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publication March 27, 2018

March 2018 Indonesia Economic Quarterly: Towards inclusive growth

  • Indonesia’s economic growth picked up in the fourth quarter of 2017 to 5.2 percent year-on-year from 5.1 percent in the third quarter. Stronger growth was driven by higher domestic demand, especially investment.
  • For 2017 as a whole, GDP growth rose to 5.1 percent from 5.0 percent in 2016, the highest in four years. The stronger outturn was partly due to stronger investment and net exports, in line with the continued recovery in commodity prices, strong global growth and international trade flows.
  • Total government spending in 2017 grew the fastest in three years, supported by higher capital, material, and social spending. Notably, capital expenditures grew 18 percent - the highest in 8 years.
  • The current account deficit widened to 2.2 percent of GDP in the fourth quarter, from 1.7 percent of GDP in the third quarter. For 2017 as a whole, improved terms of trade and the recovery in global trade helped the current account deficit narrow to 1.7 percent of GDP, the lowest in 6 years.
  • Real GDP growth for 2018 is projected at 5.3 percent. Despite an expected drop in commodity prices, in particular coal, the momentum in import-intensive investment growth is expected to continue in the near term.
  • Risks to the economic growth outlook, which include slower global trade, volatility, and structurally slower private consumption, are tilted to the downside.
  • This edition also discusses the importance of fiscal policy to fostering inclusive growth. Over the past 15 years, fiscal policy has contributed positively to Indonesia’s growth through macroeconomic stability, but has been less successful in reducing inequality.
  • To achieve inclusive growth, Indonesia needs to spend better especially in education, spend more in priority areas – infrastructure, health, social assistance – and collect more revenues in an efficient, growth-friendly manner to support increased spending. This will require:
    • further reallocating spending across and within sectors
    • continuing to enhance the effectiveness of spending and key intergovernmental transfers
    • broadening the tax base
    • improving the efficiency, simplicity and equity of existing taxes
    • strengthening revenue administration.