IMF Executive Board Concludes 2017 Article IV Consultation with Indonesia

IMF News, February 6, 2018

Source details

Canonical URL: IMF Executive Board Concludes 2017 Article IV Consultation with Indonesia

Other formats

Bibliographic details

Published: February 6, 2018

Economic performance (recent outturns)

Real GDP growth accelerated slightly to 5.1 percent in Q3:2017 from 5 percent in 2016 and H1:2017, led by robust exports and fixed investment.
Output gap is estimated at –0.5 percent of GDP.
Inflation fell to 3.3 percent in November, at the lower half of the official target band (4±1 percent), driven by a slightly negative output gap and stable food prices; core inflation has remained stable at around 3 percent.
Current account deficit declined to 1.5 percent of GDP in Q1-Q3:2017 due to higher exports.
Credit growth remains slow, reflecting both weak demand and banks’ tight lending standards.

Outlook and risks

Projections:
- Real GDP growth: 5.1 percent in 2017, rising gradually to 5.6 percent over the medium term, led by robust domestic demand.
- Inflation: projected to remain around 3.5 percent, within the official target range.
- Current account deficit: expected to remain contained at near 2 percent of GDP.
Downside risks highlighted:
- Spikes in global financial volatility.
- Uncertainty around U.S. economic policies.
- Lower growth in China.
- Geopolitical tensions.
- Domestic risks: tax revenue shortfalls and larger fiscal financing needs due to higher interest rates.
Upside possibilities: global growth and commodity prices could surprise on the upside.

Executive Board assessment and policy advice

Overall appraisal:
- Directors commended sound performance: stable growth, moderate inflation, modest current account deficit, and contained systemic risks.
- Noted favorable outlook but urged vigilance against volatile capital flows and other risks.
Growth and structural reform priorities:
- Achieving higher potential growth is essential to create jobs for the young and growing labor force.
- Priority: a self-reinforcing and well-sequenced fiscal-structural reform package that mobilizes revenues to finance development spending and supports structural reforms in product, labor, and financial markets.
Fiscal policy:
- Near-term policy mix appropriately focuses on supporting growth while preserving stability.
- Fiscal adjustment in 2018 should be gradual to protect growth while rebuilding fiscal buffers.
- Encouraged early implementation of a medium-term revenue strategy to finance growth-enhancing priority spending and structural reforms, and to reduce heavy reliance on external financing.
- The revenue strategy should include frontloaded tax policy and administration reforms; consider short-term measures to arrest the fall in the tax ratio.
Monetary and exchange rate policy:
- Current stance of monetary policy judged appropriate for targeting price stability and supporting growth.
- Recommended further enhancing monetary transmission.
- Welcomed authorities’ commitment to maintain exchange rate flexibility and to limit foreign exchange intervention to preventing disorderly market conditions.
Infrastructure and financing:
- Commended progress in boosting infrastructure investment.
- Advised aligning pace of infrastructure development with available financing and the economy’s absorptive capacity.
- Priority to finance infrastructure with domestic revenue and greater private sector participation, including foreign direct investment, to limit corporate external debt buildup and contingent liabilities from state-owned enterprises (SOEs).
- Recommended financial deepening through a national strategy for capital market development to support infrastructure investment.
Regulation, SOEs, and labor/education:
- Supported continued regulatory streamlining, targeting reductions in state control, rationalizing SOE roles, and improving coordination among ministries and regional governments.
- Emphasized improving education and easing labor market regulations to support employment: raise level and quality of education spending, streamline job protection regulations, improve vocational training and job placement services, and enhance female labor participation.
Financial sector oversight:
- Took positive note of efforts to strengthen financial oversight and crisis management.
- Encouraged focus on FSAP-identified areas: clarify institutional mandates, improve supervision of financial institutions and conglomerates, adopt a more rigorous approach to credit risk, and continue to strengthen crisis management framework.
- Highlighted the importance of monitoring foreign exchange and external debt vulnerabilities of corporates.

Selected economic indicators (highlights from the staff table)

Real GDP (percent change)
- 2013: 5.6
- 2014: 5.0
- 2015: 4.9
- 2016: 5.1
- 2017 (Q1–Q3 latest outturn): 5.3
- 2018 (Proj.): …
Domestic demand (percent change)
- 2013: 4.7
- 2014: 4.2
- 2015: 4.6
- 2016: 4.5
Gross fixed investment (percent change)
- 2013: 4.4
- 2014: 6.0
- 2015: 5.8
- 2016: 6.2
Prices (12-month percent change, consumer prices end period)
- 2013: 8.1
- 2014: 8.4
- 2015: 3.4
- 2016: 3.0
- 2017: 3.3 (Nov.)
- 2018 (Proj.): 3.6
Public finances (in percent of GDP)
- Central government revenue: 2013: 15.1; 2014: 14.7; 2015: 13.1; 2016: 12.5; 2017: 12.0 (Jan.-Sept.); 2018 (Proj.): 12.2
- Central government expenditure: 2013: 17.3; 2014: 16.8; 2015: 15.7; 2016: 15.0; 2017: 10.1
- Central government balance: 2013: -2.2; 2014: -2.1; 2015: -2.6; 2016: -2.5; 2017: -2.7; 2018 (Proj.): -2.0
- Primary balance: 2013: -1.0; 2014: -0.9; 2015: -1.2; 2016: -0.8
- Central government debt: 2013: 24.8; 2014: 24.7; 2015: 27.4; 2016: 28.3; 2017: 29.0; 2018 (Proj.): 29.5
Money and credit (12-month percent change; end of period)
- Rupiah M2: 2013: 9.4; 2014: 13.5; 2015: 9.0; 2016: 11.7; 2017: 9.8 (Jul.)
- Private Sector Credit: 2013: 20.0; 2014: 11.8; 2015: 10.3; 2016: 7.7; 2017: 8.6; 2018 (Sept.): 7.5
Balance of payments
- Current account balance (US$ billions): 2013: -29.1; 2014: -27.5; 2015: -17.5; 2016: -16.8; 2017: -16.9; 2018 (Prel.): -11.5; Latest outturn: -20.4
- Current account (in percent of GDP): 2013: -3.2; 2014: -3.1; 2015: -1.8; 2016: -1.7; 2017: -1.5; 2018 (Prel.): -1.9
- Trade balance (US$ billions): 2013: 7.0; 2014: 14.0; 2015: 15.4; 2016: 18.4; 2017: 15.8; 2018 (Prel.): 14.8
- Inward direct investment (US$ billions): 2013: 18.8; 2014: 21.8; 2015: 16.6; 2016: 23.8; 2017: 26.6
- Gross reserves (end period, US$ billions): 2013: 99.4; 2014: 111.9; 2015: 105.9; 2016: 116.4; 2017: 127.6; 2018 (Prel.): 126.5 (Oct.); Latest outturn: 135.0
- Total external debt (US$ billions): 2013: 266.1; 2014: 293.3; 2015: 310.7; 2016: 318.8; 2017: 345.4; 2018 (Prel.): 335.4 (Q2); Latest outturn: 359.3
Exchange rate (Rupiah per U.S. dollar)
- Period average: 2013: 10,414; 2014: 11,862; 2015: 13,391; 2016: 13,306; 2017: 13,382 (Jan.–Dec.)
- End of period: 2013: 12,171; 2014: 12,435; 2015: 13,788; 2016: 13,473; 2017: 13,579 (Dec. 18)
Memorandum items:
- Jakarta Stock Exchange (12-month percentage change, composite index): 2013: 22.3; 2014: -12.1; 2015: 15.3; 2016: 15.5; 2017: Dec. 18 (ytd)
- Oil production (thousands of barrels per day): 2013: 830; 2014: 794; 2015: 800; 2016: 820; 2017: 815
- Nominal GDP (in trillions of rupiah): 2013: 9,546; 2014: 10,570; 2015: 11,532; 2016: 12,407; 2017: 13,604; 2018: 14,852

Source: IMF Executive Board conclusion of the 2017 Article IV consultation with Indonesia (concluded January 10, 2018); data provided by the Indonesian authorities; and IMF staff estimates and projections.