-end yield curve, support liquidity, support market development.
  - SRBI operational experience: attracted domestic investors and portfolio inflows; yield reference point.
- BI assets and pandemic-era holdings
  - BI holdings of Treasury securities peaked in 2022 at ~40 percent of total assets; partially unwound to ~35 percent.
  - Tradeoffs: large BI presence softens global yield shocks but can hamper price discovery and deepen sovereign–bank nexus.
- Policy emphasis
  - Gradual debt switch of maturing pandemic-era purchases to marketable securities of varying tenors.
  - Foster private participation and deepen domestic financial markets; coordinate issuance with government to avoid crowding out.

---

### Monetary transmission: exchange rate and credit channels (informational annex findings)
- Key findings
  - The exchange rate and credit channels are the most significant for monetary policy transmission in Indonesia.
  - Consumer confidence is a key determinant of transmission strength; a one standard deviation rise in the consumer confidence index matters for passthrough.
  - Effectiveness linked to financial market development, exchange rate flexibility, and banking sector liquidity.
- Recent performance metrics (selected)
  - Growth Q3 2025: 5.04 percent y/y.
  - End-2025 inflation within target 2.5±1%: headline CPI 2.92% y/y; core inflation 2.38% y/y.
  - Foreign exchange reserves end-December 2025: USD 156.5 billion (6.4 months of imports).
  - BI Rate: reduced by total 150 bps since September 2024 to 4.75% as of November 2025.
  - Bank credit expansion: 7.74% y/y in November 2025.
  - Banking soundness: CAR 26.38% in October 2025; NPLs 2.25% gross and 0.90% net.

---

### Structural reform priorities and staff recommendations
- Overarching objective: promote durable private-sector-led growth to harness demographic dividend as working-age share peaks around 2030.
- Priority reforms (horizontal emphasis)
  - Governance and anti-corruption.
  - Skills and learning outcomes focused on manufacturing, digital services, green jobs.
  - Logistics and infrastructure.
  - Trade openness, investment and business environment.
  - Enhancing social protection.
- Measures to revitalize middle class, MSMEs and attract FDI
  - Raise labor productivity via training and improved education outcomes.
  - Address MSME obstacles: access to finance, crime and corruption; simplify collateral registry and expand digital infrastructure.
  - Foster FDI through lower trade barriers, regulatory clarity and predictable policies.
  - Use SEZs as laboratories for liberalization modalities; ensure SEZs are well-connected and avoid displacement or profit shifting.
- Industrial policy guidance
  - Target market failures, conduct continuous cost-benefit analysis, preserve competition, establish governance safeguards, and complement with horizontal reforms.
- Data and statistical capacity
  - Preparations for GDP rebasing expected in early 2027; adopt SNA 2025 and BPM7 over medium term; more frequent labor statistics from early 2026 recommended.

---

### Staff appraisal and recommended policy package (summary)
- Macroeconomic stance and resilience
  - Economy resilient; fiscal deficits below the 3 percent fiscal rule cap; appropriate monetary easing amid contained inflation and negative output gap; financial sector broadly resilient; external position preliminarily in line with fundamentals.
- Key near-term recommendations
  - Secure 2026 budget target of 2.7 percent of GDP to preserve policy space.
  - Continue careful spending execution and manage non-allocated buffers.
  - Boost domestic revenues to finance priority spending and make fiscal policy growth friendly.
  - Avoid quasi-fiscal activity and buildup of contingent liabilities; establish robust governance for Danantara.
  - Use monetary easing cautiously and data-dependently; preserve space for shocks.
  - Allow exchange rate to act as shock absorber; use judicious FXI under IPF guidance.
  - Gradually lower BI’s presence in debt market over medium term to enhance private participation and market depth.
  - Maintain near-term accommodative MPP stance but shift toward neutral as credit growth recovers; prioritize financial resilience in MPP calibration.
  - Advance horizontal structural reforms to boost long-term growth.
- Surveillance recommendation
  - Next Article IV consultation recommended on a standard 12-month cycle.

*Source: IMF staff report for Indonesia (selected excerpts).*

### 2025. The mission comprised Ms. Maria Gonzalez (Head), Ms. Anne-

### CONTEXT: PURSUING THE GOLDEN VISION IN A SHOCK-PRONE ENVIRONMENT

### Context and strategic objective
- Indonesia’s economic performance has been strong for over twenty-five years, supported by decades of prudent macroeconomic policy implementation and improved living standards.
- Productivity growth remains weak, with a shrinking middle class.
- Key priority: establish a dynamic and diversified formal private sector to generate high-quality jobs for the large and young population.
- Authorities remain firm on the “Golden Vision” of becoming a high-income country by 2045, pursuing higher real growth via a supportive macro policy mix and expanded government-led initiatives (including Industrial Policy to downstream commodities, self-sufficiency in food and energy, and human capital investment).
- Policy efforts include proactive engagement with trading partners to reduce trade barriers and facilitate FDI.

### Mission and contributors
- The mission comprised Ms. Maria Gonzalez (Head), Ms. Anne-Charlotte Paret, Messrs. Ashique Habib, Raju Huidrom, Akshat Singh, and Dennis Botman (Resident Representative) (all APD).
- Support and contributions from Mss. Choirunnisah and Tresnatri, Messrs. Akbar, Pasha and Wibowo (Resident Representative Office), Jionglin Andy Zheng (APD), Ms. Duttagupta (APD), Messrs. Idwan Hakim (Executive Director) and Wishnu Mahraddika (Advisor) (OED), and Ms. Isnawangsih, Ms. Niu and Ms. Tanseco (all APD).

### Structural elements covered in the report (selected)
- Major sections: Recent Developments; An Uncertain Outlook with Downside Risks; Policies (Fiscal, Monetary and Exchange Rate, Financial Sector, Risk Management, Structural Reforms); Staff Appraisal.
- Boxes and Annexes include policy initiatives, adverse global scenarios, middle class evolution, External Sector Assessment, Risk Assessment Matrix, Public Debt Sustainability Analysis, BI’s toolkit, and Monetary Policy Transmission in Indonesia.

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### RECENT DEVELOPMENTS: ECONOMIC SHOCKS AND HIGH UNCERTAINTY

- Growth and labor market
  - Growth would remain at 5.0 percent in 2025, despite a challenging external environment—including lower demand by key trading partners and softer commodity prices—offset by enhanced fiscal and monetary policy support in 2025: Q4.
  - Unemployment has declined to around pre-pandemic rates, though job losses have been accruing in labor-intensive manufacturing sectors; informality and underemployment still exceed pre-pandemic levels.

- Inflation
  - Headline inflation dropped early in 2025, reflecting low food prices, a temporary electricity support program that reduced housing costs, and a small negative output gap.
  - Core inflation has gradually risen from earlier low levels to around the mid-point of the target (2.5 ±1 percent) range.

- External position and reserves
  - Preliminary 2025 external position assessed broadly in line with fundamentals and desirable policies (Annex I).
  - The current account deficit is projected to be contained at –   0.5 percent of GDP by end-2025.
  - Gross international reserves: US$150.1 billion (5.  7 months of prospective imports) as of November 2025.
  - De facto ER arrangement classified as floating.
  - SRBI outstanding stock surged through 2024 to about IDR 900 trillion as of end-January 2025; lowered to about IDR 700 trillion (~US$43 billion) as of end–October 2025.
  - Net International Reserves softened slightly by about US$1 billion from end-2024, as of end-October 2025.

- Financial conditions and credit
  - Financial conditions turned accommodative after tightening in March/April and gradual easing thereafter.
  - Bank credit growth moderated to 7.4 percent y/y in October.
  - Loan-to-deposit ratio rising into 2025 amid tepid deposit growth earlier in the year.
  - Undisbursed loans at 23.0 percent in October.
  - Lending rates sticky due to high deposit rates offered to large depositors.

- Policy responses and social measures
  - Market pressures and ER volatility contained through policy action (foreign exchange intervention in onshore and offshore markets), equity share buy-backs, and a targeted fiscal package (“8+5+4” package).
  - Social demands attended via targeted fiscal package and enhanced communication on domestic policy objectives, and other measures (e.g., labor and gig worker legislation).

---

### AN UNCERTAIN OUTLOOK WITH DOWNSIDE RISKS

- Near-term projections (staff)
  - Growth projected to rise to 5.1 percent in 2026, led by domestic demand supported by fiscal and monetary policy accommodation.
  - Headline inflation projected at 2.8 percent by end-2025 and 2.6 percent by end-2026.
  - Current account deficit: -0.6 percent of GDP in 2024; around -0.5 percent of GDP in 2025; -1.0 percent of GDP in 2026.
  - Reserves would remain adequate in 2025 and in 2026 (~6 months of imports).

- Trade negotiations and assumptions
  - Projections reflect a new tariff of 19 percent in line with recent trade negotiations with the US.
  - Exports to the US represent 10 percent of total exports (~2 percent of GDP).
  - Detailed information on other commitments (beyond base tariff) not yet available and not reflected in projections.

- Risks
  - Near-term risks are tilted downwards (Annex II).
  - Downside risks include: escalating trade policy shocks and prolonged uncertainty; global financial market volatility and corrections; exchange rate and capital flow volatility; spikes in sovereign yields; domestic large policy adjustments without robust guardrails building vulnerabilities.
  - Upside risks include: sound and bolder-than-envisaged structural reforms (reducing trade barriers, better global value chain integration); stronger-than-expected growth in main trading partners.

- Medium-term outlook
  - Medium-term growth projected to average 5.2 percent under current policies, driven by domestic demand, moderate increase in public spending, and total investment.
  - Ambitious horizontal structural reforms (human capital, infrastructure, business climate, trade openness, governance) could raise output levels by 2-3 ppts over the medium term if carefully packaged and implemented.
  - Such reforms would improve prospects for domestic and foreign investment, strengthen SMEs, and reinvigorate the narrowing middle class.

- Authorities’ views
  - Authorities expect GDP growth between 4.7-5.5 percent yoy in 2025 and around 5.4 percent yoy in 2026.
  - Authorities anticipate growth in 2025: Q4 bolstered by expansionary fiscal and monetary policies and a rise in 2026 driven by private consumption, domestic investment, and accommodative policies.
  - Over the medium term, authorities project GDP growth rising to 8.0 percent by 2029 under an acceleration of public spending with Danantara (new SWF and SOE holding company) and the private sector acting as growth engines.

---

### POLICIES: WEATHERING THE TURBULENCE AND CAPTURING OPPORTUNITIES

- Policy framework summary
  - Protecting policy space and preserving credibility are essential to withstand shocks and stabilize progress toward the Golden Vision.
  - Calibrated policy mix should rest on a prudent and credible fiscal stance led by revenue mobilization to boost high-quality public spending while limiting quasi-fiscal activity.
  - With inflation expectations anchored and inflation on track, some space exists for monetary policy to foster growth, mindful of other supportive policies and the exchange rate’s role as shock absorber.
  - Enhancing macro policy transmission and implementing bold structural reforms (phasing out trade and investment barriers) are priorities.

A. Fiscal Policy: Protecting Credibility and Enhancing Policy Efficiency to Create Space for the Golden Vision

- Fiscal stance and recent developments
  - Fiscal deficit: 2.3 percent of GDP in 2024 (in line with budget target and within fiscal rule cap of 3 percent of GDP).
  - In 2025, fiscal deficit would expand to about 2.8 percent of GDP.
  - Drivers of 2025 widening: loss of SOE dividends (~0.4 ppt of GDP) now accruing to Danantara; weaker-than-budgeted tax collections; increasingly robust public spending execution in H2 2025; stimulus initiatives to address social demands (~0.4 percent of GDP).
  - The widening implies an expansionary fiscal impulse (~0.4 ppt of GDP).
  - Ministry of Finance transferred IDR 276 trillion (1.2 percent of GDP) from central bank account to public banks since September to support credit growth (about two-thirds of its cash reserves (SAL)).

- 2025 fiscal stimulus package (In trillions of Rupiah)
  - Social assistance: food aid, direct cash assistance — 50.4
  - Utility and transportation subsidies: electricity and transportation discounts — 11.8
  - Labor and employment support: wage subsidy, support for laid-off workers, cash for work — 19.3 (2025) and 1.5 (2026)
  - Urban program: improve housing quality, support gig economy — 2.7
  - Other tax incentives: MSMEs, home purchase, automotives — 20.6
  - Miscellaneous: acceleration of deregulation — 0.2 (2025) and 1.1 (2026)
  - Total — 104.9 (2025) and 2.6 (2026)
  - Percent of GDP — 0.44 (2025) and 0.01 (2026)
  - Sources: Indonesian authorities; and IMF staff estimates.
  - Note: For 2025, the package includes measures deployed in 2025H1, measures after the tariff shock, the "8+5+4" measures announced in September 2025, and measures announced in October.

- 2026 budget and staff recommendations
  - Approved 2026 budget targets a deficit of 2.7 percent of GDP focused on priority programs (Nutritious Meals Program, education, health, food security, defense).
  - The approved target assumes growth for 2026 of 5.4 percent.
  - Staff project a wider deficit of 2.9 percent of GDP for 2026 based on more conservative revenue and growth projections and full expenditure execution—implying a moderately expansionary fiscal stance into 2026.
  - Staff recommend securing a fiscal deficit around the approved target (2.7 percent of GDP); together with fiscal support from below-the-line measures, this would entail a broadly neutral fiscal stance.
  - Achieving the deficit target even with revenue underperformance would be feasible through careful spending execution and prudently managing buffers of non-allocated spending already built into the 2026 budget.

---

*Source: IMF staff report for Indonesia (selected excerpts).*

### 14.      Overall fiscal support would be broader than that reflected by the on-budget deficit

### 14.      Overall fiscal support would be broader than that reflected by the on-budget deficit

### Below-the-line and quasi-fiscal operations: scope and mechanics
- The 2026 budget envisages below-the-line investment financing of around 0.8 percent of GDP to support food security, social housing and village cooperative programs, with the latter two operating via domestic financial institutions as intermediaries.
- BI and MOF established a remuneration agreement under which BI will share the financing cost of the housing and cooperatives program, equally splitting the interest costs on the realized budget allocations, net of returns on government placements for the respective programs at domestic financial institutions; overall costs are expected to be manageable.
- Danantara is expected to invest into some public priorities, directly and via its SOEs, beginning in late 2025 and through 2026, further supporting activity.

### Fiscal stance, projections, and key fiscal numbers
- Staff project the deficit path to remain broadly flat at around 2.8 percent of GDP over the medium term.
- This path would support stable public debt of just above 40 percent of GDP.
- Budget table highlights (selected entries preserved exactly):
  - Revenues and grants: 13.3 / 12.9 / 12.3 / 12.0 / 12.0 / 12.3 / 12.0 (2023–2026 sequence as in table)
  - Oil and gas revenues: 0.9 / .8 / 0.8 / 0.7 / 0.7 / 0.7 / 0.7
  - Non-oil and gas revenues; and grants: 12.4 / 12.1 / 11.6 / 11.3 / 11.3 / 11.6 / 11.3
  - of which VAT: 3.7 / 3.7 / 3.9 / 3.7 / 3.7 / 3.9 / 3.7
  - Expenditure and net lending: 14.9 / 15.2 / 14.9 / 14.8 / 14.8 / 14.9 / 14.9
  - Current expenditure: 8.5 / 9.0 / 9.7 / 9.1 / 8.9 / 10.3 / 10.4
  - Development expenditure: 2.2 / 2.3 / 1.5 / 2.1 / 2.2 / 1.7 / 1.7
  - Transfers to local governments: 4.2 / 3.9 / 3.8 / 3.6 / 3.6 / 2.7 / 2.7
  - Overall balance: -1.6 / -2.3 / -2.5 / -2.8 / -2.8 / -2.7 / -2.9
  - Primary balance: 0.5 / -0.1 / -0.3 / -0.5 / -0.5 / -0.3 / -0.6
  - Cyclically-adjusted primary balance: 0.6 / 0.0 / -0.5 / -0.6
  - General government debt: 39.6 / 40.2 / 41.0 / 41.3
- Memorandum: budget baselines drawn from APBN (Oct 2024), MOF Outlook (July 2025), APBN (Sep 2025); current expenditure in 2026 Budget is pending State Budget Law 2026 enactment; debt based on BI's SUSPI.

### Sovereign risk assessment and financing composition
- The Sovereign Risk and Debt Sustainability Framework (SRDSF) points to an overall low risk of sovereign stress, anchored by a contained medium term deficit path and a still favorable interest rate-growth differential.
- Caveats:
  - Borrowing costs and the debt-service to tax ratio remain high relative to peers.
  - The interest bill represents nearly half of the public gross financing needs (GFNs), lowering fiscal space.
  - Budget financing is largely domestic, with external funding meeting about a quarter of the public GFNs, which are moderate at 5-6 percent of GDP.

### Fiscal rules, recommended framework, and risk management
- Continued adherence to fiscal rules is critical: Indonesia’s rules include a 3 percent of GDP deficit cap and a 60 percent of GDP public debt ceiling.
- Recommendations and observations:
  - The deficit rule provides an appropriate anchor and can accommodate well-targeted priority spending if supported by enhanced domestic revenue mobilization.
  - Limiting below-the-line investments and gradually bringing them on-budget would provide a fuller view of the fiscal footprint and strengthen the deficit anchor.
  - Complement with an enhanced Medium-Term Fiscal Framework (MTFF), supported by a medium-term objective (MTO) for long-term sustainability and well-calibrated counter-cyclical policymaking.
  - Manage risks preemptively by generating fiscal space, particularly through revenue mobilization and strengthened public expenditure management.
  - Under adverse shocks, the interest bill could rise and/or growth and revenues could fall short; these scenarios could press on the deficit cap.

### Danantara: opportunities, risks, and governance priorities
- Overview and scale:
  - Established: February 2025; operations started October 2025.
  - Assets: Estimated at US$900 billion (63 percent of GDP).
  - Initial Funding: US$20 billion (1½ percent of GDP) redirected from government budget and SOE dividends.
  - Initial Investments: US$10 billion (0.7 percent of GDP) in 2025Q4, with 80 percent allocated domestically and the rest overseas.
  - Danantara recently raised ~US$3 billion (0.2 percent of GDP) through low-coupon “patriot bonds.”
- Objectives and tools:
  - Purpose: Consolidate and manage SOEs—including public banks—under one entity while driving strategic national investments (commercial and strategic).
  - Financing tools: leverages SOE assets and dividends, collateralized and uncollateralized debt, and co-investment models.
  - Structure: Danantara holds 99 percent of its own shares; BP BUMN holds 1 percent “A shares” with privileges over key strategic decisions; Danantara and BP BUMN report directly to the President.
- Risks:
  - Danantara could expand quasi-fiscal activity and raise contingent liability risks if investments are leveraged, underperform, and/or accumulate explicit or contingent public liabilities.
  - An illustrative adverse scenario: a one-off materialization of contingent liabilities calibrated as a one-time 3.2 percent of GDP shock realized in 2026 (assumed twice as large as outstanding public guarantees as of 2025 Q1 on infrastructure programs of US$22.7 billion (1.6 percent of GDP) as reported in BI (2025)).
  - Inclusion of the five largest public banks in the holding will need careful management to prevent financial sector risks; limiting public bank exposures to Danantara’s own investments will be critical.
- Governance and mitigation measures:
  - Put in place robust governance and accountability arrangements aligned with best practice standards, including strong oversight and reporting obligations and transparent frameworks for project selection and implementation focused on economic feasibility and returns.
  - Secure well-balanced risk-sharing with private or foreign investors in joint projects; run SOEs and public banks on best commercial practices; establish clear and effective accountability frameworks.
  - The Santiago Principles for SWFs and OECD SOE Governance Guidelines provide helpful frameworks.

### Revenue mobilization, tax reform measures, and expenditure priorities
- Revenue objective:
  - Increasing revenue is a priority given Indonesia’s low tax to GDP ratio (~10 percent of GDP); sustaining tax revenue beyond the 10 percent threshold is associated with stronger growth.
  - Boosting tax revenue requires addressing tax administration gaps: compliance risk management (CRM), third-party data use and government database integration, digitalization (e.g., Coretax), and broadening taxpayer bases.
  - Tailored compliance strategies should focus on large business taxpayers, high wealth individuals, and the shadow economy.
- Selected reform measures and medium-term potential revenue gains (percent of GDP preserved as in original Text Table 2):
  - Tax Policy total potential: 3.5
    - VAT: 1.8 (remove certain exemptions 0.2 done; reduce registration threshold 0.2 pending; replace STLG with VAT and vehicle excise 0.6 pending; increase standard rate by 2 percentage points 0.8 with note: VAT hike in 2025 limited to luxury goods)
    - Excises: 0.5 (introduce new excises on fuel 0.5 pending; add excises on plastic—some progress; reform of tobacco taxation 0.7 noted)
    - CIT: 0.4 (replace special regimes by a single CIT 0.2 pending; introduce alternative minimum tax 0.2 pending)
    - PIT: 0.4 (broaden base 0.4; new PIT bracket 0.4; reduce basic allowance; reduce top income tax bracket)
    - Property tax: 0.3 (reduce transaction tax and increase property tax 0.3 pending)
    - Non-tobacco reforms (excluding fuels): 0.8
  - Tax Administration potential: 1.5 (compliance improvement programs; institutional reforms)
  - Total Revenue Gains from Pending Tax Policy: 6.1 (percent of GDP)
- Public spending priorities and efficiency:
  - New spending priorities should be rolled out gradually and based on absorption and implementation capacity.
  - Improve public investment management (PIM) across government levels, enhance project appraisal, and secure agile gatekeeping safeguards to minimize risks and bottlenecks.
  - Strengthen social protection (e.g., streamlining programs into a unified safety net), boost quality of health and education spending, and rationalize non-priority outlays (e.g., energy subsidies).

### Selected policy initiatives (Box 1): scale and implementation challenges
- Nutritious Meal Program:
  - Universal program to reduce stunting and boost human capital via nutritious meals to children and expectant mothers.
  - Budgeted for 2025: IDR 71 trillion (0.3 percent of GDP).
  - Fully deployed potential: IDR 450 trillion (1.9 percent of GDP annually).
  - Program is on-budget but initial rollout faced high costs, targeting, logistical, quality and governance challenges.
- “Red and White” Cooperatives:
  - Authorities establishing 80 thousand village cooperatives.
  - Maximum lending per cooperative: IDR 3 billion, total IDR 240 trillion (~1 percent of GDP) rolled out in the next five years.
  - Lending would be subsidized with public transfers to public financial intermediaries.
- Public Housing:
  - Plans include construction and upgrading supported by public banks, MPP-related incentives and below-the-line fiscal financing.

### Authorities’ views on fiscal stance and Danantara
- Authorities emphasized fiscal policy is supporting near-term growth and affirmed commitment to fiscal prudence.
- They expect to achieve the 2026 deficit target of 2.68 percent of GDP, citing efforts to enhance tax compliance and budget spending buffers.
- They concur with staff on fiscal risks and debt sustainability and see merit in maintaining prudent cash buffers balanced against growth needs.
- On Danantara, authorities view it as key to enhancing SOE efficiency and development objectives; they are confident Danantara’s frameworks will align with best practices and commit to containing fiscal risks from Danantara’s operations, with fiscal support managed case-by-case and linked to Public Service Obligations (PSOs).

### Monetary and exchange rate policy: calibration and guidance
- BI reduced the policy rate by 25 bps six times between September 2024 and September 2025, bringing it to 4.75 percent amid soft credit growth; complementary measures included easing MPP tools, retrenching SRBI stock, and net purchases of government securities in the secondary market.
- BI imposed an asymmetric cut of 50 bps to the overnight deposit facility rate (to 3.75 percent) in September and has paused rate cuts since October.
- Staff view: some space may remain for further cuts toward the upper-end of staff’s estimate of the real neutral rate, 1-2 percent, but the pace and extent of cuts should be data dependent and carefully paced given the supportive fiscal impulse, cumulative lagged effects of prior BI actions, and the need to preserve space against new shocks.

*Source: IMF staff analysis and Indonesian authorities as presented in the section titled “Overall fiscal support would be broader than that reflected by the on-budget deficit”.*

### 22.      In the face of fundamental shocks, the exchange rate should continue to act as the main

### In the face of fundamental shocks, the exchange rate should continue to act as the main

### Exchange rate, FX interventions, and reserve buffers
- De facto exchange rate arrangement assessed as floating, with significant ER movements during recent stress episodes.
- BI has implemented FXI using FX spot market, domestic non-deliverable forwards (DNDF), and offshore NDF interventions.
- Based on the IMF’s Integrated Policy Framework (IPF), well-calibrated FXI may be warranted to avoid excessive tightening of financial conditions in the case of risk-off shocks given Indonesia’s shallow FX markets.
- Interventions should be judicious and prudent to preserve buffers in a shock-prone external environment and should not prevent needed adjustment in fundamentals if warranted.
- Indonesia’s reserves remain adequate, with efforts to replenish buffers during periods of easing external pressures.
- Authorities revised export repatriation requirements: raised domestic holding requirements for export profit earnings from commodities to 100 percent for 12 months (post-deductions). Allowed deductions have contained impact so far; staff recommend gradually phasing out the export profit repatriation requirements with due consideration to market conditions.

### BI market operations, monetary policy toolkit, and market development
- 2023 introduction of the SRBI attracted capital inflows at the short end of the yield curve and boosted money market liquidity; 2024 introduction of a primary dealer system supported this.
- Continuing gradual tapering of SRBI is recommended to boost liquidity and strengthen the monetary policy credit channel.
- BI introduced a new floating rate note (BI-FRN) in 2025: Q4 to support development of Overnight Index Swaps and promote a money-market based interest rate structure.
- BI’s market-based “debt switch” of maturing pandemic-era bonds—already considered in its overall net purchases of government securities—is viewed as enabling eventual orderly tapering of BI’s exposure to government bonds to foster private sector participation.
- Recent MOF-BI remuneration agreement is described as well ringfenced; limiting further use of the scheme would bolster communication and reaffirm the public’s perception of central bank independence.

### Authorities’ views on monetary policy and FXI
- Authorities broadly agree with staff’s assessment and advice on monetary policy, emphasizing BI’s commitment to support growth while preserving stability.
- With inflation expectations well anchored and the exchange rate broadly stable, monetary policy has had room to foster growth via policy rate cuts, supportive MPPs, and open market operations while following an FXI strategy that allows the currency to move with fundamentals.
- Authorities agree with staff advice for prudent FX interventions, noting the triple intervention strategy has helped contain excessive volatility; broadening FXI to offshore NDF markets has been effective and timely.
- Authorities encourage further refinement of the IPF with flexibility and country-specific considerations, and note the need for well-calibrated FXI based on early FX market pressures.

### Financial sector resilience and key indicators
- The financial system is broadly resilient; the banking sector dominates and has strong capital and liquidity buffers.
- NPLs reported as (2.2) percent of gross loans as of September 2025).
- Banks’ deposit growth reached 11.2 percent in September.
- Lending remains soft with suppressed credit demand and a preference for safe liquid assets, including BI and government securities.
- Following equity market pressures in early 2025, net equity outflows stabilized but cumulative flows remain negative for the year (at ~US$2.5 billion as of end-October).
- The stock market index (JCI) has recovered, though listed SOEs’ prices remain subdued.
- Overall systemic risks to the financial sector appear contained.

### Macroprudential policies (MPPs), growth initiatives, and recommended stance
- MPPs kept broadly accommodative; BI further loosened several tools. With systemic risks contained and amid a negative credit gap, the current loosened MPP settings could be maintained in the near term.
- Recommendation: commence a shift towards a neutral stance as credit growth recovery builds pace to safeguard bank capital and liquidity before risks materialize.
- Clarify that financial resilience is prioritized in calibrating MPP tools over other objectives (balanced and sustained intermediation, financial inclusion) to support communication and policy effectiveness.
- Public banks’ participation in growth initiatives should be gradually rolled out, ringfenced, carefully targeted, subject to cost-benefit assessments, rigorous due diligence, and monitoring to avoid credit misallocation and protect banking system resilience.
- Growth initiatives include absorbing SOE banks under Danantara, leveraging dividends and assets to finance the SWF’s selected projects, participation in subsidized lending schemes (e.g., social housing and “Red and White Cooperatives”), and incentivized lending to priority sectors.

### Regulatory and supervisory reform priorities
- Authorities are following up on 2024 FSAP advice: implementing liquidity coverage and net stable funding ratios across all banks, enhancing stress-testing frameworks, strengthening rules on related-party transactions, and improving FMIs and payments safety and efficiency.
- OJK is aligning the use of profit and loss sharing Shariah contracts with intended purposes and substance to strengthen sector development and resilience.
- Preserving and enhancing autonomy of key institutions including OJK and the deposit insurance agency (LPS) is emphasized.
- For LPS: remove provision of liquidity to banks in recovery, place strict safeguards on recapitalization of banks in resolutions.
- Provide explicit legal protection for OJK staff for costs arising while discharging duties in good faith; prioritize safety and soundness as core mandate.
- Priority given to unlocking barriers to deepening and bolstering market-based intermediation, including strengthening credit infrastructure and supporting capital market development.
- Any potential revisions to the central bank’s mandate should consider price, financial system, and payment system stability as essential pillars for sustainable economic growth.

### AML/CFT developments
- 2025 FATF Mutual Evaluation Report: legal framework is strong and broadly effective; key areas for progress include imposing effective and dissuasive sanctions in all sectors and applying targeted financial sanctions for terrorist financing-related activities.
- Need to ensure accurate information on ultimate beneficial owners of legal persons is available to law enforcement, tax authorities, and procurement agencies.

### Money and FX market deepening — results and instruments
- Text Table 4 (Blueprint highlights and 2025: Q3 results):
  - BI-FRN issuance planned in 2025: Q4 to deepen OIS market.
  - SRBI optimization as a key pricing and liquidity instrument.
  - Broader high-quality repo collateral for monetary operations; broaden margin-related contract standards; develop FX derivatives (including DNDF).
  - Results 2025: Q3:
    - Daily MM transactions reached ~IDR 53.5 trillion (5x higher than in 2020).
    - Daily FX market turnover approached USD 10 billion.
    - Strengthened pricing framework through deeper money market term structure and improved transparency in FX pricing.
  - Participant and infrastructure actions: implementation of Money Market and FX Market Primary Dealers; establishment of Self-Regulatory Organization (APUVINDO); CCP preparations for derivatives and repo; expansion of electronic-trading platforms (MMS and multi-product ETPs); strengthened BI regulations for FX and Money Markets.

### Authorities’ implementation stance and safeguards
- Authorities, including BI and OJK, emphasize deploying the financial sector to support growth while maintaining prudential guardrails and prioritizing resilience of the banking system.
- Emphasis on enabling state-owned banks and NBFIs to manage legacy assets—through authority to write off and delete uncollectible debt exposures—to operate on a level playing field with private institutions.
- Reform agenda guided by 3P+I framework — Product, Pricing, Participant, and Infrastructure — aiming to strengthen policy transmission, accelerate market deepening, increase transaction volume and liquidity, enhance market conduct, and bolster market stability and infrastructure.

### Policies to manage near- and medium-term risks
- Economic environment characterized by unusual economic and geopolitical uncertainty; external risks include trade policy shocks and tighter financing conditions.
- Policy mix needs to be nimble, credible, and well calibrated, preserving buffers and policy space for potential new external shocks.

*Source: Provided IMF chapter text.*

### 31.      Indonesia has strong fiscal and financial buffers—as well as generally robust policy

### Indonesia has strong fiscal and financial buffers—as well as generally robust policy frameworks—to respond to adverse shocks

### Risk Assessment and Growth-at-Risk
- Growth-at-Risk indicators (using data available as of 2025: Q3) show the distribution of risks has shifted to the left relative to the 2024 Article IV.  
- Estimates yield a 5 percent probability that real GDP would contract by at least 2.9 percent the following year (using data as of 2025: Q3).  
- At the end of 2023, estimates were pointing at a 5 percent probability of a contraction of at least 1.7 percent.  
- The deterioration is led by somewhat tighter financial conditions as of 2025: Q3; macro-financial vulnerabilities and external factors play a smaller role.  
- The exercise highlights Indonesia’s sensitivity to China’s growth: a 5 percent probability that a severe downturn in China’s economy (two-standard deviations growth shock) would produce a fall of 3.5 percent in Indonesia growth the following year.  
- Reflecting limited trade linkages with the US economy, Indonesia would be relatively insulated from the direct impact of a severe US growth slowdown.

### Policy Toolkit and Guidance
- If adverse shocks materialize, the response could involve fiscal policy, monetary policy, and FXI (foreign exchange intervention).  
- Policy guidance:
  - Monetary policy support should keep inflation expectations well anchored.
  - Fiscal policy responses should remain targeted and temporary to preserve policy space.
  - Judicious and prudent use of FXI could be considered to offset risk-off shocks that excessively tighten financial conditions.
- The analysis underscores the importance of protecting buffers and policy space to allow automatic deployment during shocks without breaching the fiscal rule.

### Illustrative Adverse Global Macroeconomic Scenario (Box 2): Assumptions
- Scenario follows the 2025 October WEO adverse scenario with US tariffs for all countries rising to the highest of either the April tariff announcements or the tariff rates in the letters sent in June/July, with attendant supply chain disruptions.  
- This implies a 32 percent US tariff for Indonesia.  
- The shock is passive (hypothetical) for Indonesia—assuming no discretionary policy reactions by Indonesian authorities—but considers spillovers from policy responses elsewhere.  
- Associated global developments: lower demand from trading partners, rising global inflation expectations, higher term premia on public debt, tightening global financial conditions, and lower demand for US assets. Commodity prices are assumed to remain relatively unchanged.

### Illustrative Adverse Global Macroeconomic Scenario (Box 2): Impacts and Quantitative Results
- Global GDP would be -1.2 percent lower than baseline in 2026, with a further decline relative to baseline to around -1¾ ppts in 2027.  
- For Indonesia:
  - The shock would undermine growth mainly through lower investment, private consumption, and net exports.
  - The shock is assumed to be disinflationary for Indonesia, with inflation lower than baseline by 20 bps in 2026, and further 20 bps in 2027, due to lower domestic demand.
  - Investment growth would decline vis-à-vis baseline given tighter financial conditions and heightened uncertainty.
  - Exports would deteriorate relative to baseline given lower trading partner growth; limited direct effect of US tariffs due to small share of Indonesian exports to the US, partly offset by less dynamic imports.
  - Private consumption would be dented, partially offset by lower prices cushioning purchasing power.
- In a “no policy reaction scenario”:
  - Real output could decline by a cumulative 1.8 ppt in 2027 relative to baseline.
  - This would render growth at ~4.1 percent in 2026 and 2027, with a rebound thereafter.
  - The fiscal deficit would widen given higher interest payments as financing costs rise; without compensating measures, it could slightly exceed 3 percent of GDP deficit cap by around 2028.
  - The public debt-GDP ratio would rise over the medium term but remain below the 60 percent of GDP ceiling.
  - Gross reserves would bottom at around 102 percent of the ARA metric in 2027 (vs. 122 percent in the baseline), while remaining adequate.
  - Financial vulnerabilities (including those related to FX-exposures) would remain well contained, as reflected in the 2024 FSAP.

### Authorities’ Views
- Authorities agreed global shocks are a relevant risk but indicated Indonesia is well prepared to proactively fend them off.  
- Resilient growth and diversified trading partnerships alongside a strong and large domestic consumer base are cited as buffers.  
- Discretionary spending built into the budget and healthy buffers would enable implementation of discretionary fiscal policies without breaching the deficit rule.  
- Bank Indonesia’s policy mix will aim at fostering economic growth while maintaining stability (pro-stability and growth), in close synergy with national economic policy.

### Structural Reforms to Bolster Private-Sector Led Growth
- Structural reforms are critical to boost long-term growth sustainably and to harness the demographic dividend as the working age share of population is expected to peak around 2030.  
- Horizontal structural reforms are emphasized over exclusive reliance on sector-based industrial policies (IP). Key reform priorities include:
  - Governance and anti-corruption.
  - Skills and learning outcomes, focusing training on areas with real growth potential (manufacturing, digital services, green jobs).
  - Logistics and infrastructure.
  - Trade openness, investment and business environment.
  - Enhancing social protection.
- Elements to foster a dynamic private sector-led growth model:
  - Revitalizing the declining middle class to anchor private consumption and savings; raise labor productivity via training, targeted upskilling, and improved education outcomes; identify regulatory barriers to informality and incentivize formal employment.
  - Generating strong MSMEs: address operational obstacles—access to finance is the biggest obstacle per World Bank Enterprise Surveys, followed by crime and corruption; Indonesian MSMEs face significantly higher borrowing costs and more complex loan procedures vs. peers; improving financial inclusion (simplifying collateral registry, expanding digital infrastructure) can help narrow the credit gap and enhance firm performance.
  - Fostering FDI to boost investment, connectivity and knowledge transfer by lowering trade barriers and regulatory burdens and ensuring stable, reliable, predictable and transparent policies.
  - Amplifying gains through governance reforms: protect autonomy of anti-corruption institutions, strengthen enforcement capacity (e.g., risk-based verification of asset declarations), and ensure regulatory clarity and judicial independence.

### Middle Class Dynamics (Box 3)
- The middle class has shrunk by 5.4 percentage points from its 2018 peak over the last five years.  
- Middle-class labor market indicators:
  - Middle-class unemployment rate is relatively low (~3 percent), but above pre-pandemic levels (below 2 percent).
  - Middle-class under-employment (working less than 35 hours a week) is at 22.6 percent (vs. 20 percent pre-pandemic).
  - The share of middle-class individuals not in employment, education, or training (NEET) is 2 percent (vs. ~1.4 percent in 2019).
  - More than half of middle-class employment between 2016-24 was linked to blue-collar occupations; white-collar positions are fewer than 20 percent.
  - Around 20–25 percent of middle-class workers are in occupations threatened by AI (sales and services).
  - AI-complementary roles (professional and technical positions) make up less than 10 percent of middle-class employment.

### Industrial Policy, Downstreaming, SEZs, and Trade Integration
- IP aims to capture greater commodities value added (downstreaming) and pursue self-sufficiency; expanded via Special Economic Zones (SEZs).  
- Downstreaming example: since the January 2020 re-instatement of an export ban on nickel ore, Indonesia’s share of global nickel production rose to ~60 percent (2024); the export value of refined nickel products increased, though plateauing since 2023 as global prices moderated. Authorities envision expanding downstreaming to 28 commodities.  
- Self-sufficiency efforts include food and energy; Indonesia reached self-sufficiency in rice in 2025 via food estates.  
- SEZs: nearly 30 operating SEZs aiming to attract investments in goods and tradable high-value-added services; realizing benefits requires SEZs to be well-connected to the domestic economy and avoid displacing investments or profit shifting.  
- Careful IP deployment is advised: target market failures, use continuous cost-benefit analysis, establish governance safeguards, preserve competition, and complement with horizontal reforms. SEZs could be used as laboratories for liberalization modalities.
- Trade integration: Indonesia joined BRICS, is negotiating OECD accession, signed CEPA with the EU and Canada, is working towards CPTPP, and has a deal with the US being finalized. Many agreements envisage reductions in Non-Tariff Measures (NTMs). Staff estimates suggest a broad deregulation effort, particularly simplifying and eliminating NTMs, could yield substantial gains—much of which could be realized unilaterally, and further enhanced within deep trade agreements.

### Data and Statistical Capacity
- Indonesia’s data is broadly adequate for surveillance but could be further strengthened (Annex IV).  
- Ongoing initiatives:
  - Preparations for a GDP rebasing expected in early 2027.
  - Plans to adopt SNA 2025 and BPM7 over the medium term.
  - Plans for more frequent and timely publication of labor statistics expected in early 2026.

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

### 40.      The authorities remain firm in their Golden Vision ambition, with emphasis on policy

### The authorities remain firm in their Golden Vision ambition, with emphasis on policy supported programs, achieving an attractive investment climate, and strengthening economic and trade partnerships

### Strategic outlook and trade/investment agenda
- Authorities view the next 15 years as a window of opportunity to tap demographic benefits of a low dependency ratio.
- Continued pursuit of deeper trade integration:
  - Agreements with EU and Canada already in place.
  - Ongoing efforts with the US, CPTPP, MERCOSUR, and others.
- Policies to enhance the investment climate:
  - Streamlining business processes.
  - Easing import restrictions in several sectors (e.g., raw materials, footwear).
  - Introducing export-oriented special economic zones (SEZs).
  - Debottlenecking agenda to enhance business, trade, and investment environment.
- Trade integration will be balanced with:
  - Developing local supply chains.
  - Increasing domestic value added from commodities.
  - Enhancing resilience in an uncertain global context.
- Statistical improvements underway:
  - Work toward a 2025 GDP rebasing (forthcoming in 2027).
  - Enhanced timeliness and granularity of labor statistics.

### Staff appraisal — macroeconomic resilience and risks
- Macroeconomic stance and performance:
  - Economy remains resilient despite adverse external shocks.
  - Policies broadly prudent; fiscal deficits below the fiscal rule cap of 3 percent of GDP.
  - Appropriate monetary policy easing amid well-contained inflation, slowing credit growth, and a still negative output gap.
  - Financial sector broadly resilient.
  - Indonesia's external position in 2025 is assessed on a preliminary basis to be broadly in line with levels implied by fundamentals and desirable policies.
- Near-term risks:
  - Risks to the near-term outlook are tilted to the downside, increasing the premium on preserving policy soundness, credibility, buffers, and policy space.
- Government-led initiatives:
  - Include industrial policy (IP) and accommodative macro policies to reach high-income status by 2045.

### Fiscal policy assessment and recommendations
- Current and near-term fiscal stance:
  - The deficit is projected to widen slightly beyond the budget (to 2.9 percent of GDP) in 2026; this deficit level risks reducing policy space relative to the deficit cap.
  - A slightly smaller fiscal deficit than projected—around the budget target of 2.7 percent of GDP—would be appropriate.
- Policy recommendations:
  - Secure the 2026 budget target to preserve policy space while supporting growth.
  - Continue careful spending execution, including managing healthy buffers of non-allocated spending already built into the 2026 budget.
  - Adhere to long-standing fiscal rules and guardrails to preserve policy space and maintain credibility.
  - Boost domestic revenues to finance priority spending and make fiscal policy more effective and growth friendly.
  - Avoid quasi-fiscal activity and buildup of contingent liabilities.
  - Put in place robust governance and accountability frameworks in Danantara, in line with best practice standards, to reduce risks and enhance long-term growth.
  - Avoid expansion of below-the-line and quasi-fiscal activities; carefully ringfence and monitor such operations to better gauge fiscal footprint and raise credibility.

### Monetary policy, exchange rate, and financial sector guidance
- Monetary policy stance:
  - Some space remains for further policy rate cuts if warranted, but pace and extent must be data-dependent.
  - Further easing should consider lagged transmission, the expansionary fiscal impulse, and the need to preserve space for new shocks.
- Exchange rate and FX interventions:
  - Exchange rate should function as a shock absorber, particularly for fundamental shocks.
  - Use of FXI may be warranted in case of excessive tightening of financial conditions amid risk-off shocks given Indonesia’s shallow FX markets; if deployed, a judicious approach is needed to preserve buffers in a shock-prone external environment.
- Government debt market:
  - Over the medium term, gradually lowering BI’s presence in the government debt market could enhance private sector participation and further enhance market liquidity and depth.
- Financial sector resilience and mobilization:
  - Small negative credit gap in the near-term and systemic financial risks contained; near-term accommodative MPP stance remains appropriate.
  - Gradual shift towards a neutral setting as credit growth recovers to preserve buffers for future shocks.
  - Clarify that the MPP framework prioritizes financial resilience to enhance communication and effectiveness.
  - Carefully target and ringfence growth-oriented policy initiatives implemented via the financial sector to protect system resilience and limit credit misallocation.
  - Strengthen regulatory and supervisory framework, including enhancing independence of key financial sector agencies.
  - Progress in addressing gaps in the AML/CFT framework is welcome.

### Structural reform priorities
- Reforms that would sustainably boost long-term growth:
  - Promote durable and dynamic private sector-led growth, including revitalizing the declining middle class, strengthening MSMEs, and attracting FDI.
  - Calibrate industrial policy (IP) to:
    - Target well-identified market failures based on cost-benefit analysis.
    - Preserve competition.
    - Enforce strong governance safeguards.
    - Minimize adverse outward spillovers.
  - Reconcile IP design with trade integration efforts that significantly lower barriers to trade and investment.
  - Further deregulate, enhance trade openness (reducing trade barriers and deepening trade agreements), and improve the investment climate.
  - Strengthen governance and fight corruption.
  - Improve education and skills.
  - Upgrade logistics and infrastructure.

*Source: IMF staff appraisal and authorities' statements as presented in the provided content.*

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

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

### Recent economic developments and outlook
- Real GDP (percent change) projections:
  - 2023: 5.0
  - 2024: 5.0
  - 2025: 5.0
  - 2026: 5.1
  - 2027: 5.1
  - 2028: 5.2
- Domestic demand and components (percent change):
  - Domestic demand: 2023: 4.9; 2024: 6.0; 2025: 5.0; 2026: 5.3; 2027: 5.2; 2028: 5.2
  - Private consumption 1/: 2023: 4.9; 2024: 5.1; 2025: 5.1; 2026: 5.1; 2027: 5.1; 2028: 5.1
  - Government consumption: 2023: 3.0; 2024: 6.6; 2025: 9.0; 2026: 7.5; 2027: 5.4; 2028: 5.0
  - Gross fixed investment: 2023: 3.8; 2024: 4.6; 2025: 4.6; 2026: 5.3; 2027: 5.5; 2028: 5.6
- Output gap (in percent): 2023: -0.4; 2024: -0.3; 2025: -0.1; 2026: -0.1; 2027: 0.0; 2028: 0.1
- Key headline indicators:
  - Nominal GDP (2024): Rp 22,139 trillion or US$1,396 billion
  - Population (2025): 284 million
  - GDP per capita (2024): US$4,909
  - Unemployment rate (2025): 4.9 percent
  - Poverty headcount ratio at national poverty line (2024): 9.0 percent of population
  - Main exports (percent of total, 2024): base metal (18), coal (14), palm oil (8), oil and gas (8), textile and products (4)

### Inflation dynamics
- Consumer prices (12-month percent change):
  - End period: 2023: 2.8; 2024: 1.6; 2025: 2.8; 2026: 2.6; 2027: 2.5; 2028: 2.5
  - Period average: 2023: 3.7; 2024: 2.3; 2025: 1.9; 2026: 3.0; 2027: 2.5; 2028: 2.5
- Drivers and dynamics:
  - Inflation is within target band and approaching midpoint following temporary shocks, including a one-off reduction to administered electricity prices.
  - Volatile food inflation has since accelerated somewhat; core inflation has gradually recovered.
  - Food price volatility drove headline inflation; housing prices (embedding the temporary electricity discounts) recovered in recent months.
  - PPI inflation picked up since 2024.
  - Inflation dynamics were relatively similar across Indonesian regions.

### Capital flows, reserves, and market developments
- External flows and reserves:
  - Portfolio investment has been subdued in 2025.
  - Rupiah government bonds held by foreign investors in 2025 fell as a share of the stock.
  - Indonesia’s foreign reserves increased in 2024 (US$155.7 billion), remaining adequate.
  - Gross reserves (end period, in billions of U.S. dollars): 2023: 146.4; 2024: 155.7; 2025: 150.4; projections: 2026: 157.9; 2027: 168.6; 2028: 188.6
  - Reserves in months of prospective imports: 2023: 6.3; 2024: 6.4; 2025: 5.7; 2026: 5.5; 2027: 5.5; 2028: 5.7
- Market and exchange rate:
  - Market interest rates have fallen year-to-date in 2025, especially for shorter tenors; yield curve steepened over 2025 with falling short-end yields amid monetary policy loosening.
  - The exchange rate depreciated since fall 2024 but regained some ground since April 2025.
  - Stock prices fell starting in late 2024 but recovered since April 2025.
  - Indonesia EMBI spread (bps, e.o.p.): 2021: 161; 2022: 133; 2023: 87; 2024: 88; 2025: 75 (Nov. 19)
  - Rupiah per U.S. dollar (e.o.p.): 2021: 14,253; 2022: 15,573; 2023: 15,399; 2024: 16,132; 2025: 16,736 (Nov. 20)

### External sector and balance-of-payments
- Current account and trade:
  - Current account balance (in percent of GDP): 2023: -0.1; 2024: -0.6; 2025: -0.5; projected: 2026: -1.0; 2027: -0.9; 2028: -0.8
  - Current account (in US$ billions): 2023: -2.0; 2024: -8.7; 2025: -6.8; 2026: -15.4; 2027: -14.6; 2028: -14.8
  - Trade balance (in US$ billions): 2023: 46.3; 2024: 39.8; 2025: 44.7; 2026: 38.2; 2027: 42.6; 2028: 44.9
  - Except for palm oil, most commodity exports faced headwinds from softer prices.
  - Import growth moderated in 2025, except capital goods.
- External financing and debt:
  - External financing needs projected to increase in 2025 mainly due to stronger public debt amortization.
  - Total external debt (in billions of U.S. dollars): 2023: 408.5; 2024: 426.1; 2025: 429.3; 2026: 455.4; 2027: 478.4; 2028: 511.1
  - Total external debt (percent of GDP): 2023: 29.8; 2024: 30.5; 2025: 29.9; 2026: 29.7; 2027: 29.0; 2028: 28.7
  - Gross external financing requirement (in US$ billion) 2/: 2021–25 table lists 2025: 100.5 (Proj.)
  - In percent of short-term debt at remaining maturity (RM): 2023: 209; 2024: 188; 2025: 196.9 (Proj.)

### Fiscal sector and public debt
- Key fiscal ratios (in percent of GDP):
  - General government revenue: 2023: 15.0; 2024: 14.5; 2025: 13.7; 2026: 13.7; 2027: 13.8; 2028: 13.9
  - General government expenditure: 2023: 16.6; 2024: 16.8; 2025: 16.5; 2026: 16.5; 2027: 16.6; 2028: 16.7
  - Energy subsidies (percent of GDP): 2023: 0.8; 2024: 0.8; 2025: 0.8; 2026: 0.8; 2027: 0.7; 2028: 0.7
  - General government balance: 2023: -1.6; 2024: -2.3; 2025: -2.8; 2026: -2.9; 2027: -2.8; 2028: -2.8
  - Primary balance: 2023: 0.5; 2024: -0.1; 2025: -0.5; 2026: -0.6; 2027: -0.6; 2028: -0.6
  - General government debt 4/: 2023: 39.6; 2024: 40.2; 2025: 41.0; 2026: 41.3; 2027: 41.6; 2028: 41.7
- Fiscal assessments:
  - The primary balance is expected to deteriorate in 2025.
  - Indonesia’s tax-to-GDP ratio still lags behind EM peers.
  - Public debt-to-GDP ratio is lower than peers but the debt service to revenue ratio is higher.
  - General government debt as share of GDP is expected to stabilize gradually over the medium term.
  - The share of non-resident holdings of rupiah government securities stabilized at a lower level compared to pre-pandemic; non-bank FIs’ share has picked up.

### Monetary sector and banking system
- Policy and liquidity:
  - BI cut its monetary policy rate six times (25 bps in each step) to 4.75 percent as of November 2025, with inflation expectations well-anchored.
  - The yield curve steepened over 2025 with falling short-end yields amid monetary policy loosening.
  - BI increased secondary market purchases of government bonds in 2025 to enhance liquidity conditions and replaced maturing tranche of pandemic-era bonds.
  - Monetary base growth has been muted in 2025.
  - Broad money (Rupiah M2, 12-month percent change; end of period): 2023: 3.5; 2024: 4.8; 2025: 8.3; 2026: 8.6; 2027: 8.0; 2028: 8.1
  - Base money 5/: 2023: -1.5; 2024: 5.3; 2025: 7.4; 2026: 7.6; 2027: 7.2; 2028: 7.1
- Banking sector indicators and credit:
  - Claims on private sector (12-month percent change; end of period): 2023: 9.2; 2024: 7.7; 2025: 8.1; 2026: 9.5; 2027: 9.3; 2028: 9.3
  - Credit growth has declined since 2024; a small negative credit gap persists but is narrowing.
  - Banking system liquidity remains ample.
  - Deposit growth slowed across the banking system, though picked up in end 2025.
  - Commercial banks’ loan-to-deposit ratios increased since 2024 but edged down lately.
  - Credit growth to MSMEs declined since 2024.
  - Real estate loan growth receded since 2023; non-performing loans ratio stabilized.

### Financial soundness and vulnerabilities
- Financial soundness indicators (selected):
  - Capital to risk-weighted assets, commercial banks (in percent): 2021: 25.7; 2022: 25.7; 2023: 27.7; 2024: 26.7; 2025: 25.8 (June)
  - Nonperforming loans, commercial banks (in percent of total loans): 2021: 3.0; 2022: 2.4; 2023: 2.2; 2024: 2.1; 2025: 2.3 (Aug.)
  - Foreign currency deposits at commercial banks (in percent of total deposits): 2021: 13.9; 2022: 15.3; 2023: 15.5; 2024: 15.6; 2025: 15.9 (June)
  - Foreign currency loans at commercial banks (in percent of total loans): 2021: 14.1; 2022: 14.8; 2023: 14.5; 2024: 15.0; 2025: 15.1 (June)
  - Government debt held by financial system (percent of total financial system assets): 2021: 16.5; 2022: 15.3; 2023: 14.6; 2024: 12.6; 2025: 10.3 (Sep.)
- Vulnerability indicators (2021–25 highlights):
  - Real GDP growth (in percent): 2021: 3.7; 2022: 5.3; 2023: 5.0; 2024: 5.0; 2025: 5.0 (Proj.)
  - CPI inflation (in percent, e.o.p): 2021: 1.9; 2022: 5.4; 2023: 2.8; 2024: 1.6; 2025: 2.8 (Proj.)
  - Short-term (ST) interest rate (in percent, e.o.p.) 1/: 2021: 3.6; 2022: 6.2; 2023: 6.6; 2024: 6.6; 2025: 6.5 (Nov.)
  - Ten-year government bond yield (in percent, e.o.p.): 2021: 6.4; 2022: 6.9; 2023: 6.5; 2024: 7.0; 2025: 6.2 (Nov.)

### Implementation of past Fund advice and policy recommendations
- Fiscal policy recommendations and actions:
  - Recommendation: Budget deficit should be slightly narrower than budgeted; enhance MTFF; prioritize revenue mobilization; monitor fiscal risks.
  - Actions: The budget deficit in 2024 stood at 2.3 percent of GDP as budgeted. Authorities envisage larger revenues from improved tax administration. MTFF reforms remain pending.
- Monetary policy recommendations and actions:
  - Recommendation: Monetary policy should remain data-driven; exchange rate to serve as shock absorber; FX intervention appropriate under certain shocks mindful of reserves.
  - Actions: BI cut policy rate six times to 4.75 percent as of November 2025. Rupiah depreciated by an average of 3.9 percent in 2024. Indonesia’s de facto exchange rate regime is classified as floating. External position in 2024 broadly in line with medium-term fundamentals.
- Financial sector and macroprudential recommendations and actions:
  - Recommendation: Clarify that financial system resilience takes priority in macroprudential toolkit; bolster regulation and supervision; develop credit infrastructure.
  - Actions: BI has been loosening broadly-defined macroprudential policies to support credit growth. Authorities continue to enhance stress-testing and risk-monitoring capabilities and pursue money market deepening.
- Structural and climate-related recommendations and actions:
  - Recommendation: Implement horizontal structural reforms; design IP to target market failures; on climate, complement CIPP with plan to transition off-grid power, gradual reduction of energy subsidies and carbon pricing.
  - Actions: For 2025, authorities allocated roughly equivalent spending budgets in education and health as in 2024; public housing allocation increased by around 60 percent. Authorities announced intention to streamline NTMs and started reducing some, including LCRs. Authorities published a Comprehensive Investment and Policy Plan (CIPP) including phase out of on-grid coal-fired power plants under the JETP; a plan to transition off-grid power generation is also needed.

### Status of key 2024 FSAP recommendations (summary of progress)
- Systemic risk analysis:
  - Implement LCR and NSFR across all banks: Implemented (POJK No. 19/2024 and No. 20/2024; No. 20/2025 for Sharia entities).
  - Require banks to recognize NPLs timely and fully; increase scrutiny of restructured loans: Implemented. Pandemic-era forbearance discontinued since March 2024. As of October 2025, restructured COVID loans with current quality ~ IDR 38 trillion (~0.45 percent of total banking loan).
- Macroprudential and supervisory framework:
  - Clarify macroprudential objective and shift to neutral stance: In progress / Implemented. FSOL emphasizes stability; BI will prepare to shift towards a more neutral stance and is researching a positive cycle-neutral rate for the CCyB.
  - Strengthen toolkit for NBFIs and integrate monitoring: In progress. OJK monitoring NBFIs; work under KSSK framework planned.
  - Enhance supervisory capacity, RBBR/SREP integration, and reporting of non-financial entities: In progress. Multi-year project and regulatory steps (POJK No. 30 of 2024) to improve reporting and consolidated oversight.
- Climate risk and data:
  - Develop climate risk analysis, guidance, and data collection: Partially implemented. OJK and BI have launched CRMS and are expanding piloting; BI developed Climate Risk Analysis framework and is advancing CRST; capacity building and workshops carried out in 2024–2025.
  - Improve interagency collaboration on climate risk: Partially implemented. OJK and BI coordination strengthened; joint initiatives with ministries, research, and private sector ongoing.
- Financial integrity and AML/CFT:
  - Strengthen BO identification and sanctions: Partially implemented. OJK issued OJK Regulation Number 8 of 2023 and OJK Regulation No.24/2025; OJK and Ditjen AHU signed cooperation agreement (PKS) on 16 July 2025 to exchange beneficial ownership data.
- Systemic liquidity and crisis frameworks:
  - Reduce frequency and breadth of market interactions; deepen markets: In progress. BI introduced Primary Dealer framework (May 2024) and deactivated certain repo/reverse repo tenors; guided by Blueprint for Money Market and Foreign Exchange Market Deepening 2025-2030.
  - Address growing NBFI sector and CCP liquidity backstops: Pending. No provision for BI to provide liquidity to CCP; operational arrangements and studies continue.
  - Crisis management and financial safety net: LPS liquidity role and bail-in provisions updated but some items pending. LPS authorized to place funds for systemic banks under recovery per FSOL; government drafting implementing regulation. LPS Regulation No. 5/2024 provides for bail-in use outside Bank Recovery Program (voluntary basis).
- Financial market infrastructures and credit infrastructure:
  - Complete oversight framework for FMIs and develop CRS: Partially implemented. BI developed FMI oversight framework; MoU between BI and OJK on cooperation dated March 22, 2024. OJK developing national CRS strategy with World Bank TA expected end-2025.
  - Remove minimum government bond holdings requirement for institutional investors: Pending. Authorities acknowledge importance; regulations and POJK steps on life-cycle funds are in progress.
- State ownership and MSME support:
  - Define objectives of state ownership; improve MSME credit insurance pricing: In progress. Law No. 1/2025 amends Law No. 19/2003; authorities view MSME credit insurance pricing as low priority now but foundations laid for risk-based approach.

### Fund surveillance, capacity development, and technical assistance
- Surveillance recommendations and recent capacity development:
  - Monetary policy and central bank communication: Fund provided training and TA on FMI oversight (Aug 2025), monetary and exchange rate modeling, and residential property price index; TA on strengthening climate-risks assessments under discussion.
  - Statistics: TA to BPS and BI on residential property price index and export/import price index; TA and workshop on energy and air emission accounts (July 2024); macro-relevant climate change statistics TA (July 2023); ongoing TA on Government Finance and Public Sector Debt Statistics.
  - Fiscal policy and administration: Fund provided TA on General Tax Diagnostic and Regional Analysis (Aug 2017; revisited Apr 2024); workshop on fiscal rules (Nov 2023); capacity building on Growth-at-risk framework with FPP training scheduled for early-2026.
  - Public financial management: PIMA conducted Feb 2019; Public Sector Balance Sheet Analysis Oct 2019; TA on PPPs, fiscal risks, cash management and other fiscal topics across 2022–2025.
  - Financial sector: TA on financial conglomerate supervision, risk-based supervision, crisis management, stress testing, fintech regulation; TA to OJK on related party transactions (July 2025 and onsite Dec 2025); TA to OJK Dec 2025 on top-down liquidity stress tests; discussions ongoing on EWS and FSI capacity building; Financial Transaction Reports and Analysis Centre requested AML/CFT training on stand-alone cases.

*Source: IMF staff report excerpt (Tables, figures and text provided).*

### Annex I.  External Sector Assessment

### Annex I.  External Sector Assessment

### Overall Assessment
- The external position in 2025 is assessed on a preliminary basis to be broadly in line with the level implied by medium-term fundamentals and desirable policies.
- In the medium term, external balance is expected to be sustained despite external policy shocks and higher uncertainty, while exchange rate flexibility and structural policies would help contain the CA deficit.
- External financing needs appear sustainable.
- Indonesia’s reliance on foreign portfolio investment exposes the economy to sharp swings in market sentiment and risk premia, and to fluctuations in global financial conditions amid still-deepening domestic markets.

### Potential Policy Responses
- Maintain exchange rate flexibility to support external stability.
- Structural reforms recommended:
  - Higher infrastructure investment, higher social spending to foster human capital development and strengthening the social safety net.
  - Reducing or eliminating restrictions on inward FDI and external trade, including by moving away from non-tariff barriers.
  - Promoting greater labor market flexibility.
- Build on recent progress on trade integration and deregulation via decisive, comprehensive, broad, and sound implementation to strengthen trade, investment, and growth.

### Foreign Asset and Liability Position and Trajectory
- Background projections:
  - NIIP projected to slightly narrow from -17.6 percent of GDP at end-2024 to -17.5 percent of GDP at the end-2025.
  - Gross external assets projected to rise by 0.4 percent of GDP, with improvements in most components partly offset by declines in reserves as a share of GDP.
  - On gross liabilities, portfolio debt and equity liabilities projected to decline as a share of GDP in 2025; direct investment and other investments are projected to show net increases as a share of GDP.
  - Gross external debt projected at 29.9 percent of GDP at end-2025, falling marginally from 30.5 percent of GDP in 2024.
  - External rollover risks in the short-term are contained as reflected in the large share of long-term debt.
- Assessment:
  - Level and composition of NIIP and gross external debt indicate Indonesia’s external position is sustainable with limited rollover risk.
  - High dependence on foreign portfolio investment (19.1 percent of GDP in 2025) increases vulnerability to swings in global financial market sentiment.
  - NIIP as a share of GDP is projected to marginally improve in the medium term as robust nominal GDP growth would offset projected small CA deficits.
- Projected 2025 (% GDP):
  - NIIP: -17.5
  - Gross Assets: 37.9
  - Res. Assets: 10.5
  - Gross Liab.: 55.4
  - Debt Liab.: 29.9

### Current Account
- Background projections:
  - CA deficit projected to marginally narrow to 0.5 percent of GDP in 2025 from 0.6 percent of GDP in 2024.
  - Dynamics driven by resilient exports (frontloading of exports to the US amid trade policy shocks; resilient demand from other trading partners including a recovery in palm oil exports), offsetting headwinds from a decline in some key commodity prices.
  - Import growth projected to moderate vis-à-vis 2024, though picking up somewhat in Q4 amid demand-boosting policy measures.
  - On the savings-investment side: a 0.2 percent of GDP decrease in savings (income pressures on households, a more supportive fiscal stance) is offset by a 0.3 percent decrease in investment (higher uncertainty).
  - CA deficit projected to widen moderately in 2026 due to payback to frontloading, protracted global trade tensions, disruptions to copper exports from a force majeure event at the Freeport Copper Mine, muted commodity prices, and robust imports amid policy support.
  - CA deficit expected to remain close to the norm throughout the projection horizon amid stable savings and investment outlooks.
- Assessment and metrics:
  - Staff estimates a CA gap of 0.5 percent of GDP for 2025.
  - Constituent figures: cyclically adjusted CA deficit of −0.7 percent of GDP; staff assessed norm of −0.7 percent of GDP; adjustor of 0.5 percentage points for demographics.
  - Considering estimation uncertainty, the CA gap for 2025 is in the range of 0.0 to 1.0 percent of GDP.
  - EBA-identified policy gaps estimated at 0.4 percent of GDP, with a tighter fiscal stance than in other countries (0.8) and underspending on healthcare (0.4) contributing to the positive gap, partly offset by the credit gap (-0.6).
- Projected 2025 (% GDP) summary:
  - CA: -0.5
  - Cycl. Adj. CA: -0.7
  - EBA Norm: -0.7
  - EBA Gap: 0.0
  - Staff Adj.: 0.5
  - Staff Gap: 0.5

### Real Exchange Rate
- Background:
  - By end-2025, REER is projected to fall by 4.7 percent relative to its average level in 2024.
  - As of September 2025, the REER was 5.9 percent below its 2024 average.
  - Depreciation reflects heightened external and domestic policy uncertainty affecting capital outflows and easing domestic monetary policy tightening yield differentials.
- Assessment:
  - Staff CA gap estimate of 0.5 percent of GDP implies a REER gap of -2.9 percent (applying an estimated elasticity of 0.16).
  - REER index and level models point to REER gaps of -5.3 percent and -21.9 percent, respectively.
  - Staff assess the REER gap in the range of -6.0 to 0.3 percent with a mid-point of -2.9 percent.

### Capital and Financial Accounts: Flows and Policy Measures
- Background projections:
  - Net capital and financial flows projected to worsen to 0.1 percent of GDP in 2025 from 1.0 percent of GDP in 2024.
  - Portfolio investment flows turned negative in 2025, reflecting net outflows from equities and private bonds, alongside retrenchment of non-resident holdings of BI’s local currency instrument (SRBI), which fell from 1.0 percent of GDP at end-2024 to 0.4 percent of GDP by end-October 2025.
  - Net FDI inflows softened to 0.6 percent of GDP in 2025 (from 1.1 percent in 2024; 1.4 percent in 2022).
  - Share of nonresident holdings of rupiah-denominated government bonds was 13.6 percent at end-October 2025, down from 14.5 percent at end-2024, and well below the 39 percent share in 2019.
  - Financial flows expected to be somewhat subdued into the medium term amid external shocks.
- Assessment:
  - The small net financial and capital accounts surplus partly offset the moderate current account deficit in 2025.
  - Continued strong policies are recommended: safeguard the fiscal position and long-standing policy frameworks, advance financial deepening, and implement structural reforms that provide credibility and certainty and enable business, trade, and investment to help sustain capital inflows in the medium term, particularly during prolonged global policy uncertainty.

### FX Intervention and Reserves Level
- Background:
  - Since mid-2013, Indonesia has had a more flexible exchange rate policy framework.
  - Official foreign reserves projected at US$150 billion in 2025, slightly below end-2024, with declines due to FX interventions during stress periods offset by efforts to rebuild buffers at other times.
- Assessment and metrics:
  - End-2025 level of reserves: 10.5 percent of GDP.
  - Reserves equal 116 percent of the IMF’s reserve adequacy metric.
  - Reserves equal 5.7 months of prospective imports.
  - Predetermined short-term foreign currency drains have been stable through 2025.
  - In line with the IPF, the use of FXI is appropriate under certain shocks and circumstances, particularly when shocks trigger spikes in market premia given shallow FX markets; usage should be judicious to preserve buffers in a shock-prone environment.

*Source: Annex I. External Sector Assessment (staff report content).*

### 1. Debt coverage in the DSA: 1/CGGGNF

### 1. Debt coverage in the DSA: 1/CGGGNF

### Debt coverage and consolidation
- Coverage chosen: consolidated General Government (GG) debt, consistent with the Government Finance Statistics Manual, 2014.
- PPPs and public guarantees: not included.
- General government public debt source: BI’s SUSPI.
- Inclusion of subsectors (baseline):
  - Budgetary central government: Yes
  - Extra budgetary funds (EBFs): No
  - Social security funds (SSFs): No
  - State governments: Yes
  - Local governments: Yes
  - Public nonfinancial corporations: No
  - Central bank: No
  - Other public financial corporations: No
- Commentary on reported items:
  - Includes “Other Accounts Payable” for the Local Government, but not for the Central Government.
  - Stock of arrears could be used as a proxy in absence of accrual data on other accounts payable.
  - IPSGSs 3/ refers to Insurance, Pension, and Standardized Guarantee Schemes, typically including government employee pension liabilities.

### Accounting, valuation, and reporting basis
- Consolidation and recording:
  - Coverage is consolidated General Government.
  - Basis of recording: references to cash basis and non-cash basis (accrual recording, commitment basis, due for payment, etc.) are present; consolidated reporting is indicated.
- Valuation of debt stock:
  - Nominal value 5/: "Nominal value at any moment in time is the amount the debtor owes to the creditor."
  - Face value 6/: "The face value of a debt instrument is the undiscounted amount of principal to be paid at (or before) maturity."
  - Market value 7/: "Market value of debt instruments is the value as if they were acquired in market transactions on the balance sheet reporting date (reference date). Only traded debt securities have observed market values."
- Reporting on intra-government debt holdings: referenced but not fully itemized in the excerpt.

### Public debt structure indicators (Figure 3: selected observations and commentary)
- Perimeter shown: general government.
- Commentary: currency composition and maturity profile of public debt are expected to remain about the same over the projection horizon.
- Observed shift: Domestic banks and the Central Bank (BI) increased their share of public debt holdings during the Covid years.
- Residual maturity summary headings shown:
  - ≤ 1 year; 1-5 years; > 5 years
  - Residual maturity: 0. years
- Debt instrument categorization: Marketable debt vs Non-marketable debt.

### Baseline scenario (Figure 4: key projections and contributions; all values in percent of GDP unless indicated)
- Public debt (actual and projections):
  - 2024: 40.24
  - 2025: 41.04
  - 2026: 41.34
  - 2027: 41.64
  - 2028: 41.74
  - 2029: 41.84
  - 2030: 41.94
  - 2031: 41.94
  - 2032: 41.94
  - 2033: 41.94
  - 2034: 41.9
- Change in public debt:
  - 2024: 0.6
  - 2025: 0.8
  - 2026: 0.3
  - 2027: 0.2
  - 2028: 0.2
  - 2029: 0.1
  - 2030: 0.1
  - 2031: 0.0
  - 2032: 0.0
  - 2033: 0.0
  - 2034: 0.0
- Contribution of identified flows:
  - Total contribution (selected years): 0.5 (2024), 0.4 (2025), 0.4 (2026), 0.3 (2027), 0.2 (2028), 0.2 (2029), 0.1 (2030), 0.1 (2031), 0.1 (2032), 0.1 (2033), 0.1 (2034)
- Components:
  - Primary deficit: 0.1 (2024), 0.5 (2025), 0.6 (2026–2034 each year reported as 0.6)
  - Noninterest revenues: 14.5 (2024), 13.7 (2025), 13.7 (2026), 13.8 (2027), 13.9 (2028), 14.1 (2029), 14.2 (2030), 14.3 (2031), 14.3 (2032), 14.3 (2033), 14.3 (2034)
  - Noninterest expenditures: 14.6 (2024), 14.1 (2025), 14.3 (2026), 14.3 (2027), 14.3 (2028), 14.5 (2029), 14.6 (2030), 14.7 (2031), 14.9 (2032), 14.9 (2033), 14.9 (2034)
  - Automatic debt dynamics: 0.4 (2024), -0.3 (2025), -0.7 (2026), -0.6 (2027), -0.7 (2028), -0.7 (2029), -0.7 (2030), -0.8 (2031), -0.7 (2032), -0.7 (2033), -0.7 (2034)
  - Real interest rate and relative inflation: 1.7 (2024), 1.7 (2025), 1.2 (2026), 1.4 (2027), 1.4 (2028), 1.3 (2029), 1.3 (2030), 1.3 (2031), 1.4 (2032), 1.4 (2033), 1.4 (2034)
  - Real interest rate: 1.9 (2024), 1.6 (2025), 1.1 (2026), 1.3 (2027), 1.3 (2028), 1.3 (2029), 1.3 (2030), 1.2 (2031), 1.3 (2032), 1.4 (2033), 1.4 (2034)
  - Relative inflation: -0.2 (2024), 0.0 (2025), 0.1 (2026–2034 each year reported as 0.1 or 0.0 in 2034)
  - Real growth rate: -1.9 (2024), -1.9 (2025), -2.0 (2026), -2.0 (2027), -2.0 (2028), -2.1 (2029), -2.1 (2030), -2.1. (2031), -2.1 (2032), -2.1 (2033), -2.1 (2034)
  - Other identified flows / Other transactions: 0.0 (2024), 0.2 (2025), 0.6 (2026), 0.4 (2027), 0.3 (2028), 0.3 (2029), 0.3 (2030), 0.3 (2031), 0.2 (2032), 0.2 (2033), 0.2 (2034)
  - Contingent liabilities: 0.0 across projection years
  - Contribution of residual: 0.1 (2024), 0.4 (2025), -0.1 (2026), -0.1 (2027), -0.1 (2028), -0.1 (2029), -0.1 (2030), -0.1 (2031), -0.1 (2032), -0.1 (2033), -0.1 (2034)
- Gross financing needs (GFN) and debt service:
  - Gross financing needs: 5.5 (2024), 6.5 (2025), 6.4 (2026), 6.0 (2027), 5.5 (2028), 5.2 (2029), 5.9 (2030), 5.7 (2031), 5.5 (2032), 5.3 (2033), 5.1 (2034)
  - Of which: debt service: 5.4 (2024), 6.0 (2025), 5.8 (2026), 5.4 (2027), 4.9 (2028), 4.6 (2029), 5.3 (2030), 5.2 (2031), 5.0 (2032), 4.7 (2033), 4.5 (2034)
  - Local currency GFN component: 3.8 (2024), 4.5 (2025), 4.5 (2026), 4.0 (2027), 3.6 (2028), 3.5 (2029), 4.0 (2030), 3.9 (2031), 3.8 (2032), 3.6 (2033), 3.4 (2034)
  - Foreign currency GFN component: 1.6 (2024), 1.5 (2025), 1.3 (2026), 1.4 (2027), 1.3 (2028), 1.1 (2029), 1.3 (2030), 1.3 (2031), 1.2 (2032), 1.1 (2033), 1.1 (2034)
- Memo macro assumptions:
  - Real GDP growth (percent): 5.0 (2024), 5.0 (2025), 5.1 (2026), 5.1 (2027), 5.2 (2028), 5.2 (2029), 5.2 (2030), 5.2 (2031), 5.2 (2032), 5.2 (2033), 5.2 (2034)
  - Inflation (GDP deflator; percent): 0.9 (2024), 1.9 (2025), 3.0 (2026), 2.5 (2027–2031 each year reported as 2.5), 2.4 (2032), 2.3 (2034)
  - Nominal GDP growth (percent): 6.0 (2024), 7.0 (2025), 8.2 (2026), 7.7 (2027), 7.8 (2028), 7.8 (2029), 7.9 (2030), 7.9 (2031), 7.9 (2032), 7.9 (2033), 7.9 (2034)
  - Effective interest rate (percent): 5.9 (2024), 6.3 (2025), 6.0 (2026), 5.9 (2027), 5.9 (2028), 5.8 (2029), 5.8 (2030), 5.7 (2031), 5.9 (2032), 5.9 (2033), 5.8 (2034)
- Baseline commentary: "Public debt is expected to increase modestly in 2025 but will stabilize gradually over the medium terrm, mostly due to a favorable interest-growth differential. Gross financing needs are expected to remain manageable averaging around 5½ percent of GDP over the medium-term."

### Realism of baseline assumptions (Figure 5: diagnostics and commentary)
- Forecast track record and percentile diagnostics use comparator group: Emerging Markets, Non-Commodity Exporter, Surveillance.
- Commentary: 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.
- Projected 3-year fiscal adjustment and 3-year debt reduction are within norms; real GDP growth path broadly in line with assumed fiscal adjustment and potential growth.
- Percentile rank examples:
  - 3-year debt reduction above 75th percentile: 5.9 ppts of GDP (percentile rank 44.1)
  - 3-year adjustment above 75th percentile: 2 ppts of GDP (percentile rank 44)

### Medium-term assessment (Figure 6: indices, risk signals, and probabilities)
- Debt fanchart module:
  - Fanchart width: 35.3 0.5 (percent of GDP) [values shown as "35.30.5"]
  - Probability of debt non-stabilization (percent): 41.1 0.3
  - Terminal debt-to-GDP x institutions index: 21.4 0.5
  - Debt fanchart index (DFI): 1.3
  - Risk signal: Moderate (DFI thresholds: low < 1.13; high > 2.08)
- Gross Financing Needs (GFN) module:
  - Average baseline GFN: 5.9 2.0 (percent of GDP)
  - Initial Banks' claims on gen. govt (pct bank assets): 11.2 3.6
  - Change in banks' claims in stress (pct banks' assets): 15.2 5.1
  - GFN financeability index (GFI): 10.7
  - Risk signal: Moderate (GFI thresholds: low < 7.6; high > 17.9)
- Medium-term index (MTI) and final assessment:
  - MTI produces aggregate mechanical "low" signal (just below threshold).
  - Final assessment probabilities for 2025-2030:
    - Prob. of missed crisis, if stress not predicted: 9.1 pct.
    - Prob. of false alarms, if stress predicted: 42.0 pct.
- Commentary: Adequate balance of risks around projected debt baseline; moderate risks under macro-fiscal and debt holder shock due to low GFNs and initial high bank exposure. Mitigating factors include declining share of foreign holdings of local-currency debt and cash buffers.

### Long-term risk assessments and triggered modules (Figures 7–10)
- Triggered long-term modules: Pensions; Health; Large Amortization; Climate (Adaptation and Mitigation); Natural Resources.
- Climate adaptation:
  - Estimated climate adaptation investment need: about 0.8 percent of GDP per year over the long-term (Aligishiev, Bellon and Massetti (2022) and ESCAP (2019)).
  - Indonesia among top 25 countries in emissions per output.
  - Commentary: Fiscal reforms to create fiscal space will be critical over the longer run.
- Climate mitigation:
  - Scenarios based on investment needs per year for a 10 year period to reach zero net carbon emissions by 2050.
  - Assumption: public sector makes all investments needed to reach net zero by 2050; private sector delivery or less costly mitigation policies would lower impact on debt and GFN.
- Natural resources module:
  - Triggered as extraction volumes over a six-to-fifteen year horizon are expected to deviate from historical averages.
- Long-run projections include comparisons:
  - Baseline; Baseline with t+5; Baseline with t+5 and DSPB; Historical 10-year average.

### Data issues and adequacy for surveillance (Annex IV and Tables)
- Overall data adequacy assessment: B (Data Adequacy Assessment Rating: B).
- Detailed sectoral and dimension ratings (median rating string): BBABABB for unspecified ordered dimensions; Coverage: CBBBA; Consistency: B; Frequency and Timeliness: AAAAA (across sectors where applicable).
- Noted data characteristics and recent improvements:
  - Data provided to the Fund are adequate for surveillance.
  - Positive developments since last Article IV: impending switch from semi-annual to quarterly and prompter publication of labor statistics (starting Q1 2026); December 2024 publication of annual historical breakdown of investment by institutional sector up to 2022.
  - Authorities working on GDP rebasing; first publication of rebased GDP expected in early 2027 (with a 2025 base year).
  - Authorities working on the gap between National Accounts and BoP data (declining over time).
  - Interest in gradual adoption of BPM7 and SNA 2025 standards; Technical Assistance could support these objectives.
  - Resuming publication of inflation expectation survey recommended to support monitoring and monetary policy effectiveness.
- Rationale for assessment: broadly adequate for surveillance but shortcomings remain in national accounts (need for updated base year currently 2010), external, price and fiscal statistics, granularity (lack of breakdown of investment data between public and private; absence of seasonally adjusted quarterly national accounts), small negative net errors and omissions in BOP (average -0.1 percent of GDP in last 5 years).
- Data Standards Initiatives:
  - Indonesia subscribes to SDDS since September 1996 and publishes data on its National Summary Data Page.
  - Table of Common Indicators required for surveillance provided as of December 15, 2025 (frequency and timeliness matrix present in source).

*Source: IMF staff (Indonesia DSA excerpts, figures, and annex tables as provided).*

### Annex V. BI’s Toolkit—Official Security Markets

### Annex V. BI’s Toolkit—Official Security Markets

### BI’s monetary policy toolkit and open market operations
- Monetary policy uses a mix of levers, such as the policy rate and liquidity management tools, including open market operations based on local-currency (LC)-denominated official securities.
- Over the last five years, instruments on both sides of BI’s balance sheet were reshaped, including Treasuries held on BI’s balance sheet and a new set of central bank issued short-term securities, with the stated purpose of deepening the money market and attracting foreign capital inflows in the form of portfolio investment.

### BI’s liabilities: new short-term BI-issued securities
- In late 2023, BI introduced four short-term BI-issued securities:
  - Two LC-denominated and two in foreign currency (FC); each has a traditional and an Islamic finance version.
  - The BI Rupiah Securities (SRBI) is a conventional LC security that uses BI’s holding of government securities as the underlying instrument.
  - Purpose of SRBI: manage the short-end of the yield curve, support liquidity, and support market development.
- SRBI operational experience:
  - SRBI has been successfully traded since its launch, attracting domestic investors and portfolio inflows, buttressing FX reserves.
  - Its yield has become an important reference point on the broader monetary policy stance.
  - Over the first year, issuance was stepped up. Through 2025, BI shifted focus into further supporting credit, with BI injecting liquidity by tapering off SRBI issuances.

### Cross-country lessons and operational considerations
- Cross-country best practices and an IMF desks survey of Indonesia’s EM peers indicate:
  - Many inflation-targeting central banks use their own securities to manage liquidity to support the transmission of the policy rate, especially with excess reserve balances or constrained T-bill supply.
  - Central bank securities have been used to promote yield curve formation and market development as a secondary objective; interest payments entail costs for the central bank and indirectly to the government through lower central bank dividends.
  - Careful design and operational practices are key: tenor choice should target the market segment to be developed and be coordinated with the Treasury to avoid crowding out; eligible investor base should balance breadth against crowding out and fragmentation risks.
  - Central bank–Treasury coordination (liquidity forecasting, issuance schedule) is critical to smooth market operations and absorption.

### Tenor focus and investor-targeting tradeoffs
- Indonesia’s CB securities—including the SRBI—are focused on short tenors, justified because the usual rationale for longer tenors (absorbing structural liquidity or insufficient T-bonds) does not appear relevant for Indonesia.
- The goal of attracting portfolio flows is rare among peers; while SRBI’s domestic investor base is substantial, ensuring attractive yields for non-residents poses tradeoffs with liquidity management.

### BI’s assets: shifts in government securities holdings
- BI holdings of Treasury securities expanded in 2020-23 with acquisition of pandemic-era Treasury (non-marketable) securities at reduced interest costs, underpinned by “burden-sharing” and “coordination” agreements between BI and the MoF providing emergency financing in 2020-22.
- Key balance-sheet figures and trends:
  - Share of government securities in BI’s balance sheet peaked in 2022 at about 40 percent of total assets.
  - That share has been partially unwound to ~35 percent, exceeding pre-pandemic levels (under 20 percent).
  - Holdings by insurance and pension funds (non-banks) are about 19 percent, compared with an average of about 40 percent in other ASEAN countries (ADB, 2025).
- Tradeoffs from BI’s large presence in the LC government debt market:
  - Reduced non-resident participation and increased BI holdings help soften transmission of global shocks to yields.
  - A large central bank presence may hamper price discovery, could disincentivize non-resident return, reduce market depth, and strengthen the bank–sovereign nexus.
  - Unwinding central bank holdings would require careful calibration to avoid market disruptions and/or crowding out private sector lending.
- Policy emphasis:
  - Gradual debt switch of maturing pandemic-era purchases to marketable securities of varying tenors to enable well calibrated tapering by BI.
  - Foster private participation and diversification of the investor base for LC securities.
  - Deepen domestic financial markets, build a reliable short-term yield curve, avoid fragmentation, and deepen the institutional investor sector.
  - Coordination with the government on objectives, design, and issuance of securities to ensure successful liquidity management, market development, reserves management, and avoidance of fragmentation and crowding out.

### Box 1 — Government borrowing costs and debt issuance mix: key findings and figures
- Nominal effective interest rates and debt shares:
  - The nominal effective interest rate on LC government debt has declined since the pandemic but remains relatively elevated (~7½ percent in 2024).
  - While the nominal effective interest rate on FC is low, the high share of domestic borrowing (around two-thirds) implies that the overall nominal effective interest rate is high, around 6 percent.
  - Public debt-to-GDP ratio is relatively low at around 40 percent.
  - Non-resident share of rupiah bonds fell from 39 percent in 2019: Q4 to 14 percent in 2025: Q3.
  - Most public debt (~70 percent) is issued domestically in LC.
- Literature-based trade-offs and implications:
  - Greater foreign participation in the domestic government bond market tends to reduce long-term yields.
  - When non-resident holdings decline, domestic banks and non-banks absorb most LC debt; greater participation by (private) non-bank investors helps absorb debt supply and contains yield increases when issuance rises.
  - Excessive external/FC borrowing raises FX-related risks; domestic borrowing reduces currency mismatch exposure but can crowd out private credit, tighten bank liquidity, and strengthen the sovereign–bank nexus.
  - Heavy reliance on captive investors such as banks and the central bank can heighten financial stability risks and limit market absorption capacity.
- Indonesia’s policy actions:
  - Efforts to diversify external/FC borrowing and manage FX risks, including issuance of renminbi (“Dim Sum”) and Australian dollar–denominated (“Kangaroo”) bonds.

*Prepared by Ashique Habib, Raju Huidrom, Akshat Singh, and Jionglin Andy Zheng.*

### 7.      The analysis demonstrates that the exchange rate and credit channels are the most

### 7. The analysis demonstrates that the exchange rate and credit channels are the most significant for monetary policy transmission in Indonesia

### Monetary policy transmission — key findings
- The exchange rate and credit channels are identified as the most significant channels for monetary policy transmission in Indonesia.
- Consumer confidence is a key determinant of the strength of transmission.
- The empirical framework provides a robust basis for understanding how monetary policy shocks transmit to inflation and output.
- The effectiveness of transmission is closely linked to consumer sentiment, implying complementarity between credit supply measures and confidence-boosting measures.
- Policymakers should pay close attention to factors affecting the exchange rate and credit channels, including:
  - financial market development,
  - exchange rate flexibility,
  - banking sector liquidity.

### Empirical detail on consumer confidence
- The consumer confidence index, published by Bank Indonesia, measures consumer optimism regarding current economic conditions and expectations for the next six months.
- For the regression referenced, the index is standardized such that a unit increase reflects a one standard deviation rise in consumer confidence index.

### Policy implications and recommendations (from analysis)
- Strengthen financial market development to bolster exchange rate and credit channel effectiveness.
- Maintain or enhance exchange rate flexibility to allow exchange rate channel transmission.
- Preserve and improve banking sector liquidity to support credit channel transmission.
- Complement efforts to stimulate credit supply with confidence-boosting measures to ensure effective transmission of monetary policy.
- In the context of ongoing structural reforms and financial deepening, strengthen monetary policy transmission to ensure policy actions translate into desired macroeconomic outcomes.

### Latest economic performance & outlook (selected statistics)
- Growth in Q3 2025: 5.04% year-on-year.
- Inflation at the end of 2025 within target of 2.5±1%:
  - headline CPI at 2.92% year-on-year,
  - core inflation at 2.38% year-on-year.
- Foreign exchange reserves at end-December 2025: USD 156.5 billion, equivalent to 6.4 months of imports.
- 2025 overall economic growth projected range: 4.7–5.5%.
- Current account balance projected range for 2025: surplus of 0.1% of GDP to deficit of 0.7% of GDP.
- Growth projections:
  - 2026: 4.9–5.7%,
  - 2027: 5.1–5.9%.
- Inflation target range maintained at 2.5±1% through 2026 and 2027.

### Fiscal policy (selected statistics and measures)
- Provisional budget deficit as of December 2025: 2.92% of GDP.
- Social assistance spending growth: 19.2% year-on-year.
- Nutritious Meals Program (NMP) as of December 15, 2025:
  - NMP reached IDR 52.9 trillion,
  - benefiting 50.7 million recipients,
  - creating approximately 741,985 jobs.
- Interest subsidy support to MSMEs and cooperatives reached 4.2 million borrowers as of November 30, 2025.
- Disaster response disbursement: IDR 268 billion in assistance funds to 3 provinces and 52 affected districts and municipalities in Sumatra.
- Going forward: projected budget deficit staying below the 3 percent of GDP ceiling.

### Monetary and financial sector policy (selected statistics and measures)
- Since September 2024, the BI Rate has been reduced by a total of 150 basis points, bringing it to 4.75% as of November 2025.
- As of October 2025:
  - average daily repo transactions in 2025 reached IDR 17.7 trillion (up 17.9% from 2024 and 62.7% from 2023),
  - average daily Overnight Index Swap transactions increased by 35.7% year-on-year to IDR 66.5 billion.
- Macroprudential liquidity incentives (KLM) framework adjustments:
  - liquidity incentives for banks to decrease lending rates increased from a maximum of 0.5% to 1.0% of third-party funds (DPK),
  - incentives for credit disbursement remain up to 4.5% of DPK.
- Bank credit expansion: 7.74% year-on-year in November 2025 (up from 7.36% the previous month).
- Banking liquidity and funding:
  - liquid assets-to-DPK ratio: 29.67%,
  - DPK growth: 12.03% year-on-year.
- Banking sector soundness:
  - Capital Adequacy Ratio (CAR) rose to 26.38% in October 2025,
  - Non-performing loans: 2.25% gross and 0.90% net.

### Structural reforms and institutional changes
- Establishment of Danantara as the super holding entity for state-owned enterprises (SOEs), operating as a sovereign wealth fund (SWF).
- Danantara investment focus: downstream natural resource industries, advanced manufacturing, renewable energy, digital infrastructure, strategic upstream sectors, and food security.
- Emphasis on transparent investment consolidation, robust governance, and comprehensive risk management frameworks to mitigate quasi-fiscal and contingent liability exposures.
- Policy synergy to address five key areas:
  - safeguarding macroeconomic and financial system stability;
  - fostering stronger and more resilient growth;
  - enhancing economic and financial market financing;
  - accelerating national economic and financial digitalization;
  - strengthening bilateral and regional economic cooperation and multilateral engagement.
- Real-sector transformation policies to improve capital, labor, and productivity, combining industrial strategies and structural reforms.

### Conclusion (summary perspective)
- The analysis underscores the central role of the exchange rate and credit channels in monetary policy transmission in Indonesia, with consumer confidence amplifying or dampening transmission.
- Strengthening financial markets, exchange rate flexibility, banking liquidity, and confidence-enhancing measures is critical to ensure monetary policy actions translate into desired outcomes.
- Together with prudent fiscal, monetary, and structural reform agendas, these measures provide a foundation for resilient, inclusive, and sustainable growth.

*Prepared by Asia and Pacific Department; excerpted from the Staff Report for the 2025 Article IV Consultation — Informational Annex (December 16, 2025).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2026/english/1idnea2026001-source-pdf.pdf_