IMF Staff Completes 2020 Article IV Mission to Indonesia

IMF News, January 7, 2021

Source details

Press Release No. 21/2; Publication date: January 7, 2021.
IMF team led by Mr. Thomas Helbling conducted virtual discussions for the 2020 Article IV Consultation from November 25 to December 11, 2020.
End-of-mission press release conveys preliminary staff findings and does not necessarily represent the views of the IMF’s Executive Board.

"The Indonesian economy has rebounded in the second half of 2020, and the recovery is expected to accelerate in 2021 and 2022."
Real GDP projections:
- "Real GDP is projected to expand by 4.8 percent in 2021 and 6 percent in 2022."
Drivers of the projected rebound:
- Strong policy support measures.
- COVID‑19 vaccine distribution plans.
- Improved global economic and financial conditions.

"The uncertainty surrounding the growth outlook is larger than usual."
Key risks:
- Upside risk: early widespread vaccination.
- Downside risk: delays in vaccination leading to a more protracted pandemic.
- Macro-financial fallout could be larger-than-expected.
- Credit conditions could be slow to improve.

"To secure the ongoing recovery, sufficient policy support will be essential."
Short-term fiscal stance:
- Accommodative macroeconomic policy mix expected in 2021 is welcome.
- 2021 budget maintains some pandemic-related emergency spending from 2020 and reallocates resources and potential carryovers to increased high-impact spending, notably public investment.
Medium-term guidance:
- Restore the macroeconomic policy framework (example given: "3 percent of GDP budget deficit target") that was "appropriately and temporally suspended during the pandemic."
- A detailed fiscal strategy backed by revenue‑boosting measures is recommended to manage the balancing act and reinforce Indonesia’s prudent policy track record.

"Pursuing monetary accommodation, through a combination of lower policy interest rates and Bank Indonesia (BI)’s government bond purchases, is appropriate under the current exceptional circumstances."
Authorities’ plan for 2021:
- Use only the market mechanism defined in April 2020 for BI’s government bond purchases to balance benefits and risks associated with monetary budget financing by BI.

"The banking system remains stable, owing to bold and timely policy interventions."
Recommendations and observations:
- Adequate loan loss provisioning will be critical to absorb rising asset quality risks.
- Authorities preparing measures to promote bank lending, especially for SME financing; additional targeted policy steps could be warranted if aggregate credit does not recover as expected.
- The envisaged financial sector omnibus bill will address regulatory challenges and provide the legal foundation for further financial deepening.
- Complementary initiatives include BI’s money market deepening blueprint and BI’s blueprint on digitally‑oriented payment systems to improve monetary policy transmission, economic inclusion, and financial inclusion.
- "The government’s emphasis on the importance of safeguarding the operational independence of BI is welcome."

"The strong structural reform momentum should be sustained, with financial deepening and digitalization, a medium-term government strategy to secure needed tax revenue to achieve long term development goals and greater social protection, and a transition toward a greener economy."
Specific reforms highlighted:
- The omnibus law on job creation should help lower obstacles to new job‑creating investment and boost productivity.
- Implementation of the Regional Comprehensive Economic Partnership (RCEP) in Indonesia would reinforce benefits from the omnibus law.
- High‑quality governance standards in regulatory settings should be maintained when implementing the omnibus law.

"Indonesia’s proactive policies tackling climate change issues could put further emphasis on a greener economy."
Recommendation:
- Further progress in monitoring and execution of adaptation plans to increase resilience to climate change is desirable, given Indonesia’s high exposure to related natural hazards.

The IMF team exchanged views with officials in the government, Bank Indonesia, Financial Services Authority (OJK), other public agencies and representatives of the private sector.
The team thanked the authorities for "the frank and constructive discussions in the virtual meetings, as well as for the logistical support."

IMF Staff Completes 2020 Article IV Mission to Indonesia — Press Release No. 21/2, January 7, 2021.