Press Release No. 14/584

Press Release: IMF Statement at the End of the 2014 Article IV Mission to Indonesia

December 18, 2014

An International Monetary Fund (IMF) team, led by David Cowen, visited Jakarta, Solo, and Yogyakarta during December 3-17, 2014 to conduct the 2014 Article IV Consultation discussions. The team exchanged views with officials in the government, Bank Indonesia, and other public agencies and enterprises on recent developments in Indonesia and the near- to medium-term outlook. It also met with the private sector, civil society, and academia. Based on the visit, a staff report will be prepared and presented to the IMF's Executive Board in February 2015.

At the conclusion of the visit, Mr. Cowen issued the following statement:

“Sound macroeconomic management has bolstered policy credibility and external resiliency in Indonesia. Over the past 18 months, policy and reserve buffers have been strengthened considerably. The current policy framework rightly focuses on maintaining macroeconomic and financial stability, while pursuing structural reforms to raise the economy’s growth potential and provide more opportunities for Indonesia’s youthful labor force. Reforms to expand fiscal space, deepen financial markets, and close infrastructure and skills gaps could raise growth to 6 percent or more in the medium term.

“Near –term prospects are likely to continue to be affected by global headwinds from weakening commodity prices and tightening financial conditions. Despite this, GDP growth is projected to be sustained at 5.1 percent in 2015—about the same pace as this year, supported by a recovery in investment demand and more buoyant manufacture exports. Inflation has temporarily risen following the November 2014 increase in subsidized fuel prices, but is expected to return to within Bank Indonesia’s 2015 target band (4.0 ±1 percent) by the end of next year. Notwithstanding soft commodity prices, the current account deficit is projected to decline to around 2¾ percent of GDP in 2015, supported by rising manufacture exports as well as a lower oil import bill. Risks to the outlook arise mainly from a deeper-than-expected slowdown in emerging market trading partners and surges in global financial market volatility.

“The decisive action taken by the government in November to reduce fuel subsidies has freed up space in the budget to provide safety nets in the near term to the more vulnerable and to support plans to increase growth-critical social and capital spending. The fiscal position is expected to be further strengthened by additional reforms to fuel pricing. Revenue reforms will also be necessary to mobilize the significant resources required to support the government’s medium-term development plans.

“Monetary policy continues to provide a strong anchor to inflation expectations. It has also facilitated a strengthening in Indonesia’s external position, aided by a more flexible exchange rate framework. In the period ahead, the combination of a tight monetary policy bias and exchange rate flexibility should help narrow the current account deficit, provided it is supported by a prudent fiscal stance and accelerated structural reforms.

“Macro- and micro-prudential policies will need to remain geared towards preserving financial system stability. Ongoing efforts to deepen financial markets would also make the system more resilient and help mobilize longer-term savings needed to support investment. A strengthening of the financial stability architecture, anchored by a new Financial System Safety Net Law, remains a priority.

“Finally, a clear, comprehensive strategy centered on easing supply bottlenecks and improving the investment climate should bolster growth over the medium term, provided it is supported by a trade policy geared towards promoting exports.”