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Indonesia: Current challenges, future potential

June 28, 2011

Jakarta, June 28, 2011 – The latest Indonesia Economic Quarterly released today by the World Bank highlights the continued positive economic performance of the Indonesian economy through mid-2011 and its even greater future economic potential. However, achieving this potential is not automatic. Strong, sustained progress on investments and policy reforms is needed to move growth up to a new level and to address the current challenges faced by Indonesia’s economy.

Growth moderated slightly in the first quarter of 2011 but still came in at a robust 6.5 percent year-on-year, supported by strong private consumption and investment. Portfolio capital inflows have been strong and foreign direct investment inflows have continued to grow. Inflation has also come down from the highs of January as domestic food inflation has declined. However, recent developments highlight a range of ongoing challenges. Weak government disbursement rates illustrate the constraints on improving public service delivery and infrastructure provision. Despite the recent falls in rice prices, poor households remain vulnerable to domestic food production shocks. The current turbulence in financial markets caused by the Euro zone debt crisis is another key source of uncertainty and a reminder of Indonesia’s sensitivity to movements in short-term capital flows.

“The high oil prices seen over 2011 have increased spending on poorly-targeted energy subsidies.” says Shubham Chaudhuri, Lead Economist for the World Bank in Indonesia. “Increased public spending on subsidies means a higher opportunity cost in terms of money which could be spent on pressing developing needs, such as education, health, social protection, and infrastructure. The savings from reform could also be used for cash transfers to limit the impact on vulnerable households.”

The Government’s recently released Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development 2011-2025 aims to move Indonesia into one of the largest economies in the world by 2025. The Master Plan has the potential to be a transformative tool that can be successfully implemented with the right policies, investments, political commitment and coordination. The ambitious target to have the private sector finance up to half of the total investment will also require progress in areas such as public private partnerships and deepening domestic financial markets.

“The poor quality of infrastructure is one of the biggest obstacles to firms operating in Indonesia” said World Bank Country Director for Indonesia, Stefan Koeberle. “As emphasized by the Government’s Master Plan 2011-2025, improving connectivity is a key ingredient for Indonesia to reach its future growth potential.”


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