The World Bank revised down its forecast for economic growth in Indonesia for the year 2014. In the July 2014 edition of the Indonesia Economic Quarterly, the institution projects economic growth in Southeast Asia’s largest economy at 5.2 percent, slightly down from its previous forecast of 5.3 percent. The downgrade is the result of a weaker outlook for commodity prices and tighter credit conditions. Moreover, the growing fiscal deficit contributes to the challenges that will be faced by the new government (which will be inaugurated in October 2014).
The World Bank, once again, emphasized the necessity of structural reforms in order to safeguard long-term economic growth. For example, the wide current account deficit should be addressed to by implementing fuel subsidy reforms. Other reforms required to foster structural high economic growth (+6 percentage point growth year-on-year) involve the reduction of inequality and more infrastructure investments. Inequality is a major concern as the pace of poverty reduction has declined, while the gap between rich and poor has increased. Future economic expansion and social cohesion can be jeopardized if inequality is not properly dealt with. According to the World Bank: “in 2002, the top 10 percent of households consumed 6.6 times more than the poorest 10 percent. By 2013, the affluent was spending 10 times more than the poor.” Therefore, the World Bank suggests pro-poor policies, including enhancing rural infrastructure, education and labour market mobility.
Indonesia's large fuel subsidies imply fiscal vulnerabilities. The country’s fiscal deficit is worsened by the depreciation of the Indonesian rupiah exchange rate and higher international oil prices. Furthermore, weaker government revenue has also increased pressures on the fiscal deficit. Total government revenue-to-GDP declined from 16.3 percent in 2011 to 15.3 percent in 2013.
Last month, the Indonesian government raised the budget deficit to 2.4 percent of gross domestic product (GDP) in the revised 2014 State Budget but it remains unknown whether the government can keep the ratio below that limit (particularly in case global energy price keep rising). Ndiame Diop, World Bank Lead Economist for Indonesia, said that “the quality of spending through fuel subsidy reduction and preventing further deterioration of tax and non-tax revenue collection, would ease pressure on the deficit.”