A positive matter is that Indonesia improved its fiscal policy credibility by determining more realistic revenue targets in the 2017 State Budget (in earlier years the tax revenue targets became increasingly out of tune with reality). But the World Bank stresses that Indonesia needs to accelerate tax administration and policy reforms in order to increase tax revenue in a structural manner. The Indonesian government's tax amnesty revenue contributed to a lower budget deficit in 2016, but non-tax amnesty revenue collection weakened. The 2017 State Budget features more achievable revenue targets but further tax administration and policy reforms are required to meet these targets.

Download the World Bank's January 2017 IEQ here

Rodrigo Chaves, World Bank Country Director for Indonesia, said Indonesia's 2017 State Budget improves Indonesia’s quality of spending, including sustained higher allocations for infrastructure, health, and social assistance, and better targeting for energy subsidies and social programs for the poor. It is very important for Indonesia to sustain this reform momentum so that the country can meet its development goals.

Improving the quality of public spending in Indonesia entails two actions: (1) reallocating spending toward priority sectors where public spending is low and additional spending can have the greatest impact on poverty and growth. These sectors include infrastructure, health, and social assistance. (2) Maximizing the effectiveness of spending in all sectors-particularly agriculture, education, and social assistance.

Furthermore, the latest Indonesia Economic Quarterly also highlights Indonesia’s recent improvement in the World Bank’s Ease of Doing Business ranking, climbing from number 106 in 2016 to number 91 in the 2017 ranking, hence Southeast Asia's largest economy made it among the top ten improvers, globally. This improvement is particularly attributed to reforms that eased starting a business, getting electricity, and paying taxes, registering property, getting credit, enforcing contracts and trading across borders. However, to boost private investment policymakers need to move on to medium-term structural reforms, Hans Anand Beck, Acting Lead Economist, said.

Positive Matters:

Indonesia’s economy weathered recent global financial volatility and is well placed to mitigate future risks to its growth outlook due to solid economic fundamentals and policy reforms:

  • Improved fiscal policy credibility and composition of government spending
  • Low and stable inflation at 3.02 percent (y/y) in 2016
  • Robust private consumption growth
  • Moderate budget deficit, current account deficit, and government debt.

Looming Risks:

  • Ongoing international financial volatility together with sluggish global trade and subdued growth in advanced economies
  • Continued deceleration of economic growth in China
  • Global policy uncertainty, particularly concerning global trade agreements and the pace of interest rate normalization in the US

World Bank's Economic Growth Forecasts for Indonesia (% change, unless otherwise indicated):