The central bank of Indonesia (Bank Indonesia) believes that the Indonesian government needs to make a more careful selection in terms of infrastructure development projects in order to curtail the big amount of imports that put pressure on the country's current account balance and rupiah exchange rate.
Mirza Adityaswara, Bank Indonesia's Senior Deputy Governor, said infrastructure development is very important for Indonesia. However, at the same time he advises the central government to make a priority list of infrastructure projects. Those projects that require a big amount of capital goods and raw materials that are imported from abroad can then be delayed, provided the project is not high on the priority list.
In the first five months of 2018 a total of USD $4.1 billion worth of goods were imported into Indonesia in the context of government-led infrastructure development in Southeast Asia's largest economy. This puts additional pressure on Indonesia's current account deficit (CAD). The CAD is expected to widen to USD $25 billion, or approximately 2.5 percent of the nation's gross domestic product (GDP), in full-year 2018. This would be a significant increase compared to the USD $17.53 billion deficit (or 1.73 percent of GDP) in the preceding year.
Around a month ago, Indonesian Finance Minister Sri Mulyani Indrawati said the central government would review imports of capital goods for big government projects in a bid to reduce pressures on the CAD. However, there has not been any update since that statement.
In fact, Indonesian Coordinating Minister for Economic Affairs Darmin Nasution recently said it is better not to curtail imports for infrastructure projects because these projects bring economic fruits for the country in the future. He would therefore not like to see falling imports, but prefers to see a boost in Indonesia's export performance.
Meanwhile, he also wants to see a reduction in Indonesia's dependence on fuel imports. Therefore, the government will soon require all sectors in the economy to use B20 biofuel (which consists of a 20 percent bio component that is mixed with petroleum diesel). This policy could save Indonesia around USD $5.6 billion, per year.
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