## Indonesia Has an Opportunity to Boost Growth

_IMF News, March 3, 2021_

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## Bibliographic details
- Authors: Minsuk Kim, Robin Koepke IMF
- Published: March 3, 2021

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### Economic performance and outlook
- Indonesia’s GDP fell 2.1 percent in 2020.
- The downturn in 2020 was smaller than other countries in the Asia-Pacific region, reflecting less stringent containment measures and lower dependence on highly impacted sectors like tourism.
- Economic activity began to rebound in July 2020 following easing of containment measures and strong government support, driven by government consumption and net exports.
- The recovery is expected to be gradual over the current year amid uncertainty over the pandemic’s evolution and slow rollout of vaccinations.
- Initial recovery drivers: policy support and an improving global economy; later drivers: greater mobility and confidence as the vaccination program advances.

### Pandemic response and fiscal stance
- The National Economic Recovery Program focused on strengthening health care capacity and providing financial support to vulnerable households and businesses.
- The central bank purchased government bonds in the primary market as an exceptional, temporary measure to ensure financial market stability.
- Indonesia temporarily suspended its pre-pandemic budget deficit ceiling of 3 percent of GDP until 2023.
- Recommendation: Return to the deficit ceiling should be gradual and complemented by a well-specified, medium-term fiscal strategy.

### Support for firms, credit, and the banking sector
- The government introduced extraordinary support measures for businesses, including a large-scale loan restructuring program and interest subsidies for the most affected sectors, such as hospitality.
- These measures helped avert mass bankruptcies, but credit growth to Indonesian firms remains weak.
- Weak credit growth likely reflects a combination of weak loan demand and risk aversion by banks amid underlying corporate vulnerabilities.
- Authorities should be vigilant and ready for bolder actions if credit growth remains sluggish, since weak credit would be a drag on economic growth.
- The banking system weathered the initial shock due to strong capital positions and regulatory relief measures (temporary relaxation of loan classification standards and liquidity coverage requirements).
- Banks should use the 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 address potential bank failures efficiently.

### Policy priorities and recommendations
- Sustain financial support for viable firms to underpin the recovery and facilitate restructuring of hard-hit industries.
- 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.
- Higher revenues would enable increased spending on:
  - education,
  - infrastructure,
  - health,
  - social safety nets.
- Additional fiscal resources would also help Indonesia tackle climate change challenges and support the transition to a greener economy.
- Appropriate reforms and policy actions can lead to a greener and more inclusive recovery.

*By Minsuk Kim and Robin Koepke; IMF, Asia and Pacific Department; March 3, 2021.*

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## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [Read the report](https://www.imf.org/en/Publications/CR/Issues/2021/03/01/Indonesia-2020-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-50131)
- [Read the press release](https://www.imf.org/en/News/Articles/2021/03/01/pr2154-indonesia-imf-executive-board-concludes-2020-article-iv-consultation)
- [Divergent Recoveries in Asia](https://blogs.imf.org/2021/02/23/divergent-recoveries-in-asia-history-is-not-destiny/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2021/03/03/na030321-indonesia-has-an-opportunity-to-boost-growth_