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Indonesia: Growth Continues, Challenges Lie Ahead

September 28, 2010

Jakarta, September  28, 2010 – The latest Indonesia Economic Quarterly released today by the World Bank reports that Indonesia’s  economy continues to record robust growth, unlike many of the world’s major economies. This growth has allowed the policy focus to shift from near-term uncertainty towards laying the foundations for longer-term growth to allow the government to better support investment and stronger social outcomes for all Indonesians. The Indonesian Government seeks to achieve over 7 percent growth by 2014 and can potentially do so through greater investments in infrastructure, enhanced skills development and improvements in productivity.

Indonesia recorded 6.2 percent growth in the second quarter, the fastest since the global economic crisis struck two years earlier. Growth was driven primarily by domestic demand, particularly private consumption, which has led to a rise in imports. Government spending was weak over most of the first half of the year, although it is expected to accelerate in the second half. These growth patterns are expected to continue over the near-term, with a further pick-up in investment expected related to the improvement in investors’ access to credit and the proposed increase in public spending on capital expenditures in 2011.

Indonesia’s inflation had returned to historical averages by last August, with headline inflation volatile between June and August, mainly due to the impact on food prices of the extremely wet ‘dry’ season. The unusual weather impacted food prices especially for spices and then rice. Local rice prices are now much higher than the international price, impacting poorer households especially since a greater share of their expenditures is on food. These disruptions are expected to be temporary.

We’re seeing a renewed confidence in the country’s prospects and a strong return of capital inflows,” said Enrique Blanco Armas, the World Bank’s Senior Economist for Indonesia, referring to the inflow of USD 7.3 billion between June and August. “Looking forward, a policy challenge in the near-term is how to address any rise in inflationary pressures while ensuring less volatile and more sustainable capital flows that can Indonesia achieve its growth potential and support improving quality of life for all Indonesians.”

Policy reforms across multiple areas, supported by targeted expenditures, will help to meet the Government’s medium-term targets for growth and poverty reduction. Needed reforms include: greater public investment for infrastructure to address the constraints on private sector activity due to Indonesia’s stretched infrastructure; facilitating access to financial services which can cushion the impact of shocks and boost poor households’ ability to start up businesses; and reducing the mismatch between the skills of workers entering the labor market and the skills demanded by employers.

“The Government faces some immediate priorities to support growth and ensure that it benefits all Indonesians, especially the poorest,” said World Bank Lead Economist for Indonesia, Shubham Chaudhuri. “In particular, improving Indonesia’s infrastructure will help to promote growth going forward by enhancing connectivity between regions, fostering the formation of centers of economic activity and improving the efficiency of Indonesia’s urban areas.”

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