Indonesia Economic Quarterly: Adjusting to pressures
July 2, 2013
- The second quarter of 2013 was an eventful one as Indonesia’s economy, financial markets and policy settings adjusted to pressures which have been mounting over recent quarters and to shifts in the global environment.
- The outlook for the economy weakened, following slightly weaker-than-expected growth in the first quarter and signs that domestic demand, particularly investment, has continued to moderate. As a result, the World Bank has lowered its GDP growth projection for 2013 to 5.9 percent, from the 6.2 percent projected in the March 2013 IEQ.
- While the World Bank’s base case is for only a moderate slow-down in Indonesia’s growth in 2013, the risk of a more pronounced growth slow-down is high, with domestic demand facing headwinds from temporarily higher inflation due to higher fuel prices and the potential effects of recent international financial market volatility, and weaker commodity prices likely continuing to weigh on exports.
- On the fiscal front, the combination of lower revenues and higher subsidy spending continued to pressure public finances. A revised Budget, incorporating a long awaited increase in subsidized fuel prices, along with a comprehensive compensation package to reduce the impact of higher fuel prices on the poor, was approved on June 17.
- The sizable increase in subsidized fuel prices is a major reform. In the short-term, the reform helps to cap the increase in the 2013 Budget deficit. Over the longer-term, the reform is part of a needed response to ongoing adjustments in Indonesia’s economy - increasing demand for imported energy due to strong growth coupled with declining domestic oil production and, crucially, the need to redirect fiscal spending more efficiently and more equitably in support of Indonesia’s development goals.
- The increase in social spending under the revised Budget, in part to help shield poor households from the impact of higher fuel prices, is significant, and the design of the social compensation package demonstrates the important steps being taken towards developing a more comprehensive, integrated and well-targeted social support system.
- Social protection in Indonesia is poised to be strengthened further when the new national social security system (Sistem Jaminan Sosial Nasional, SJSN) starts being implemented in 2014. If well implemented, the SJSN programs can help to reduce vulnerability, protect against economic shocks, facilitate job mobility, reduce elderly poverty, help reduce inequality, and mobilize scarce savings.
- Improvements in social security and healthcare coverage will happen against the backdrop of a serious and complex dual problem of under- and over-nutrition: the double burden of malnutrition, associated with rapid income growth and urbanization in Indonesia.
- To enhance service delivery and increase the Government’s capacity to successfully implement ambitious new programs such as the SJSN, further improvements in the performance of Indonesia’s civil service bureaucracy will be required, building on significant progress already made in the process of bureaucracy reform.
For more World Bank analysis on social assistance in Indonesia, see www.worldbank.org/id/poverty