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Indonesia's Economy Builds Momentum

April 7, 2010

Jakarta, April 8, 2010 – The World Bank’s just-released Indonesia Economic Quarterly reports that Indonesia’s economy accelerated through 2009, with growth ending the year above pre-crisis averages. The previous year’s downturn appears to have had limited impact on people’s access to work and welfare, and what impact it did have appears to have waned by late 2009. With the stronger economy, the Quarterly states that policy makers now need to build further on this growth momentum:

  • Protect the economy from volatility in the global economy, by reducing the exposure of the budget to swings in commodity prices
  • Invest more resources in public goods and social services
  • Foster a stronger investment climate and more effective bureaucracy
  • Ensure economic growth leads to improved living standards for all Indonesians

The outlook for Indonesia’s economy has improved slightly between December 2009 and March 2010. The economy is expected to grow by 5.6 percent in 2010 (higher than the previous forecast of 5.4 percent) and then by around 6.2 percent or more in 2011.

“Indonesia’s economy should expand by 5.6 per cent in 2010 or even more, with the major drivers of Indonesia’s growth expected to continue to come from domestic demand, with imports picking up. Moderate price growth should lift households’ real purchasing power,” said Enrique Blanco Armas, World Bank Senior Economist for Indonesia. “Investment growth is also expected to pick up in 2010 thanks to higher commodity prices and external demand.

With this positive near-term outlook, the report shifts the focus to medium-term issues.

Developments in the global economy have challenged Indonesia, and the economy has performed well” said Shubham Chaudhuri, the World Bank’s Lead Economist for Indonesia. “BI’s managed large capital inflows and the government’s stimulus package added perhaps 1 percentage to GDP growth in 2009. But risks remain and there are near-term issues to monitor”

These issues include:

  • Bank Indonesia has managed recent large capital inflows in a way that has limited the volatility in the rupiah without pressuring domestic prices…or been at high cost to the budget
  • The ASEAN-China Free Trade Agreement has continued to be implemented, appears to have had little impact and offers significant long-term opportunities for Indonesia
  • But the budget is being impacted by volatile world oil prices, pushing up the cost of subsidies and making planning more difficult and spending less effective, particularly for education

Maintaining Indonesia’s growth into the longer-term needs better support for investors, systems to protect vulnerable Indonesians and ensure all benefit from the country’s growth, and a government able to deliver services effectively, as the government addresses in its medium-term development plan.

For Indonesia to rise to its potential, investments must be made in the quality of government services, infrastructure accessible to all, and rules and regulations that support investors” said Shubham Chaudhuri.

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