IMF Staff Completes 2022 Article IV Mission to Indonesia

January 25, 2022

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.
  • The Indonesian economy rebounded in 2021Q4 and the recovery is projected to accelerate in 2022 despite the spread of the omicron variant.
  • While policy support will still be needed until the recovery firms up, a gradual and coordinated unwinding of pandemic-related expansionary policies would safeguard economic and financial stability, as well as rebuild buffers for tackling downside risks.
  • A medium-term strategy to continue raising government revenue is essential to meet the pressing need for more spending on development to unlock Indonesia’s growth potential and meet its Sustainable Development Goals.

Washington, DC: An International Monetary Fund (IMF) team led by Ms. Cheng Hoon Lim conducted virtual discussions on the Indonesian economy for the 2022 Article IV Consultation from January 4 to 24, 2022. At the end of the virtual mission, Ms. Lim issued the following statement:

“Indonesia has continued to respond with bold, comprehensive, and well-coordinated policy measures to protect lives and livelihoods from the impact of the COVID-19 pandemic, and to ensure a sustainable and inclusive recovery. While the pandemic, as elsewhere, has led to tragic loss of life and triggered a major economic downturn, the authorities’ measures have succeeded in maintaining economic and financial stability.

“The economy is recovering at a brisk pace. The Delta variant surge slowed the economic recovery in mid-2021, but growth picked up in the fourth quarter and is expected to strengthen over 2022−23. IMF staff project GDP growth at 5.6 percent for 2022 and 6.0 percent in 2023, supported by favorable global commodity prices, easing restrictions on activity, continued policy support, and rising mobility and confidence as the vaccination program expands into more remote areas.

“The balance of risks to the outlook is improving, but remains tilted to the downside. The emergence of more aggressive COVID-19 variants could put further pressure on the health system and lead to renewed mobility restrictions, and risks of spillovers from tighter global financial conditions have increased. On the upside, the boost from global commodity prices could last longer than expected, while recent and prospective structural reforms could reduce the extent of economic scarring in Indonesia.

“With the recovery underway, gradually restoring the central tenets of the pre-pandemic macroeconomic policy frameworks will reinforce Indonesia’s strong policy track record. However, the IMF team noted that if severe downside risks—such as a slower recovery or a rapid resurgence of COVID-19 infections and related containment measures—were to materialize, longer-lasting pandemic support could become necessary.

“The IMF team commended the authorities for their commitment to return to the budget deficit ceiling of 3 percent of GDP by 2023. The aim to consolidate public finances by phasing out emergency COVID-19 support, while accommodating the continued need for expenditure on health and social protection while the pandemic continues is appropriate. Moreover, the stronger-than-expected fiscal outcome in 2021 will lessen the trade-off between unwinding exceptional policies and providing adequate macroeconomic policy support. Despite the increased government borrowing amid the pandemic, Indonesia’s public sector debt remains low and would remain sustainable even if adverse macroeconomic shocks were to materialize.

“Inflation has remained lower than in other emerging and advanced economies, allowing Bank Indonesia (BI) to support the recovery through accommodative policies. Inflation is expected to rise gradually within the inflation target range in 2022. BI’s nimble policies are welcome, given fluid risks to inflation and the recovery, as is its move to gradually reduce excess banking system liquidity. If faced with adverse monetary policy spillovers, BI should preserve monetary policy space by allowing for greater exchange rate flexibility. The Fund team supports the authorities’ commitment to exit from monetary budget financing by the end-2022 target date, and recommends confining further primary market purchases under the market mechanism this year to periods of severe market dysfunction.

“The financial system appears sound, and the credit outlook is improving. A credit rebound in 2021 has been bolstered by accommodative monetary and macroprudential policies, as well as improved access to government guarantees for bank lending to MSMEs and corporates. Asset quality risks have generally declined with the economic recovery but are still elevated in sectors hard-hit by the pandemic. While crisis-related measures are still in place, intensive supervision will be required to ensure prudent lending.

“The authorities have continued to implement their structural reform agenda despite the difficult context posed by the pandemic. The 2021 tax reform bill is an important step toward addressing Indonesia’s low revenue intake, and the introduction of a carbon pricing scheme is an important step towards climate change mitigation. Going forward, both should be reinforced by further and broader reforms, including the development of a comprehensive medium-term revenue strategy and reforms to energy subsidies and pricing. Private sector activity and investment will be bolstered by last year’s omnibus law on job creation, and its impact could be enhanced by complementary reforms such as improvements to education, infrastructure, and efforts to strengthen governance frameworks.

“The IMF team met with officials in the government, Bank Indonesia, Financial Services Authority (OJK), other public agencies and representatives of the private sector and civil society. The team would like to thank the authorities and other interlocutors for the frank and constructive discussions in the virtual meetings, as well as for the logistical support.”

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