Luis Breuer, Team Leader IMF (Image cource: IMF)

 JAKARTA (TheInsiderStories) – The International Monetary Fund (IMF) has projected a 5.1 per cent growth rate in 2017 and 5.3 per cent in 2018 for the Indonesian economy.

Growth over the two years will be led mainly by higher exports and investment. Domestic demand, which has been relatively subdued, is expected to rise modestly next year, along with credit growth.

The multilateral agency projects that full-year 2017 inflation is projected to remain low, at 3.7 per cent, and 3.6 per cent in 2018, due to broadly stable food prices and administrative rates, and a slightly negative output gap.

The current account deficit is expected to remain contained at 1.7 percent of GDP in 2017 and 1.9 percent in 2018, with the overall balance of payments remaining in a surplus.

IMF concludes that the Indonesian economy will continue to perform well, supported by prudent macroeconomic policies, improved global growth and commodity prices and sustained efforts to strengthen competitiveness.

‘In the near term, policies should focus on promoting growth while preserving stability. Monetary policy should focus on price stability and supporting growth, while fiscal policy should rebuild buffers to defend stability,’ IMF Team Leader stated Luis E. Breuer on Wednesday (15/11).

‘Boosting medium-term growth requires revenue-enhancing tax reforms to finance development spending, and reforms in the product, labor, and financial markets,’ he said.

‘Notwithstanding this positive outlook, the balance of risks is on the downside and mainly external. They include a reversal in capital inflows, slower growth in China, and geopolitical tensions,’ he said.

Domestic risks include tax revenue shortfalls and tighter global financial conditions that could push up domestic interest rates. On the upside, global growth and commodity prices could be stronger than expected.

‘The near-term policy mix should balance the objectives of supporting growth while at the same time maintaining stability,’ he added.

Fiscal policy is appropriately geared towards rebuilding fiscal buffers by targeting a lower budget deficit in 2018. The budget also incorporates continued actions to rebalance away from untargeted subsidies and other unproductive spending, and redirect funds toward social spending and investment.

These actions, combined with authorities’ efforts to support structural reforms, will enhance confidence and stimulate higher inclusive growth.

‘Monetary policy should continue to maintain price stability while supporting growth. The current monetary stance is broadly appropriate. Monetary transmission has improved, although further progress can be achieved, including through completing a risk-free yield curve,’ Breuer said.

The authorities, Breuer said, should continue to allow the exchange rate to move freely, in line with market forces.

Financial policies should remain focused on safeguarding financial stability. The banking system is well capitalized, profitability is high, and system-wide liquidity remains ample, he said.

Non-performing loans have stabilized but special-mention loans and restructured loans remain elevated and require close attention.

Efforts should continue to enhance financial oversight and crisis management in line with the key recommendations of the 2017 Financial Sector Assessment Program.

‘Boosting inclusive growth over the medium term and unleashing the economy’s potential to address the employment needs of a young labor force will require revenue-enhancing reforms to finance development spending and continued reforms to the product, labor, and financial markets,’ Breuer said.

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.

Given limited fiscal space, immediate reform priority could be directed 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 authorities have made progress with the framework for public infrastructure investment. These efforts should be strengthened with closer integration of public investment to the macroeconomic program, allowing us to better monitor potential risks, including from the buildup of leverage by state-owned enterprises (SOEs),’ he said.

‘Greater private sector participation and adequate cost-recovery policies in SOEs, including those in the electricity sector, would support the authorities’ intention to close the infrastructure gap.’

The team exchanged views with officials in the government, Bank Indonesia, Financial Services Authority (FSA), other public agencies and representatives of the private sector. The team wishes to express its gratitude to the authorities and counterparts for their hospitality and constructive discussions.

Written by Elisa Valenta, email: elisa.valenta@theinsiderstories.com

 

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