Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Indonesia on May 22, 2023.
Indonesia's forward-looking, and well-coordinated policies helped it close out the highly challenging global environment of 2022 with healthy growth, falling inflation, and a stable and profitable financial system. With the recovery underway, policies have been geared toward restoring the pre‑pandemic macroeconomic policy frameworks and accelerating structural reforms, to reinforce macroeconomic stability and build policy space against future shocks. Going forward, Indonesia is well-placed for continued strong and inclusive growth, supported by broad-based reforms to promote an enabling business environment, diversify the economy, and mitigate climate change.
The Indonesian economy performed strongly in 2022, growing by 5.3 percent, driven by a recovery in domestic demand and solid export performance and amid high international commodity prices. Growth is projected to moderate slightly to 5 percent in 2023, given tighter policy settings and the normalization of commodity prices. Inflation, having peaked at 6 percent last year, is forecast to return to Bank Indonesia's target range (3±1 percent) in the second half of 2023. The current account balance stood at 1.0 percent of GDP in 2022, on the back of high commodity prices, and is projected to turn into a small deficit in 2023. Risks are broadly balanced in the near-term, but a highly uncertain global economic environment continues to cloud the outlook.
Executive Board Assessment[2]
Executive Directors noted that the Indonesian economy is performing strongly, inflationary pressures are moderating, and macroeconomic policies have been appropriately returned to their pre-pandemic settings. The outlook remains favorable, and risks are broadly balanced, but with considerable uncertainty related to the external environment.
Directors welcomed the authorities' achievement of the 3 percent deficit ceiling one year earlier than envisaged and commended their commitment to fiscal discipline. Directors emphasized the importance of a concrete medium-term fiscal strategy going forward, including efforts to increase revenue mobilization, implement energy subsidy reform and expand social protection.
Directors noted that monetary policy has been tightened appropriately to preserve price stability. However, they emphasized the need for monetary policy to act decisively if inflation surprises on the upside. Directors also welcomed the end of the central bank primary market purchases of government bonds as scheduled.
Directors noted that the Indonesian financial sector remains resilient, but intensive supervision remains important to tackle vulnerabilities related to higher interest rates and the sovereign bank nexus. They agreed that crisis-related regulatory relief measures should not be extended when they expire in March 2024 to reduce risks, including those of delayed loss recognition.
Directors observed that Indonesia has ample policy space to respond to adverse shocks. They agreed that the exchange rate should play a shock-absorbing role, noting that the use of foreign exchange intervention may be appropriate under certain shocks and circumstances.
Directors welcomed the recently adopted legislation on job creation and the financial sector, while noting the importance of prompt implementation and continued reform momentum, to promote an enabling business environment, enhance financial deepening, and mitigate the scarring effects of the pandemic.
Directors noted Indonesia's diversification strategy focusing on downstream activities from its raw commodities, such as nickel. They welcomed Indonesia's ambitions to increase value added in exports, attract foreign direct investment, and facilitate transfer of skills and technology, and noted that policies should be informed by further cost-benefit analysis, and designed to minimize cross-border spillovers. In that context, Directors called for considering phasing out export restrictions and not extending the restrictions to other commodities.
Directors welcomed the steps taken by Indonesia to limit greenhouse gas emissions and deforestation. They noted that energy subsidy reform and carbon pricing are critical to facilitate a green transition, but also agreed that the transition needs to be managed carefully and that mobilizing private financing is critical.
[1]Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2]At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
Table 1. Indonesia: Selected Economic Indicators, 2020–25 |
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