Government Spending Drives Modest Growth Pick-Up in Indonesia

March 15, 2016

More Private Investment is Essential to Sustained Recovery: World Bank

Jakarta, March 15, 2015: Government spending for infrastructure is driving a modest pick-up in growth, projected to be 5.1 % for 2016, says a new World Bank report.

Weaker than expected revenue growth and the continued decline in commodity prices poses downside risks to sustained government investment.  Robust investments by the private sector will be essential for sustained economic recovery, according to the March 2016 edition of the Indonesia Economic Quarterly.

“Indonesia enjoys a higher growth rate than most commodity exporters, which have been impacted by disappointing global growth. But growth below 6 percent is insufficient to create enough jobs for the 3 million Indonesians entering the work force each year,” says Rodrigo A. Chaves, World Bank Country Director for Indonesia.  “A more solid recovery depends on strong private sector investment, which requires sustained and comprehensive regulatory reforms to improve the business climate.”

Investments by the central government increased by 42 percent year-on-year in 2015. In contrast, growth in private sector investment remained subdued.

Growth in consumer spending also remained moderate, compared to years past, as high food price inflation curbed spending growth.  Export and import volumes continued to decline, and export revenues fell by 14.4 percent relative to 2014.  Oil and gas export revenues declined by 42 percent year-on-year, coal revenues by 26.5 percent, and palm oil revenues by 19.3 percent.

The persistent decline of commodities underlines the urgency to diversify the economy, to the manufacturing and services sector, particularly tourism, which can create higher-pay, higher-skilled jobs. But manufacturing has also been hard hit, with exports falling by 13.4 percent year-on-year, and infrastructure development for tourism has been insufficient.

“Indonesia has many industries that can significantly improve growth, including manufacturing,” said Ndiame Diop, World Bank Lead Economist for Indonesia.  “But these sectors are still constrained by cumbersome and restrictive regulations. While the government has proposed bold reforms in the last 6 months, more action will hopefully tip investor confidence and boost investment.”

This edition of the IEQ, entitled Private Investment Is Essential, outlines several measures that the government can include in subsequent policy packages, in order to facilitate investment. For example, lowering capital requirements for logistics companies; a centralized review system of trade regulations; and better institutional coordination and public education to increase access to finance.

More private sector investment is essential, given the limitations in revenue collection imposed by falling oil and gas revenues, which dipped to only 1.2 percent of GDP in 2015, compared to 3.4 percent in GDP in 2012.  The revenue-to-GDP ratio slid to only 13.0 percent of GDP last year.

To increase revenue, the government is undertaking tax policy reforms, strengthening tax administration, and investing in IT and data management systems. But the impact of these reforms will not be overnight.

The March 2016 IEQ also includes an in-depth look at the high costs of logistics in Indonesia, and how the costs may be reduced.  In addition, the report also examines the potential impact of better pricing on incentivizing efficiency, production, and use of renewable energy.  Lastly, this IEQ discusses public perception of increasing inequality in Indonesia; the GINI coefficient climbed to 41 in 2014, a marked increase from 30 in the year 2000.  

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