publication December 14, 2017

December 2017 Indonesia Economic Quarterly: Decentralization that Delivers

The Indonesian economy continued to expand at a solid pace during the third quarter of 2017 helped by commodity tailwinds and stronger domestic and external demand, according to the World Bank’s December 2017 Indonesia Economic Quarterly.

World Bank Group


Recent Macroeconomic Developments

  • Indonesia’s economy strengthened modestly in the third quarter of 2017 supported by higher commodity prices, stronger global growth, rebounding international trade, and relatively accommodative monetary and financial conditions.
  • Real GDP growth strengthened from 5.0 percent year-on-year in the second quarter to 5.1 percent in the third quarter of 2017, partly due to strong investment and export growth.
  • Investment growth was at its highest in more than four years. Foreign direct investment recorded the largest net inflow in over seven years. Indonesia’s key export commodities and other manufactured goods exports surged in the third quarter. Export and import volumes both registered double-digit growth for the first time since 2012.
  • Private consumption growth remained flat on a year-on-year basis, but there are indications that it is starting to recover. Sales of consumer durables, such as passenger car and motorcycles, both rebounded, with the latter jumping double-digits in the third quarter, after three years of consecutive contractions.
  • The current account deficit narrowed from 1.9 percent of GDP in the second quarter to 1.7 percent of GDP, due to wider goods trade surplus from stronger exports in the third quarter.

 

Economic Outlook

  • Real GDP growth is estimated at 5.1 percent for 2017 and strengthen to 5.3 percent in 2018, driven by a continuation of strong investment growth and a modest, but continued recovery in consumption. Risks to the outlook include volatility in global financial markets, and slower private consumption growth, which constitutes more than half of GDP, particularly in the fourth quarter.
  • Considering the continued subdued food prices and the absence of further planned energy price hikes this year, consumer price inflation is expected to average 3.8 percent in 2017, easing further to 3.5 percent in 2018.
  • Amid stronger commodity prices and the associated the positive terms-of-trade shock, and the enhanced demand for Indonesia’s exports in line with strong global economy and strengthening trade flows, Indonesia’s current account deficit is expected to narrow to 1.6 percent of GDP in 2017. As terms-of-trade decline in 2018 while investment remains robust, the current account is expected to widen modestly to 1.8 percent of GDP.
  • At 2.2 percent of GDP, the 2018 fiscal deficit target in the Budget is lower than in previous years, providing increased fiscal space in the short term. In line with the stronger macroeconomic outlook for 2018 and ongoing tax policy and administration reforms, the World Bank also projects a fiscal deficit of 2.2 percent of GDP, the same as the 2018 Budget target.  

 

Making Decentralized Democracy Deliver Local Service Improvement: The Role of the Central Government

  • This edition also discusses how local government service delivery performance has changed over time, and what levers the central government can use to encourage and support better performance in future.
  • Over the last 15 years, there has been general improvement and regional convergence in access of services with decentralization, but the quality of services remain poor and regional disparity is widening.
  • This report offers three key policy recommendations to help align incentives to promote service delivery performance by local leaders and public officials:
    • Implement good practices for evaluating local government performance.
    • Embed results-orientation into intergovernmental fiscal transfers.
    • Use transparency and comparative local government performance data to stimulate citizen engagement.

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