Indonesia’s economy continues to face challenging external conditions. Global growth, trade and commodity prices remain weak, weighing on GDP growth and fiscal revenues.
The forest fires and haze this year have also constrained GDP growth, costing Indonesia an estimated IDR 221 trillion (1.9% of GDP) – more than twice the reconstruction cost after the 2004 Aceh tsunami. The impact of the forest fires is discussed in some depth in this issue of the IEQ.
The government is responding and demonstrating intent to implement reforms. For example, it increased capital spending by an estimated 49.8% year on year (yoy) in real terms in the third quarter.
Increased public sector spending has helped support growth, with the GDP growing at 4.7% yoy in the third quarter, the same pace as in Q1 and Q2 2015.
The World Bank projections for next year are unchanged from the October 2015 IEQ. While the forecast for 2016 GDP growth remains 5.3%, public consumption and investment are now expected to contribute slightly more to growth both this year and next.
Seven policy packages of regulatory and structural reforms and fiscal stimulus have also been announced in an effort to boost private sector investment, which this year has remained subdued.
The government’s commitment to accelerate public spending in 2015 and lower than expected revenue collection expanded the fiscal deficit to 2.5% of GDP in October.
If revenue collection remains weak in 2016, the ongoing public infrastructure spending momentum and its growth impulse may be at risk.
The Dana Desa, or Village Fund, is set to increase substantially next year, potentially contributing to public infrastructure spending. This edition of the IEQ addresses the early implementation challenges which may be critical to the program’s success.
Also discussed in this issue of the IEQ is the potential effect of the Trans-Pacific Partnership (TPP) on Indonesia, whether the country joins or not. The impact of the TPP on trade may be limited, due to already low import tariffs in member countries and existing trade agreements with Indonesia. The effect on investment may be more important, as the pact increases access to the global economy and affords higher legal protection for foreign investors than domestic legislation usually does.
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