Statement by IMF Staff Mission to Indonesia

Press Release No. 07/97
May 15, 2007

Mr. Stephen Schwartz, Senior Resident Representative of the International Monetary Fund (IMF) in Indonesia, made the following statement today in Jakarta:

"An IMF mission led by Mr. Milan Zavadjil, Assistant Director in the Asia and Pacific Department, is completing a visit to Jakarta today for the 2007 Article IV Consultation discussions.1 The team exchanged views with the government on the economic outlook, policies to improve banking intermediation, and progress in ongoing structural reforms. Based on these discussions, the team will prepare a staff report, scheduled to be presented to the IMF's Executive Board in mid-July.

"Since the last Article IV Consultation a year ago, economic growth in Indonesia has built momentum, inflation has moderated, and the external position has strengthened. These developments are the result of strong economic management and a continued favorable external environment. While macroeconomic conditions have improved, however, poverty and unemployment remain high. Appropriately, the government has been focusing on removing structural constraints in order to accelerate growth and address these issues.

"After a slowdown during the first half of 2006, the economy has regained momentum, with growth estimated at about 6 percent (year-on-year) in the past three quarters. The mission expects this pace to be broadly maintained for the remainder of 2007. Lower interest rates and support from government spending should help investment growth to pick up, and private consumption should recover as well. With price pressures reasonably well contained, the mission expects inflation to remain in the 6-6½ percent range during the remainder of the year, within the government's inflation target of 5-7 percent. Downside risks to the outlook stem from the possibility of lower-than-expected global growth, volatile commodity prices, and a tightening of global liquidity conditions. Notwithstanding these risks, given improved fundamentals and rising foreign exchange reserves to around US$50 billion at present, the economy is increasingly well-positioned to weather such shocks.

"The mission supports Bank Indonesia's recent easing of interest rates, in line with the improving inflation outlook. Given the typical lags in monetary transmission and with inflation still high by regional standards, the focus of monetary policy going forward should be on reducing inflation further in 2008. At the same time, the recent appreciation of the rupiah should help contain inflation, and if it persists, could leave open the possibility for some further interest rate cuts in the future.

"The mission also supports the government's intention for a modest increase in the fiscal deficit targets in 2007 and 2008. Deficits in the range of 1.6-1.8 percent of GDP for these years should be financeable and would provide room for pressing social and infrastructure spending, while also keeping the debt-to-GDP ratio on a downward path.

"With lower interest rates and the pick-up in domestic demand, credit growth has been increasing in recent months. Nevertheless, banking intermediation remains constrained by weak credit quality of potential borrowers, problems in the legal system, and a lack of adequate financial products to promote long-term financing, particularly for infrastructure. The mission welcomes the government's intention to address many of these issues in a forthcoming package of financial sector reforms.

"As the government has recognized, stronger medium-term growth will require further progress in structural reforms to enhance infrastructure and improve the investment climate. The recent passage of the Investment Law is a welcome signal of the government's determination. The mission encourages the authorities to press ahead with important ongoing elements of the reform strategy, including efforts to improve tax administration, implement a more balanced framework for business-labor relations, and further strengthen the financial sector. In the mission's view, continued sound economic management, if accompanied by sustained follow-through in the reform agenda and improvements in infrastructure, could raise Indonesia's growth to at least 6½ -7 percent over the coming years."


1 The "Article IV" mission is the regular annual visit by an IMF staff mission to member countries to hold discussions and gather information on economic policies.



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