Indonesia: Hard policy choices required, says World Bank Report

July 22, 2014

Risks of Prolonged Slowdown with Growing Fiscal Deficit


Jakarta, 21 July 2014 – Indonesia’s economic growth in 2014 is projected to be 5.2 percent, slightly lower than the 5.3 percent forecasted earlier in the year, says a new World Bank report.

The July 2014 edition of the Indonesia Economic Quarterly, the World Bank Indonesia office’s flagship publication, says that weak commodity prices and tighter credit conditions are key factors constraining GDP growth in the near term. A growing fiscal deficit adds to the challenges facing Indonesia’s new government which comes into office this October.  Minimizing the risks of a prolonged growth slowdown will require implementation of much-needed reforms, says the report. 

Indonesia is starting a new chapter in its history and faces hard policy choices ahead. In the near term,  it is critical to address rising fiscal pressures and keep the current account deficit sustainable. But to achieve longer term goals such as lifting growth above 6 percent and reducing inequality, deeper structural reforms such as fuel subsidy reform and more infrastructure investments are crucial. Such reforms would help share prosperity more broadly in this great country,” said Rodrigo A. Chaves, World Bank Country Director for Indonesia.

Amongst the hard choices for the near-term is tackling fiscal vulnerabilities. Depreciation of the Rupiah and higher international oil prices have enlarged the fiscal deficit, due to increased fuel subsidy spending. Weakening revenue performance also increases the fiscal deficit.  Total government revenue-to-GDP has dropped down from 16.3 percent in 2011 to 15.3 percent in 2013.

"Capping the deficit at 2.4 percent of GDP, as projected under the revised 2014 Budget, will be difficult, especially if global energy prices continue to increase.  Steps taken to improve the quality of spending through fuel subsidy reduction and preventing further deterioration of tax and non-tax revenue collection, would ease pressure on the deficit,” says Ndiame Diop, World Bank Lead Economist for Indonesia.

The new government will also face the longer term challenge of addressing increasing inequality. The high rates of poverty reduction in the past decade are beginning to slow and the gap between the rich and poor has grown.  In 2002, the top 10 percent of households consumed 6.6 times more than the poorest 10 percent. By 2013, the affluent was spending 10 times more than the poor. Even after many years, many workers are unable to earn higher incomes which threatens to bring families back into poverty.

Increasing inequality is a serious concern.  “Rising inequality carries risks for future economic growth and social cohesion.  Pro-poor policies, such as improving rural infrastructure, expanding  access to quality education and labor market mobility, would boost the earnings of  poor and vulnerable families and help combat inequality,” says Lead Economist Ndiame Diop

Inequality is one of the key focus of the July 2014 issue of the Indonesia Economic Quarterly.  The report also looks at the economic impact of forest fires in Sumatra and Central Kalimantan.

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