IMF Survey: Indonesia: Sustaining the Recovery
IMF News, October 10, 2007
Source details
- Canonical URL
- IMF Survey: Indonesia: Sustaining the Recovery
Other formats
Bibliographic details
- Authors: Milan Zavadjil IMF Asia, Pacific Department October
- Published: October 10, 2007
Economic performance and outlook
- GDP growth is running at around 6 percent and could pick up further.
- Prospects for continued GDP growth of around 6-6½ percent in 2007 and 2008 look good, though downside risks stem from the U.S. mortgage crisis impacts on global growth, commodity prices, risk appetite, and capital flows to emerging markets.
- The current account surplus increased to about 2½ percent of GDP in 2006, supporting the decline in external debt and the buildup of reserves.
- Indonesia repaid all remaining obligations to the IMF ahead of schedule.
- At the height of the global selloff, the equity index had declined 20 percent from the all-time high reached in July; equity and bond markets quickly and fully recovered as markets calmed.
Inflation, fiscal, and financial stability
- Inflation remains under control and well within Bank Indonesia's target range of 5-7 percent for 2007.
- Public finances: small fiscal deficits and public debt reduced to below 40 percent of GDP and on a continued declining trend.
- Banking system: well capitalized, very liquid; nonperforming loans have declined; profitability is rising; corporates have deleveraged.
- Policy aim: achieve the medium-term goal of reducing inflation to levels of major trading partners (about 3 percent), noting that historically inflation has rarely been below 5 percent.
Social outcomes and structural challenges
- Despite macro improvements, poverty and unemployment remain high and persistent.
- Recent investment and growth have disproportionately benefited capital-intensive sectors such as mining, supported by high commodity prices.
- Labor-intensive manufacturing (textiles, footwear, electronics) has suffered from restrictive labor regulations and strong regional competition, limiting formal employment growth.
- The government aims to boost GDP growth to at least 7 percent to realize tangible improvements in social conditions; this is described as ambitious but achievable with the right policies.
- Poverty rates have remained high, partly reflecting rising food prices; a small decrease in poverty in 2007 is noted as encouraging.
Policy priorities and recommendations
- Maintain confidence through proactive and predictable macroeconomic management.
- Monetary policy should remain focused on inflationary developments and continue the inflation targeting regime introduced in 2005.
- Clearly communicate the priority of the inflation target and set interest rates appropriate to achieve that objective.
- Fiscal policy should use declining debt ratios to create fiscal space and ramp up priority spending, with an emphasis on on-budget infrastructure investment.
- Increase infrastructure investment to address supply bottlenecks:
- Raise public infrastructure investment.
- Increase private sector participation through public-private partnerships; a sound framework has been put in place, though project preparation and implementation need acceleration.
- Boost private investment through improved investment climate and availability of financing:
- Address strict labor legislation and difficult legal and regulatory environment that impede investment, including foreign direct investment.
- Recent steps: a new investment law and a key tax law were passed and should help make the regulatory environment more business friendly.
- Improve long-term financing:
- Credit to the private sector remains far below precrisis levels as a share of GDP; staff analysis suggests weak demand from creditworthy investors is a major factor.
- Enhance demand by improving the legal environment and investment climate.
- Increase supply of long-term financing by developing domestic capital markets and the nonbank financial sector; bank credit is generally short maturity as banks match short maturity of deposits.
Key takeaways
- Much progress achieved since the Asian crisis: economy in better shape, less vulnerable to external shocks.
- Continued focus required on policies to boost public and private investment, structural reforms to improve the investment climate, support infrastructure investment, and enhance financial intermediation.
- Stability-oriented macroeconomic policies remain critical to reduce volatility and strengthen confidence in Indonesia's economic performance.
IMF Survey: Indonesia: Sustaining the Recovery — Milan Zavadjil, IMF Asia and Pacific Department, October 10, 2007.