Improved Fiscal Management Strengthens Indonesia’s Economic Resilience: World Bank

October 25, 2016

Public Policy Reforms Support Growth

Jakarta, October 25, 2016: Improved fiscal management is supporting GDP growth in Indonesia, projected at 5.1 percent for 2016, according to a new World Bank report.

But external risks such as weaker than expected global growth and volatility in global financial markets pose downside risks to Southeast Asia’s largest economy, says the October 2016 edition of the Indonesia Economic Quarterly (IEQ).

Higher than previously estimated revenue from the tax amnesty program has eased fiscal risks, along with adjustments to government expenditures. The amnesty program collected 56.6 percent of its target by the end of phase 1. This additional revenue is expected to raise capital spending and hence have a positive impact on growth. 

Improved fiscal management, sounder public policy and structural reforms, including timely responses on food prices, are yielding positive outcomes. Risks have declined and some indicators improved. Looking forward, we are optimistic that ongoing efforts to develop tourism and manufacturing will result in more jobs, boost export earnings, and further support growth,” said Rodrigo Chaves, World Bank Country Director for Indonesia. 

Growth resilience and policy reforms have advanced efforts to reduce poverty. Indonesia’s poverty rate fell by 0.4 percentage points in the first quarter of 2016, marking the biggest year-on-year decline in the last three years. Policies that have contributed to the decline include; efforts to stabilize rice prices (including management of rice imports and market operations by the Bureau of Logistics), and the expansion of social assistance programs such as the Family Hope conditional cash transfer program. The program’s recent expansion to 3.5 million households has contributed nearly one-third of the total observed poverty decline.

Furthermore, the Gini coefficient – a measure of inequality – fell by 1.1 points to 39.7. Although this inequality remains high, the decline was the largest annual drop since the Asian financial crisis of 1997-1998. 

The IEQ also highlights the potential of Indonesia’s tourism sector to unlock private investment, create jobs, boost export earnings, and promote targeted infrastructure investment programs in tourism destinations.

Indonesia has the potential to develop a world-class tourism industry” said Ndiame Diop, the World Bank’s Practice Manager for Macroeconomics and Fiscal Management in South East Asia and the Pacific. But tourism destinations need much more infrastructure development, and results require better coordination between government agencies and the private sector.”

The Ministry of Tourism has set a target of attracting US$10 billion in private investment for 10 tourist destinations by the year 2019. According to the World Travel and Tourism Council, every US$1 million travel and tourism spending in Indonesia supports 200 jobs.

This edition of the IEQ, entitled Pressures Easing, also analyzes access to water, sanitation and hygiene services in Indonesia, and its importance in improving indicators for health and nutrition. Poor access to basic sanitation services has contributed to the high rate of stunting in Indonesia, where about 1 in 3 children under 5 years of age are stunted, or suffering low height for their age.

In addition, the report looks at food security policies (including the impact of government subsidies for farming products), and an evaluation of Indonesia’s teacher certification program which shows that increased teacher qualifications are not enough to improve student learning outcomes.

The quarterly reports, now in its 6th year of production, are produced with support from the Australian Government.

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