Press Release No. 24/221

IMF Staff Completes 2024 Article IV Mission to Indonesia

June 14, 2024

• Indonesia’s economic outlook remains positive despite external challenges. Growth is projected at 5.0 percent in 2024, and at 5.1 percent in 2025. Headline and core inflation would remain comfortably in the target range.
• Macroeconomic policies remain prudent and should continue to focus on maintaining stability and preserving buffers amid a shock-prone world. The monetary policy stance remains broadly adequate. Slightly narrower-than-planned fiscal deficits in 2024-25 would still support growth within a more balanced policy mix.
• Ambitious structural reforms are needed to raise potential growth, and enhance human, physical and institutional capital; ensuring a sound and predictable business environment that is open to trade and investment would build resilience against geo-economic fragmentation trends.

Washington, DC: An International Monetary Fund (IMF) team led by Ms. Maria Gonzalez conducted discussions on the Indonesian economy for the 2024 Article IV Consultation from May 23 to June 6, 2024. At the end of the mission, Ms. Gonzalez issued the following statement:

“Indonesia’s prudent fiscal, monetary, and financial policy frameworks have provided the foundations for macro-stability and social gains. Decisive policy actions facilitated a robust recovery from consecutive global shocks since 2020. Indonesia’s growth remains strong despite external headwinds, inflation is low and well-contained, the financial sector is resilient, and policies are generally prudent and geared towards preserving buffers.

“The outlook remains positive despite a challenging global context. Growth would reach 5.0 and 5.1 percent in 2024 and 2025 respectively, with dynamic domestic demand offsetting the drag from softer commodity prices. Inflation is projected to converge to the mid-point of the target range over time. Real exports would expand at a slower pace while import growth would recover in line with domestic demand, leading to moderate current account deficits in 2024-25. The balance of payments surplus will continue to strengthen over time, reflecting a pickup of FDI and portfolio inflows, supporting a further buildup of reserve buffers.

“Risks are broadly balanced. Commodity price volatility (e.g., from geopolitical shocks), a slowdown in Indonesia’s key trading partners, or spillovers from high-for-longer policy rates in advanced economies (AEs) are important external downside risks. On the domestic side, a weakening of long-standing sound macro-fiscal frameworks could hamper policy credibility. On the upside, stronger-than-anticipated growth in trading partners, or an earlier-than-expected monetary policy easing could strengthen growth; deeper-than-envisaged structural reforms could raise growth over the medium term.

“Following a decisive post-pandemic consolidation, Indonesia’s fiscal deficit narrowed in 2023, anchored by the first primary surplus in about a decade. The fiscal stance would become expansionary in 2024-25; a slightly narrower deficit would both support growth and a more balanced policy mix while also preserving policy space to respond to downside risks. Enhancing the energy subsidy targeting and raising revenues, including from legislated and further tax policy measures, would create space for more growth-friendly spending in the near term. Over the medium term, Indonesia’s hard-earned policy credibility should be preserved. Indonesia’s fiscal rule—its 3 percent of GDP deficit cap—remains well-suited to support its Golden Vision, especially if supported with a strengthening of fiscal revenues to boost high- quality development spending that would preserve fiscal prudence; keeping fiscal risks— including from contingent liabilities—well contained also remains key.

“The monetary policy stance remains broadly adequate. Recent policy rate hikes by Bank Indonesia (BI) sought to fend-off possible imported inflation pressures from rupiah depreciation in a context of heightened global financial market uncertainty. With the policy rate above neutral, financial risks contained, and ample liquidity, accommodative macroprudential policy has supported credit growth. Monetary policy should remain data-driven, calibrated to the impact of developments on domestic conditions, and supported by a flexible exchange rate serving as a shock absorber. BI’s recently introduced instruments seek to facilitate money market development and attract capital flows into the short end of the curve; efforts could continue to be bolstered to enhance policy effectiveness. FX reserve buffers remain adequate.

“Indonesia has taken important steps to strengthen its financial sector supervisory and regulatory frameworks over the past several years. The 2023 Financial Sector Omnibus Law (FSOL) clarified and strengthened the mandates of the financial sector regulatory authorities, including on the management of systemic risks through BI’s macroprudential mandate. BI is implementing the macro-prudential mandate through a three-pronged strategy of (i) maintaining financial resilience by mitigating risk propagation from interconnectedness and contagion; (ii) managing balanced and sustainable intermediation to tackle procyclicality; and (iii) supporting financial inclusion. Clarifying that financial system resilience takes priority amongst objectives as the macroprudential toolkit is calibrated would enhance communication and effectiveness. As the credit gap continues to close, gradually shifting towards a neutral macroprudential policy (MPP) stance would help contain the build-up of macro-financial risks. The Financial Sector Assessment Program (FSAP) found the financial system to be resilient. Banks are profitable, and their capital and liquidity ratios significantly exceed regulatory minima. Credit growth has recovered to pre-pandemic rates. A tighter “bank-sovereign nexus”—due to holdings of sovereign bonds and SOE lending—poses risks, but banks appear resilient.

“Indonesia will need to navigate a more shock-prone world. The appropriate policy response will need to be calibrated to the nature and duration of the shock, and supported by enhanced communication. In the context of Indonesia’s shallow FX markets, shifts in market sentiment may trigger outflows and destabilizing spikes in premia. The use of FXI may be appropriate under certain conditions to mitigate such shocks. Preserving buffers will be particularly important amid geoeconomic fragmentation which may lead to more frequent and volatile external shocks, including to capital flows and commodity prices.

“The authorities are pursuing an ambitious growth agenda in their Golden Vision to reach high- income status by 2045. This is supported by public spending (including on education, social programs, and infrastructure), institutional reforms (including to enhance the labor market, business environment and financial sector), and Industrial Policy (IP), which aims to increase the value-added of exports in selected sectors. Comprehensive horizontal structural reforms— in areas such as governance and anti-corruption, infrastructure, export complexity, human capital, labor resilience, and economic openness—will be essential to further bridge important structural gaps and help meet the country’s ambitions for strong, sustainable and broadly shared growth.

“Supporting Indonesia’s attractiveness to trade and FDI would help mitigate geoeconomic fragmentation risks: securing transparent, simple, and predictable investment and business frameworks would help build resilience against reshoring pressures and attract new investment flows. As IP is deployed, careful design is important to ensure that it targets well- identified market failures in a time-bound and cost-effective way, anchored by strong governance frameworks. Transitioning away from the use of non-tariff measures (NTMs) will be critical to sustain strong and inclusive growth while supporting global economic integration.

“The IMF team met with officials in the government, Bank Indonesia, Financial Services Authority (OJK), other public agencies and representatives of the private sector and civil society. The team would like to thank the authorities and other interlocutors for the frank and constructive discussions, as well as for excellent logistical support.”