IMF Executive Board Concludes 2020 Article IV Consultation with Indonesia

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the 2020 Article IV consultation [1] with Indonesia.

The Indonesian economy is gradually recovering, owing in part to a bold, comprehensive, and coordinated policy response to address the socio-economic hardship inflicted by the COVID‑19 pandemic in the first half of 2020. Real GDP increased by 3.2 percent in 2020:Q3 (q/q, s.a.) and is expected to have contracted by a modest 1.9 percent in 2020 as a whole. Headline inflation reached 1.7 percent (y/y) at end‑2020, below the Bank Indonesia’s target band (3±1 percent), partly due to a strong harvest leading to lower food prices. The current account deficit is expected to have narrowed to 0.5 percent of GDP in 2020, mostly due to a relatively sharper contraction of imports.

The outlook is positive. Real GDP is projected to expand by 4.8 percent in 2021 and 6 percent in 2022, led by strong policy support measures, including increased public investment and COVID‑19 vaccine distribution plans, as well as improved global economic and financial conditions. Inflation is projected to rise gradually to 3 percent (y/y) at end‑2021. The current account deficit is projected to widen to 1.5 percent of GDP in 2021, reflecting higher imports driven by economic recovery. Credit growth is expected to pick up in 2021 with stronger activity, albeit remaining below nominal GDP growth due to increased risks to asset quality and bank profitability. The uncertainty surrounding the growth outlook is nevertheless larger than usual. Early widespread vaccination is an upside risk, while delays could lead to a more protracted pandemic, a downside risk. The macro-financial fallout of the pandemic and economic downturn could be larger-than-expected, and credit conditions could be slow to improve.

Executive Board Assessment [2]

Executive Directors commended the authorities’ containment measures and supportive macroeconomic policies, which have been instrumental in cushioning the economic impact of the pandemic. They noted that Indonesia’s strong fundamentals and prudent macroeconomic policy track record have contributed to its economy’s resilience.

Directors noted that supportive monetary and fiscal policies along with the envisaged increase in public investment should help foster economic recovery. They observed that risks to the outlook are tilted to the downside, mainly due to domestic and global uncertainties associated with the pandemic. Early completion of a widespread vaccination program, however, is an upside risk, and Directors were encouraged by the recent increase in the funding for the health policy response to the pandemic. They observed that Indonesia has the macroeconomic policy space to provide additional support if downside risks materialize. They welcomed the measures to foster transparency and ensure the effectiveness of pandemic-related spending.

Directors commended the authorities’ commitment to return to the statutory budget deficit ceiling by 2023, noting the importance of unwinding the exceptional measures in a balanced manner. They stressed the need to underpin the fiscal rules with a medium-term fiscal strategy that includes revenue measures. Higher government revenues would help create space to boost development spending and support sustainable and inclusive growth. Capacity building support will be crucial.

Directors agreed that maintaining an accommodative monetary policy stance, contingent on the inflation outlook, is appropriate. They noted the authorities’ strategy of pursuing monetary accommodation through a combination of lower policy interest rates and government bond purchases by Bank Indonesia in the current exceptional circumstances. To balance the benefits and risks of temporary monetary budget financing, they welcomed Bank Indonesia’s plan to conduct bond purchases in 2021 only as a last resort under the market mechanism. They suggested that clarifying the last-resort criteria would help enhance the monetary policy framework and safeguard Bank Indonesia’s operational independence. Directors also noted the role of exchange rate flexibility in absorbing shocks.

Directors noted that the banking system remains stable, but continued monitoring on bank asset quality is warranted. They emphasized that proactive loan loss provisioning will be critical for banks’ ability to weather any deterioration in asset quality. They noted that additional targeted policy steps to revive credit might be necessary if bank lending to the private sector does not rebound. Directors also highlighted the importance to continue upgrading crisis management and resolution frameworks.

Directors welcomed the authorities’ push for structural reforms with the omnibus bill on job creation, as well as their plans to close infrastructure gaps. They encouraged the authorities to sustain the reform momentum, with a focus on developing a medium-term government revenue strategy, financial deepening and digitalization, and fostering a greener economy and tackling challenges related to climate change.