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Indonesia’s economy began 2017 on a strong footing, helped by a more supportive global environment and improved domestic fundamentals. The country’s real GDP growth is projected to increase from 5.2 percent this year to 5.3 percent in 2018, according to the World Bank’s June 2017 Indonesia Economic Quarterly.

Real GDP growth strengthened to 5.0 percent (year-on-year) in the first quarter of 2017, compared to 4.9 percent in the previous quarter, driven by a rebound in government consumption and surging exports.  While inflation has risen due to hikes in electricity tariffs, it remains relatively low.  Monetary policy continues to be accommodative.

Fiscal performance in the first half of 2017 is strong, with improved revenue collection in relation to last year, and better quality of expenditure. More realistic revenue targets in the 2017 budget reduced the need for substantial budget cuts like the ones undertaken in 2016. The recent Standard and Poor’s credit rating upgrade clearly attests to the improvements in the country’s fiscal management and credibility.

Global policy uncertainty and the threat of increased protectionism in some countries still pose substantial downside risks to the nascent recovery in world trade. The ongoing recovery in global commodity prices has helped boost export and fiscal revenues, but prices, particularly those of coal, are expected to ease in 2018.

“The S&P upgrade is a significant acknowledgement of the progress made by the Government in improving fiscal management and credibility. Commodity prices are providing some support. However, Indonesia must continue to make progress on structural reforms. Persistent efforts remain vital to expanding the economy’s potential and making it less reliant on commodity exports.” said Rodrigo A. Chaves, World Bank Country Director for Indonesia.

The government will increasingly face difficult choices as it seeks to tackle critical, but possibly unpopular, structural reforms.  In particular, the report shows how restrictions on FDI are an impediment to FDI inflows into Indonesia.

“Foreign direct investment is not contributing enough to increase Indonesia’s growth potential through physical and human capital development, and productivity growth.  The Government should therefore re-evaluate restrictions, particularly those in the negative investment list, to encourage more FDI.” said Hans Anand Beck, Acting Lead Economist for the World Bank in Indonesia.

 

The report argues for the importance of increasing investment in early childhood development. In particular, stunting among children is an urgent national challenge with more than one-third, or close to 9 million children under five years old, being stunted. Several programs and services have marginally improved early childhood development outcomes, but they need to be better integrated and implemented at a sufficient scale for greater impact.

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