Indonesia: Rapid Growth Needs More Investment

March 18, 2015

Economy to pick up only in 2016, says new report

Jakarta, 18 March 2015 – Key reforms are underway, but rapid economic growth for Indonesia is unlikely before 2016 without strengthening investment growth, says a new World Bank report.

Lower global commodity prices caused by a slowdown in China affect Indonesia’s growth outlook, according to the March 2015 edition of the Indonesia Economic Quarterly, entitled ‘High Expectations’.  Economic growth moderated to 5.0 percent in 2014.

A doubling of government spending in infrastructure can help lift demand and accelerate fixed investment spending, currently at 4.3 percent year-on-year.  But much more is needed, and effective implementation is crucial.

“The Government of Indonesia deserves praise for the fuel subsidy reforms and subsequent budget reallocations to infrastructure spending. But lower oil prices and weak tax compliance have eroded the savings from subsidy reform, requiring sustained public policy action at this time of high expectations. In the long term, Indonesia would benefit from improving revenue collection, including from the non-oil sector,” says Rodrigo Chaves, World Bank Country Director for Indonesia.

Domestic consumption continues to be the main driver of growth.  But the risks posed by relatively tight credit, higher import costs and profit margin pressures may dampen domestic spending and investment.

Further improving the investment climate and Indonesia’s competitiveness may boost market sentiment.

“Accelerating fixed investment spending will strengthen Indonesia’s economy, and private sector involvement in this endeavor is key. The establishment of the ‘One Stop Shop’ for business licensing at the Investment Coordinating Board (BKPM) is a step in the right direction. But full implementation will not be require some time,” says Ndiame Diop, World Bank Lead Economist for Indonesia.

This IEQ also takes a closer look at the role of Indonesia’s natural resources sector over the commodity boom period.  For Indonesia’s considerable natural wealth to play a stronger role in development, effective public management of these resources – and a sound policy framework for regulation – will be critical. 

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