Press Release No.  15/584

Press Release: IMF Staff Completes 2015 Article IV Mission to Indonesia

December 22, 2015

An International Monetary Fund (IMF) team, led by Luis E. Breuer, visited Jakarta from December 3–17, 2015, to conduct the 2015 Article IV Consultation discussions. The team exchanged views with officials in the government, Bank Indonesia, and other public agencies and enterprises on recent economic developments in Indonesia and the near- to medium-term outlook. It also met with a range of private sector representatives.

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

“The economic outlook for Indonesia remains solid. The Indonesian authorities have taken significant steps in the past few years to strengthen the policy framework. They have demonstrated sound monetary management and a prudent fiscal stance, which was underpinned by historic fuel subsidy reforms in 2015. This has contributed to macroeconomic stability and supported growth. In effect, Indonesia safely navigated a difficult external environment in 2015, characterized by the fall of commodity prices, shifts in global financial conditions, and slower growth of trading partners. Medium-term prospects are favorable, supported by an inclusive growth-enhancing policy agenda that also places emphasis on stability.

“Overall, macroeconomic performance in 2015 has been satisfactory. Economic growth has stabilized and is projected to reach 4.7 percent this year. A moderate acceleration to around 5 percent is forecast in 2016; investment activity would lead the recovery, in particular, public sector spending. Weak commodity prices and slower demand from trading partners present headwinds to growth.

“Inflation has fallen sharply and is projected to reach 3 percent at end-2015. Next year, it is expected to remain within the official band (3–5 percent). The external current account deficit will narrow significantly in 2015, to an estimated 2 percent of GDP on lower imports, and is projected to increase moderately in 2016 due to a pickup in domestic demand. The fiscal deficit is expected to rise in 2015 but to remain below the 3 percent of GDP statutory limit for the general government.

“Risks to the outlook are tilted to the downside, mainly from external factors including more volatile global financial conditions, a deeper-than-expected slowdown in emerging market trading partners, and further declines in commodity prices. Domestic risks could arise from slower-than-expected progress on implementation of key structural reforms, tax revenue and infrastructure spending.

“The authorities’ fiscal strategy is well-directed. It aims to create fiscal space through improved revenue mobilization and reform of general subsidies in order to increase spending on infrastructure and targeted social programs that benefit vulnerable social groups. The authorities have had early successes in the large reduction in fuel subsidies and the expansion of conditional cash transfers and public investment. However, important challenges remain with revenue mobilization as lower commodity prices and a related contraction of imports have adversely affected government revenues.

“The authorities are taking actions to strengthen the fiscal framework. The intention to adjust the 2016 budget based on the actual revenue of 2015 will help considerably. This should be combined with an enhanced revenue strategy of risk-based tax administration and base-broadening tax reform, supported by the early adjustment of selected excises to boost revenue in the short run. Fiscal policy should be framed in a medium-term plan that provides guidance to government programs. Higher public investment should be combined with sound public financial management and governance reform of state-owned enterprises as well as the careful monitoring of potential fiscal risks.

“The current stance of monetary policy is appropriate and has helped the economy adjust successfully to external pressures. The authorities have also responded appropriately to increased financial market volatility by allowing exchange rate and government bond yield to move flexibly, and increasing efforts on financial market deepening. Maintaining these policies will support the economy’s ability to navigate an uncertain external environment.

“Financial sector indicators reveal a well-capitalized and profitable banking sector. Non-performing loans have increased somewhat from low levels. Progress has been made with consolidated financial sector supervision and the close monitoring of corporate and financial sector risks coming from the external environment. The authorities introduced innovative hedging regulations to manage exchange rate risks of corporate foreign currency debt. The approval of the draft Financial System Safety Net law is a top priority to strengthen the institutional framework to support the work on financial sector stability.

“The authorities’ growth strategy is focused on improving competitiveness to accelerate economic growth and diversity the economy. A series of policy packages issued since August 2015 signal a renewed policy strategy that aims to improve the business climate and reduce the cost of doing business. The authorities expressed a strong commitment to continue with structural reforms to establish new drivers of growth, including reviewing the role of domestic and foreign investment and assessing the benefits of regional trading arrangements. Increased flexibility in labor practices could further generate employment and attract new private investment.

“The mission wishes to express its deep gratitude to the authorities for their hospitality, gracious support, and constructive discussions. The IMF’s Executive Board is tentatively scheduled to discuss the staff report in February 2016.”