The FINANCIAL — Stronger global economic growth and continued gains in commodity prices are helping to drive up Indonesia’s economic growth forecast to 5.2 percent this year from 5.0 percent in 2016. Global policy uncertainty and fiscal dynamics pose downside risks, according to a new World Bank report released on March 22.
The report says the fundamentals of the Indonesian economy remain strong, with robust economic growth, a low current account deficit and unemployment, a conservative government deficit and inflation at a record low. Double-digit real wage growth, accommodative monetary policy and higher commodity prices helped increase household consumption and investment and exports rebounded in the fourth quarter of 2016.
Staying the course on continued structural reforms is crucial to further enhance the economy’s potential growth, says the March 2017 edition of the Indonesia Economic Quarterly.
“Having achieved robust growth in 2016, the economic outlook for Indonesia remains on the positive side this year. With an increase in commodity prices, 2017 offers an opportunity for Indonesia to solidify its recovery and secure stronger growth in the longer-term. The country will continue benefitting from sustaining structural reforms in order to do so” said Rodrigo A.Chaves, World Bank Country Director for Indonesia.
The Bank projects inflation to be temporarily higher this year at 4.3 percent, up from 3.5 percent in 2016, due to hikes in electricity tariffs linked to better targeted public subsidies, and due to vehicle registration fees. The current account deficit is expected to remain at a five-year low of 1.8 percent of GDP, unchanged from 2016, on stronger commodity prices Meanwhile, the central government budget deficit is projected to edge up to 2.6 percent of GDP, partly due to stronger public expenditures on investment.
The report includes a study on services trade in Indonesia. It says Indonesia should reduce restrictions on services trade to improve productivity and competitiveness. According to data from the Organization for Economic Cooperation and Development, Indonesia has some of the most restrictive barriers to services trade.
“Trade restrictions on services weaken the quality of those services and are also impeding the productivity of other sectors of the economy, as services such as transport, distribution and electricity are key inputs for industrial production. Lifting these restrictions could therefore bring economy wide benefits.” said Hans Anand Beck, Acting Lead Economist.
The report also finds that the redesign of the Kredit Usaha Rakyat (KUR) program towards the provision of subsidized loans to micro, medium and small enterprises (MSMEs), has led to a 10-fold increase in the cost of the program. With more selective targeting, program costs could be much lower, and the savings could be redirected to other underfunded priority sectors in Indonesia. There is a strong need to rethink the use of subsidized loans to support MSMEs.
The Australian government’s Department of Foreign Affairs and Trade supports the publication of the report.