“As policies taken to address inflation and the current account deficit will restrain growth in the near term, the economy will be slower than anticipated,” said ADB’s Deputy Country Director for Indonesia, Edimon Ginting. “However, we expect to see improvements next year in terms of growth, inflation, and the current account.”

The first-half growth in 2013 of 5.9% was below projections, with deceleration of fixed investment, decrease in government’s consumption as well as inflation higher than anticipated due to a sharp rise in fuel prices. Private consumption remained the main driver of growth. Increase in employment and wages, coupled with tax reductions for lower-income earners, offset the impact of inflation and tighter consumer credit.

In the short term, ADO 2013 Update predicts the current fiscal and monetary measures that are implemented to ensure macroeconomic stability will take a toll on economic growth. Higher inflation will also dampen private consumption in the coming months. Nevertheless, growth in consumption is expected in 2014, when inflation subsides. Election-related spending during the upcoming parliamentary and presidential elections is also predicted to contribute to consumption in the first half of next year.

ADO 2013 Update also notes that Indonesia is now in a better position to respond to financial market volatility than it was during the 2008–2009 global financial crisis. It highlights that Indonesia’s international reserves have been bolstered, and the country has built additional buffers including swap facilities with other counties and a contingent funding facility mechanism with development partners. The reduction in fuel subsidies has contributed to strengthening the country’s fiscal position and freed up budget resources for economic and social programs.

The Government needs to ensure sustained improvements in the trade balance by accelerating structural reforms and pushing ahead with building infrastructure, with a focus to increase the country’s competitiveness in manufactured exports. Concerted efforts are also required to improve the quality of education and accelerate labor productivity.

This article was first published by the Asian Development Bank on 2 October 2013