JAKARTA (TheInsiderStories) - Indonesia’s economy continues to register strong growth, thanks in large part to solid economic policies and increased household consumption, says the The International Monetary Fund (IMF) in its latest report. The donor said, economic growth of the country in 2017 is projected to rise modestly to 5.1 percent in near time, supported by robust private consumption.
Last year Indonesia’s growth ended at 5.02 percent—up from 4.8 percent in 2015—remains among the highest in large emerging market economies. Household consumption—one of the main drivers of growth for Indonesia—is strengthening due to people’s improving purchasing power amid low inflation and a stronger rupiah.
Still, while strong household consumption should continue to support growth, Indonesia needs more investment to sustain and even accelerate the pace over the medium term. While, inflation is expected to remain within the official target band 4+1 percent, albeit slightly higher in 2017 due to lower electricity subsidies.
The multilateral agency also sees the current account deficit would remain contained. The risks to the outlook have risen and are mainly external. External risks include uncertainties about the policies of the incoming United States administration, tighter global financial conditions, spillovers from a significant China slowdown, and lower commodity prices, which could intensify macro-financial vulnerabilities related to banks and corporates.
IMF said, domestic risks include tax revenue shortfalls or higher domestic interest rates due to tighter global financial conditions, which could curb fiscal space. Main policy recommendations strengthen the medium-term fiscal framework through tax policy and administration reforms, and continue to improve the effectiveness and efficiency of public spending.
Monetary policy should stand ready to deal with changes in a more volatile external environment, while maintaining exchange rate and bond yield flexibility. It is important to fully implement the enhanced financial stability framework by issuing the regulations of the Financial System Crisis Prevention and Mitigation Law, strengthen inter-agency coordination to respond to shocks, and address macro-financial vulnerabilities from the bank and corporate sectors.
Deeper structural reforms are needed to improve the business environment further and support private investment. Finally, the policy strategy should continue to include actions to boost the economy’s resilience, to allow it to prosper even if the external environment becomes choppier.
Continuing with reforms
The government has already started to implement reforms to improve the investment climate and boost growth. These include expanding investment in public infrastructure, reducing the layers of government regulations, and opening up new areas of the economy to private investment. The government’s strategy to strengthen tax collection and broaden the tax base through tax reform will also generate additional revenues to pay for priority government investment.
Indonesia’s youthful workforce has the potential to be one of the country’s most powerful economic levers. Reforms that can help narrow the skills gaps between what employers need and what employees have—such as expanding vocational training opportunities—can help strengthen the economy’s productivity.
Current shifts in the global economy
Indonesia’s positive economic outlook, however, is challenged by global uncertainties, including around policies from the new United States administration, and the possible impact from China’s rebalancing and expected economic slowdown. To best adapt to this new environment, the country needs to stand ready to manage short-term risks and, at the same time, ramp up economic reforms to increase potential growth.