IMF Staff Completes 2016 Article IV Mission to Indonesia

IMF News, November 24, 2016

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An IMF team, led by Luis E. Breuer, visited Indonesia from November 7–18, 2016, to conduct the annual Article IV Consultation.
The team exchanged views with government officials, Bank Indonesia, other public agencies, private sector representatives, academics, and students.
End-of-mission press releases convey preliminary findings of IMF staff; these views do not necessarily represent the views of the IMF’s Executive Board. Staff will prepare a report for the Executive Board, subject to management approval.

Growth in 2016 is projected at 5 percent on account of strong private consumption.
Growth in 2017 is expected to reach 5.1 percent, driven by private consumption and a gradual pickup in private investment in response to a recovery of commodity prices and lower interest rates.
Inflation is projected to rise from around 3.3 percent at end-2016 to just above the middle of the official target band at end-2017 due largely to better targeting of electricity subsidies, and to remain within the official target range (3-5 percent).
The external current account deficit is projected to rise from about 2 percent of GDP in 2016 to around 2.3 percent next year due to a pickup in fixed investment and imports.

Largely external:
- Uncertainties about policies of the next United States administration.
- Tighter global financial conditions.
- Slower-than-expected growth in China.
- A faster pace of monetary tightening in the United States.
- A renewed fall in commodity prices.
Domestic:
- A smaller fiscal buffer, reflecting tax revenue shortfalls or higher domestic interest rates due to tighter global financial conditions.

The government’s fiscal strategy: broaden the revenue base and raise growth-enhancing expenditures, while making them more efficient within the 3 percent of GDP fiscal deficit rule.
The authorities have embarked on a gradual fiscal consolidation. The revised 2016 fiscal plan approved by Cabinet in August incorporates prudent revenue projections and spending commitments, and protects government priorities.
Weak tax revenues continue to constrain spending.
The 2017 budget rebuilds fiscal buffers by targeting a lower deficit (2.4 percent of GDP).
The team welcomed budget plans to:
- Expand the taxpayer base.
- Improve targeting of subsidies.
- Increase transfers to local governments.
- Ensure financing for public investment and social programs.
The authorities plan to upgrade the main tax laws in 2017.
Ongoing expenditure reviews in agriculture, health, and education are expected to improve spending efficiency.
Implementation of these actions will strengthen the medium-term fiscal framework and contribute to growth through productivity gains and better infrastructure.

The current stance of monetary policy is appropriate.
Bank Indonesia (BI) reduced policy rates in 2016 amid falling inflation and easing external pressures.
The implementation of BI’s new policy rate in August has been smooth.
Given the uncertain external environment, the team welcomed BI’s recent decision to keep the policy rate unchanged, as well as its policy to allow the exchange rate and government bond yields to adjust, while reserving intervention to ensure the orderly operation of markets.
Keeping this flexibility will be important to allow the economy to adjust smoothly to volatile external conditions.

Financial sector indicators reveal a well-capitalized and profitable banking sector.
Non-performing loans have increased from low levels, and indicators suggest they may have peaked.
Significant progress has been made with the approval of the financial crisis prevention law; the team concurred with the authorities on the importance of issuing implementing regulations expeditiously.
Progress has been made with consolidated financial sector supervision and the close monitoring of corporate and financial sector developments, where pockets of vulnerabilities remain.
The introduction of hedging requirements for corporate foreign currency borrowing will help mitigate these vulnerabilities.

Following the landmark 2015 fuel subsidy reform, the authorities have been implementing reforms aimed at improving the business environment, including on infrastructure, regulations, opening sectors of the economy to private investment, and a new minimum wage formula.
The team agreed with the authorities on the need to continue structural reforms in these areas to support private investment and growth.

The mission team expressed deep gratitude to the authorities for their hospitality, support, and constructive discussions.
The IMF’s Executive Board is tentatively scheduled to discuss the staff report in January 2017.

IMF Communications Department, November 23, 2016.