IMF Hopeful, Though Cautious, About Indonesia's Economic Growth

The International Monetary Fund, or the IMF, grew more cautious about Indonesia's economy this year while keeping a positive outlook for next year on the back of the country's prudent growth-spurring macroeconomic policies and efforts to strengthen competitiveness amid improved global growth and commodity prices, according to an end-of-mission statement released on Tuesday (14/11). (Reuters Photo/Yuri Gripas)

By : Tabita Diela | on 10:15 AM November 16, 2017
Category : Business, Economy

Jakarta. The International Monetary Fund, or the IMF, grew more cautious about Indonesia's economy this year while keeping a positive outlook for next year on the back of the country's prudent growth-spurring macroeconomic policies and efforts to strengthen competitiveness amid improved global growth and commodity prices, according to an end-of-mission statement released on Tuesday (14/11).

The IMF expects Indonesia's economy to grow 5.1 percent this year and 5.3 percent in 2018 on the back of higher exports and investment, as well as rising domestic demand and credit growth. The outlook is slightly lower compared to the Fund's previous outlook for Indonesia's growth rate at 5.2 percent this year and 5.3 percent next year.

"The Indonesian economy continues to perform well," Luis E. Breuer, IMF mission chief for Indonesia, said in a statement.

The assessment is similar to the government's expectation of 5.17 percent growth this year but lower compared to a 5.4 percent growth target next year in the 2018 state budget.

"Notwithstanding this positive outlook, the balance of risks is on the downside and mainly external," Breuer said.

Breuer referred to a potential reversal in capital inflows, slower growth in China — Indonesia's biggest trade partner — and geopolitical tensions, while the domestic risks include tax revenue shortfalls and tighter global financial conditions that could push up domestic interest rates.

The end-of-mission note also praised the 2018 state budget that contains a lower deficit and continued actions to redirect unproductive spending for subsidies toward social spending and investments.

The government expects a fiscal deficit of 2.19 percent of gross domestic product (GDP), lower compared to the target of 2.92 percent of GDP in the revised 2017 budget.

Tax Revenue Concern

Limited fiscal space, however, will force the government to make priorities in terms of spending and strategy. Immediate reform priority, according to the IMF team, could be given to structural reforms with low fiscal costs such as reforming products to encourage private investment.

"There is a critical need to implement a medium-term revenue strategy that centers on early tax policy reforms and improved tax administration to strengthen the business environment," the statement said.

Given limited fiscal space, immediate reform priority could be given to structural reforms with low fiscal costs, such as reforming product markets to encourage higher private investment, further streamlining and harmonizing complex regulations and improving coordination with local governments, and fostering financial deepening with a sound oversight framework.

The mission also said that Indonesia's monetary policy transmission has improved but still has some ways to go.

"These efforts should be strengthened by closer integration of public investment to the macroeconomic program to better monitor potential risks, including from the buildup of leverage by state-owned enterprises [SOEs]," the statement said.

Financial Stability

On the financial side, Breuer and his team said the policies should remain focused on safeguarding financial stability while the banking system remains well capitalized, has high profitability and liquidity is still ample.

"Non-performing loans have stabilized but special-mention loans and restructured loans remain elevated and require close monitoring," he said. "Efforts should continue to enhance financial oversight and crisis management."

Indonesian Finance Minister Sri Mulyani Indrawati responded positively to the IMF report, saying it reflects many similarities to the government's targets and outlook.

IMF's points on tax reform and private investment, for example, have been on the government's agenda so far.

"The government's efforts in improving the ease of doing business, investment climate, as well as spending capital for infrastructure are all to meant to improve the confidence in investment," Sri Mulyani said.

"The only difference was statistical interpretation," Sri Mulyani said, noting that the IMF saw the data in more "careful" ways.

A team of economists led by Breuer visited Indonesia from Nov. 1-14 for the so-called "Article IV consultation" during which they assessed economic, financial development and the country's policies with the representatives from the government, central bank and the private sector.

The consultation is called "Article IV" because it is required by Article IV of the IMF's Articles of Agreement. The team will report their findings to IMF management and then present it to the executive board.

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