## IMF Survey: Indonesia: Sustaining the Recovery _IMF News, October 10, 2007_ ## Source details **Canonical URL:** [IMF Survey: Indonesia: Sustaining the Recovery](https://www.imf.org/en/news/articles/2015/09/28/04/53/socar1010a) ## Other formats - [Markdown version](/en/news/articles/2015/09/28/04/53/socar1010a/index.md) - [Structured JSON version](/en/news/articles/2015/09/28/04/53/socar1010a/index.json) - [Bundle manifest](/en/news/articles/2015/09/28/04/53/socar1010a/bundle-manifest.json) ## 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.* --- ## References - [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus) - [PRESS CENTER](http://presscenter.imf.org/) - [IMF Country Focus](https://www.imf.org/en/news/country-focus) - [Article: Indonesia better set](https://www.imf.org/external/pubs/ft/survey/so/2007/CAR0914A.htm) - [IMF annual consultation](https://www.imf.org/external/np/sec/pn/2007/pn0791.htm) - [IMF staff report](https://www.imf.org/external/pubs/cat/longres.cfm?sk=21250.0) - [Selected issues](https://www.imf.org/external/pubs/cat/longres.cfm?sk=21251.0) - [Indonesia and the IMF](https://www.imf.org/external/country/IDN/index.htm) - [https://www.imf.org/en/home](https://www.imf.org/en/home) _Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/socar1010a_