Indonesia: Improved Government Spending Can Spur Higher Growth in 2016

December 15, 2015

Swift implementation and disbursement can crowd in private investment: World Bank


Jakarta, December 15, 2015:  The government’s increased capital spending by close to 50 percent year-on-year in real terms supported growth in the third quarter and could further boost growth in 2016 if the pace continues, says a new World Bank report.

Additional reforms as seen in the 7 policy packages of regulatory reforms may also improve investor sentiment, although domestic household consumption – the main driver of growth in Indonesia – is growing at a slower pace than in previous years and external trade remains weak, according to the December 2015 edition of the Indonesia Economic Quarterly, or IEQ.

The forest fires this year have also constrained GDP growth, costing Indonesia an estimated USD 16.1 billion, equivalent to 1.9 percent of GDP or more than twice the costs of reconstruction in Aceh after the tsunami. The GDP of Kalimantan, the worst affected island, declined by 1.2 percent quarter-on-quarter in the third quarter, in part due to the fires and haze. Growth in East Kalimantan declined by 3.5 percent year-on-year, and in Papua by 0.6 percent year-on-year.

“The year ahead will continue to be challenging, as demand from China may continue moderating and markets anticipate higher interest rates in the US. There could be some market turbulence. Hence the government’s commitment towards more public investments in infrastructure, health, and social assistance programs next year is welcomed.  It could strengthen growth prospects as well as help the poor and vulnerable,” said Rodrigo Chaves, World Bank Country Director for Indonesia.  

“If reforms are sustained and implementation is effective, Indonesia may be buffered from potential volatility and enjoy higher growth in 2016,” added Chaves.

World Bank projections for next year are unchanged from the October 2015 IEQ; the forecast for 2016 remains 5.3 percent growth. GDP growth was at 4.7 percent year-on-year in the third quarter, the same pace as in Q1 and Q2 2015.

Although public sector spending has improved in terms of both higher budget commitments for development priorities and faster capital project implementation, revenue collection remains lower than expected. Full implementation of the government’s expenditure plans for next year may prove challenging and possibly constrain growth prospects.

Other sectors of the economy are less buoyant. Private sector investment remains subdued for 2015. Exports and imports also weakened, reaching their lowest levels since 2010.

“A reform momentum has produced seven economic policy packages. If effectively implemented, they may help ameliorate impediments to business and encourage private investment. In the long term, increased fixed investment is crucial to a return to higher economic growth and job creation,” said Ndiame Diop, World Bank Lead Economist for Indonesia.

Unemployment increased from 5.9 percent in 2014 to 6.2 percent in 2015, and the sectors generating jobs are low productivity industries with limited income mobility, such as construction and trade.

The December 2015 IEQ contains analysis of the recent forest fires and the policy options to reduce the occurrence of fires in the future.  This issue also assesses the implementation so far and prospects of the Dana Desa, or Village Fund, program, as transfers to local governments are set to increase significantly in the coming years.  The report also presents an early overview of the potential costs and benefits of joining the Trans-Pacific Partnership. 

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