Jakarta's National Monument: Indonesia has the firepower to boost its economy. (photo: Algi Febri Sugita by Getty Images)

Jakarta's National Monument: Indonesia has the firepower to boost its economy. (photo: Algi Febri Sugita by Getty Images)

Indonesia Has an Opportunity to Boost Growth

March 3, 2021

After several years of strong growth, Indonesia’s GDP fell 2.1 percent in 2020. While large, this downturn was smaller than other countries in the Asia-Pacific region, reflecting less stringent containment measures and lower dependence on highly impacted sectors like tourism.

The IMF’s latest yearly assessment of Indonesia’s economy shows the country has the firepower to boost its economic recovery. Appropriate reforms and policy actions can lead to a greener and more inclusive recovery.

Here are five charts on Indonesia's outlook.
  • Economic activity started to rebound last July, following the easing of containment measures and strong government support, led by government consumption and net exports. Amid uncertainty over the pandemic’s evolution and slow rollout of vaccinations, the recovery is expected to be gradual over the current year. Policy support and an improving global economy can be the main drivers initially, followed by greater mobility and confidence as the vaccination program advances.
  • Indonesia’s comprehensive response to the pandemic was crucial in preventing a deeper downturn. The National Economic Recovery Program aimed at strengthening health care capacity and providing financial support to vulnerable households and businesses. The central bank supported these efforts by purchasing government bonds in the primary market, an exceptional but appropriate and temporary move that has ensured financial market stability. To support this plan, Indonesia temporarily suspended its pre-pandemic budget deficit ceiling of 3 percent of GDP until 2023. Considering the relatively low public debt ratio and the ongoing recovery, the envisaged return to it should be gradual and complemented by a well-specified, medium-term fiscal strategy.
  • Sustained financial support for viable Indonesian firms will be essential to underpin the recovery and facilitate the restructuring of hard-hit industries. The government introduced several extraordinary support measures for businesses, such as a large-scale loan restructuring program and interest subsidies for the most affected sectors, like hospitality, which has helped avert mass bankruptcies. Nonetheless, credit growth to Indonesian firms remains weak, likely reflecting a combination of weak loan demand and risk aversion by banks amid underlying corporate vulnerabilities. Authorities ought to be vigilant and ready for bolder actions if credit growth remains sluggish, as it would be a drag to economic growth in general.
  • The banking system has weathered the storm well but have to prepare for reduced profitability and the risks of asset quality deterioration after the pandemic. Strong capital positions, as well as a suite of regulatory relief measures, such as the temporary relaxation of loan classification standards and liquidity coverage requirements, have helped Indonesian banks to absorb the initial shock. They might use this window to prepare against possible credit losses, through active provisioning and close monitoring of restructured loans. Supervisors should continue to strengthen crisis management and resolution frameworks to efficiently address potential bank failures.
  • Prioritize strengthening government revenues. Indonesia’s government revenue (as a share of GDP) is substantially lower than most other emerging countries, including others in the region. Indonesia has a pressing need to increase government spending on development to unlock its considerable growth potential and meet the Sustainable Development Goals. Higher revenues would enable boosting spending on education, infrastructure, health, and social safety nets, fostering sustainable and inclusive growth. Additional fiscal resources would also help Indonesia tackle challenges related to climate change and transition to a greener economy.