International Monetary Fund, "Indonesia: 2020 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Indonesia" (IMF Country Report No. 21/46, March 2021)
Summary
IMF Country Report No. 21/46, March 2021, packaging the 2020 Article IV consultation with Indonesia: the press release of March 1, 2021, the staff report the Executive Board considered on February 12, 2021 and a statement by the Executive Director for Indonesia. Staff expected real GDP to have shrunk 1.9% in 2020 after growing 3.2% in the third quarter, with inflation at 1.7% at end-2020, below Bank Indonesia's target band. Growth is projected at 4.8% in 2021 and 6% in 2022, helped by public investment and vaccine plans. The Executive Director's statement says the government gave the INA investment authority Rp. 15 trillion, about US$ 1 billion, in initial capital.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
Cite this document
“International Monetary Fund, ‘Indonesia: 2020 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Indonesia’ (IMF Country Report No. 21/46, March 2021).”
Original at www.imf.org. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/international-monetary-fund-indonesia-2020-article-iv-consultation-pre-e0350a23f4/
, SHA-256 564f2077d2869aaab3dda0cda2286e9e782351f3d4c91600abe6b910e2b0be5a.Full text
IMF Country Report No. 21/46
INDONESIA
2020 ARTICLE IV CONSULTATION—PRESS RELEASE;
March 2021 STAFF REPORT; AND STATEMENT BY THE EXECUTIVE
DIRECTOR FOR INDONESIA
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions
with members, usually every year. In the context of the 2020 Article IV consultation with
Indonesia, the following documents have been released and are included in this package:
• A Press Release summarizing the views of the Executive Board as expressed during its
February 12, 2021 consideration of the staff report that concluded the Article IV
consultation with Indonesia.
• The Staff Report prepared by a staff team of the IMF for the Executive Board’s
consideration on February 12, 2021, following discussions that ended on
December 10, 2020, with the officials of Indonesia on economic developments and
policies. Based on information available at the time of these discussions, the staff
report was completed on January 29, 2021.
• An Informational Annex prepared by the IMF staff.
• A Statement by the Executive Director for Indonesia.
The documents listed below have been or will be separately released.
Selected Issues
The IMF’s transparency policy allows for the deletion of market-sensitive information and
premature disclosure of the authorities’ policy intentions in published staff reports and
other documents.
Copies of this report are available to the public from
International Monetary Fund • Publication Services
PO Box 92780 • Washington, D.C. 20090
Telephone: (202) 623-7430 • Fax: (202) 623-7201
E-mail: publications@imf.org Web: http://www.imf.org
Price: $18.00 per printed copy
International Monetary Fund
Washington, D.C.
© 2021 International Monetary Fund
PR21/54
IMF Executive Board Concludes 2020 Article IV Consultation
with Indonesia
FOR IMMEDIATE RELEASE
Washington, DC – March 1, 2021: 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 inf lation 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
1
Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial information, and discusses with officials the country's economic developments
and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
2
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:
http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
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 inf lation 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
benef its 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
f ramework 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 f ocus on developing a medium-term government
revenue strategy, financial deepening and digitalization, and fostering a greener economy and
tackling challenges related to climate change.
Indonesia: Selected Economic Indicators
2016 2017 2018 2019 2020 1/ 2021
Est. Proj.
Real GDP (percent change) 5.0 5.1 5.2 5.0 -1.9 4.8
Domestic demand 4.6 5.0 6.1 4.0 -2.8 5.1
Of which:
Private consumption 2/ 5.0 5.0 5.0 5.2 -2.5 5.0
Government consumption -0.1 2.1 4.8 3.2 6.0 5.0
Gross fixed investment 4.5 6.2 7.9 4.4 -4.7 4.5
Change in stocks 3/ 0.2 -0.1 0.4 -0.6 -0.3 0.3
Net exports 3/ 0.1 0.3 -1.2 1.4 0.8 -0.1
Saving and investment (in percent of GDP)
Gross investment 4/ 33.9 33.7 34.6 33.8 32.5 32.7
Gross national saving 32.0 32.1 31.6 31.1 32.0 31.2
Prices (12-month percent change)
Consumer prices (end period) 3.0 3.6 3.2 2.6 1.7 3.0
Consumer prices (period average) 3.5 3.8 3.3 2.8 2.0 2.0
Public finances (in percent of GDP)
General government revenue 14.3 14.1 14.9 14.2 12.1 12.1
General government expenditure 16.8 16.6 16.6 16.4 17.8 18.0
Of which: Energy subsidies 0.9 0.7 1.0 0.9 0.7 0.6
General government balance -2.5 -2.5 -1.8 -2.2 -5.7 -5.9
Primary balance -1.0 -0.9 0.0 -0.5 -3.7 -4.0
General government debt 28.0 29.4 30.4 30.6 35.7 40.1
Money and credit (12-month percent change; end of period)
Rupiah M2 10.0 8.3 6.3 6.5 11.5 7.0
Base money 3.9 8.9 0.2 2.9 -6.5 7.0
Claims on private sector 7.7 7.2 10.3 5.8 -0.5 5.6
One-month interbank rate (period average) 6.5 5.6 6.2 6.4 4.5 …
Balance of payments (in billions of U.S. dollars, unless otherwise indicated)
Current account balance -17.0 -16.2 -30.6 -30.4 -5.5 -17.4
In percent of GDP -1.8 -1.6 -2.9 -2.7 -0.5 -1.5
Trade balance 15.3 18.8 -0.2 3.5 23.4 20.3
Of which: Oil and gas (net) -4.8 -7.3 -11.4 -10.3 -9.2 -8.7
Inward direct investment 3.9 20.6 20.6 23.5 13.6 18.8
Overall balance 12.1 11.6 -7.1 4.7 6.7 16.4
Terms of trade, percent change (excluding oil) 0.4 1.3 0.4 -2.7 -5.4 1.7
Gross reserves
In billions of U.S. dollars (end period) 116.4 130.2 120.7 129.2 135.9 152.3
In months of prospective imports of goods and services 7.6 7.1 7.1 9.9 7.9 8.1
As a percent of short-term debt 5/ 213 237 201 204 207 217
Total external debt 6/
In billions of U.S. dollars 320.0 352.5 375.4 403.5 416.6 446.9
In percent of GDP 34.3 34.7 36.0 36.1 38.3 38.5
Exchange rate
Rupiah per U.S. dollar (period average) 13,306 13,383 14,231 14,140 14,541 …
Rupiah per U.S. dollar (end of period) 13,473 13,568 14,390 13,866 14,050 …
Memorandum items:
Jakarta Stock Exchange (12-month percentage change, composite index) 15.3 20.0 -2.5 1.7 -5.1 …
Oil production (thousands of barrels per day) 820 815 810 805 710 707
Nominal GDP (in trillions of rupiah) 12,402 13,590 14,838 15,834 15,841 16,939
Sources: Data provided by the Indonesian authorities; and IMF staff estimates and projections.
1/ Based on data as of January 29, 2021 and does not include the national accounts data for 2020:Q4 released on February 5, 2021. The actual
real GDP growth rate in 2020 was -2.1 percent.
2/ Includes NPISH consumption.
3/ Contribution to GDP growth (percentage points).
4/ Includes changes in stocks.
5/ Short-term debt on a remaining maturity basis.
6/ Public and private external debt.
INDONESIA
STAFF REPORT FOR THE 2020 ARTICLE IV CONSULTATION
January 29, 2021
KEY ISSUES
Context. Indonesia has responded with a bold and comprehensive policy package to
cushion the impact of the COVID-19 pandemic. The economy rebounded in the third
quarter of 2020, and the economic recovery is projected to strengthen in 2021
and 2022. Strong policy support and an improving global economy will be the main
drivers initially, and greater mobility and confidence will follow with the planned
vaccination program in 2021. The uncertainty surrounding the growth outlook is larger
than usual. Early completion of a widespread vaccination program is an upside risk,
while a protracted pandemic remains 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. Ongoing reforms aimed at promoting investment are
expected to help mitigate the scarring effects from the pandemic and put the economy
on a sustained growth path that builds on Indonesia’s favorable demographics.
Main Policy Recommendations
• The moderately expansionary fiscal policy stance planned for 2021, together with the
envisaged increase in public investment, should help foster economic recovery. The
flexibility to reallocate budget should be used as needed. If downside risks
materialize, there is space for a more expansionary macroeconomic policy response.
• The plan to return to the budget ceiling of 3 percent of GDP by 2023 is a welcome
commitment to the fiscal rules. It should be backed by a medium-term fiscal strategy,
which would help anchor expectations, and should include revenue measures.
• Pursuing monetary accommodation through a combination of lower policy interest
rates and government bond purchases by Bank Indonesia (BI) is appropriate in the
current exceptional circumstances. The plan for BI to conduct bond purchases
in 2021 only on a last-resort basis under the market mechanism will help balance the
benefits and risks of temporary monetary budget financing.
• Proactive loan loss provisioning also under the partially relaxed loan classification
rules will be critical for banks’ ability to weather the expected deterioration in asset
quality. Additional targeted policy steps to revive credit might be needed if bank
lending to the private sector does not rebound with the economic recovery.
• The strong structural reform momentum should be sustained, with the focus shifting
to financial deepening and digitalization, and a medium-term government revenue
strategy to secure the tax revenue gains needed for higher development spending.
INDONESIA
Approved By Mission dates: November 25-December 10, 2020
Odd Per Brekk and Mission team: Thomas Helbling (Head), Eugenio Cerutti, Koki
Ana Ilyina Harada, Agnes Isnawangsih, Minsuk Kim, James Walsh (senior
resident representative) (all APD), William Gbohoui (FAD), Hou Wang
(MCM), and Francisco Arizala (SPR). Alisara Mahasandana, Executive
Director; Firman Mochtar, Alternate Executive Director, and Dian
Susiandri, Advisor (all OED); and Odd Per Brekk (APD) joined the
concluding meetings. Purva Khera (MCM), Robin Koepke (APD), and
Manasa Patnam (EUR) contributed to the preparations for the
mission and presented background papers during the mission. Nong
Jotikasthira contributed to the preparation of this report.
CONTENTS
PRE-COVID-19 LANDSCAPE ______________________________________________________________________ 4
THE COVID-19 CRISIS AND THE POLICY RESPONSE ____________________________________________ 4
THE NASCENT RECOVERY, PROSPECTS, AND RISKS AND VULNERABILITIES_________________ 8
A. Outlook _________________________________________________________________________________________ 8
B. Risks ____________________________________________________________________________________________ 9
C. External Sector Assessment ___________________________________________________________________ 10
POLICIES TO SECURE THE RECOVERY AND BOLSTER MEDIUM-TERM PROSPECTS _________ 11
A. Fiscal Policy ____________________________________________________________________________________ 12
B. Monetary Policy and the Policy Mix ___________________________________________________________ 15
C. Financial Sector Policies _______________________________________________________________________ 18
D. Other Structural Reforms ______________________________________________________________________ 21
STAFF APPRAISAL ________________________________________________________________________________ 23
FIGURES
1. COVID-19 Developments ______________________________________________________________________ 26
2. Recent Economic Developments ______________________________________________________________ 27
3. Inflation Dynamics _____________________________________________________________________________ 28
4. Capital Flows and Market Developments _____________________________________________________ 29
5. External Sector_________________________________________________________________________________ 30
6. Fiscal Sector ___________________________________________________________________________________ 31
7. Monetary Sector _______________________________________________________________________________ 32
8. Macrofinancial Developments _________________________________________________________________ 33
9. Selected Emerging Market Economies: Financial Soundness Indicators ______________________ 34
2 INTERNATIONAL MONETARY FUND
INDONESIA
TABLES
1. Selected Economic Indicators, 2016–21 _______________________________________________________ 35
2. Selected Vulnerability Indicators, 2016–20 ____________________________________________________ 36
3. Balance of Payments, 2015–21 ________________________________________________________________ 37
4. Medium-Term Macroeconomic Framework, 2017–25 ________________________________________ 38
5. Summary of Central Government Operations, 2015–21 (In trillions of rupiah) _______________ 39
6. Summary of Central Government Operations, 2015–21 (In percent of GDP) _________________ 40
7. Summary of General Government Operations, 2015–21 ______________________________________ 41
8. Monetary Survey, 2016–21 ____________________________________________________________________ 42
9. Financial Soundness Indicators, 2016–20______________________________________________________ 43
10. Key Poverty and Social Indicators _____________________________________________________________ 44
11. Key FSAP Recommendations __________________________________________________________________ 45
12. Integrating Fund Surveillance and Capacity Development ____________________________________ 47
APPENDICES
I. Risk Assessment Matrix________________________________________________________________________ 48
II. External Assessment ___________________________________________________________________________ 49
III. Debt Sustainability Analysis ___________________________________________________________________ 50
IV. Designing a Medium-Term Revenue Strategy for Stronger and More Sustainable and
Inclusive Post-Pandemic Growth in Indonesia ________________________________________________ 59
V. COVID-19, Exceptional Policies, and Monetary Budget Financing in Indonesia ______________ 66
INTERNATIONAL MONETARY FUND 3
INDONESIA
PRE-COVID-19 LANDSCAPE
1. Indonesia has established a prudent macroeconomic policy track record and enjoyed
stable growth of around 5 percent in the years before the pandemic. Macroeconomic indicators
were favorable, including low inflation of around 3 percent that fluctuated well within Bank
Indonesia’s (BI’s) target range, low budget deficits, and a low public debt ratio. The banking system
is well-capitalized and liquid. The track record has been underpinned by solid policy frameworks,
including fiscal rules, an inflation targeting regime, and, for most of the banking system, regulations
in line with Basel III.
2. Indonesia has also faced structural challenges and vulnerabilities. If addressed,
economic growth could be higher, harnessing the country’s demographic dividend. A low revenue
intake has limited the scope for government spending on development. In recent years, net external
portfolio liabilities have risen with large capital inflows. As a result, Indonesia has now one of the
highest shares of nonresident holdings of public debt across emerging markets (EMs) and accounts
for a substantial share in total EM public debt held by nonresident investors. The rupiah government
bond market has thus become an important channel of transmission for external financial
disturbances, and the currency risk premium on rupiah assets is relatively high, comparable to those
in other major emerging market economies.1 Progress with structural reforms has been slow.
THE COVID-19 CRISIS AND THE POLICY RESPONSE
3. The COVID-19 pandemic has accelerated again recently. After a period with limited
domestic transmission and a lockdown, virus infections accelerated in the second half of 2020. This
acceleration was in part driven by the economic reopening but also reflected increased testing after
an initially slow health policy response. More recently, after a period of relative stabilization, daily
new cases have increased again, and test positivity rates remain high (Figure 1). An ambitious
1
Analysis of the role of nonresidents in domestic bond markets indicates that while a larger share of nonresident
participation in bond markets tends to reduce the level of local currency government bond yields, it also tends to
increase their sensitivity to changes in global risk aversion (see Chapter 1 of the Selected Issues for further details).
4 INTERNATIONAL MONETARY FUND
INDONESIA
vaccination program began in January 2021, with the goal of inoculating about two thirds of the
population (or about 182 million people) by March 2022. Free vaccines will be made available to the
public in phases, starting with health workers and public service workers.
4. The pandemic and containment measures triggered a major economic downturn in the
first half of 2020, although the economy is now recovering. Indonesia introduced international
travel restrictions in early February 2020 and then adopted domestic containment measures that led
to further supply and mobility disruptions in the economy. Real GDP contracted by 3.5 percent in
the first half of the year (H/H, s.a.). While large, the initial economic impact of the pandemic was
milder than in many other countries, reflecting relatively less stringent containment measures and
lower shares of some high-impact sectors (e.g., tourism) in value added. Meanwhile, the nationwide
poverty rate increased to 9.8 percent in March 2020, up from 9.4 percent a year ago. With the easing
of containment measures, economic activity rebounded from its second-quarter lows in July, and
real GDP increased by 3.2 percent in the third quarter (q/q, s.a.), led by government consumption
and net exports (Figure 2).
5. Headline inflation has fallen below the lower bound of the BI’s inflation target range,
partly reflecting a positive food supply shock. Headline inflation declined faster than core
inflation through much of 2020, as disinflation was partially driven by lower prices of food due to a
INTERNATIONAL MONETARY FUND 5
INDONESIA
strong harvest (Figure 3). More recently, and as examined in Chapter 2 of the Selected Issues, the two
inflation measures have realigned, suggesting that the disinflationary effects associated with the
pandemic reflect mainly the negative aggregate and sectoral demand impacts. These impacts
manifested themselves in most CPI subcomponents experiencing lower price changes, especially
in 2020:Q2.
6. Indonesia experienced major portfolio outflows during the global financial market
turmoil in early 2020, but these were more than offset by subsequent inflows. Net portfolio
inflows resumed strongly in 2020:Q2, more than offsetting the outflows in the previous quarter.
While the portfolio flows turned negative again in 2020:Q3, in line with developments in other EMs,
cumulatively, net portfolio flows were positive as of September 2020. However, much of the
rebound in portfolio and other inflows reflected net purchases of foreign currency-denominated
government and corporate securities by nonresidents, while the rebound in local currency debt and
equity flows was modest (Figure 4). The overall balance of Indonesia’s BOP in the first three quarters
of 2020 was also supported by a substantial narrowing of the current account deficit as exports
contracted less than imports, with the latter responding strongly to the retrenchment in domestic
demand (Figure 6). The BI’s foreign exchange reserves increased by US$7 billion to US$136 billion by
year-end in 2020, resulting in a broadly unchanged reserve adequacy metric of 121 percent
(Figure 5).
7. The authorities responded with a bold, comprehensive, and coordinated policy
package to the unprecedented shocks and their complex demand and supply effects. The
response required temporary changes to key pillars of the macroeconomic policy framework, which
had underpinned Indonesia’s strong economic performance in recent years. In particular, the ceiling
on the budget deficit of 3 percent of GDP was suspended through 2022 and the ban on BI
purchases of longer-term, government bonds in the primary market was removed. The major policy
measures included the following:
6 INTERNATIONAL MONETARY FUND
INDONESIA
• Four successive fiscal packages
aimed at strengthening
healthcare and mitigating the
economic and social hardship
of the pandemic. The total
allocation for the COVID-19
response under the six
subprograms of the National
Economic Recovery Program
(PEN) amounted to 4.4 percent
of GDP in 2020. The 2020 fiscal
deficit was projected to widen
to 6.3 percent of GDP in the
revised final budget, from
1.8 percent in the initial
budget (Figure 6), with an
estimated fiscal impulse (net of
budget reallocation) of
3½ percent of GDP.2
• BI cut its policy rate by 125 bps
and increased liquidity support to banks (Figure 7). In March and April 2020, it aimed to stabilize
domestic market conditions by using a “triple-intervention” strategy in the spot and domestic
non-deliverable forward (DNDF) foreign exchange (FX) markets, and the local currency
government bond markets. Banks have been allowed to run down their capital conservation
buffers; while loan classification and restructuring policies have been partially relaxed.
8. The pandemic resulted in temporarily tighter financial conditions. Financial conditions
tightened markedly during the global financial market turmoil in March and early April 2020, but
2
The difference between the estimated budget allocation and the estimated fiscal impulse reflects the reallocation of
some budgetary spending to the PEN program.
INTERNATIONAL MONETARY FUND 7
INDONESIA
have eased since, reflecting BI’s swift policy response and global developments. Only a few price
indicators, notably sovereign spreads and stock market indices, have not yet recovered to
pre-pandemic levels (Figure 4).
9. The policy response has accommodated an increased demand for liquidity by banks
and the private sector. Nevertheless, growth in
credit to the private sector has slowed sharply
amid increased risk aversion sentiment by banks
and weak loan demand, with an outright decline
in credit of 0.5 percent (y/y) by end-October
(Figure 8). As in previous crises, albeit not to the
same extent, lending by public banks has
declined less than that by other banks, thereby
cushioning the overall impact (Chapter 3, Selected
Issues). Overall, bank funding conditions
improved last year, reflecting BI liquidity support
and increased deposits, especially demand
deposits. Bank holdings of liquid assets, notably
government bonds, have risen by similar amounts. Banks had restructured about one-fifth of their
loans by end-October 2020, reflecting in part a temporary relaxation of loan classification standards
(rescinding the usual requirement to reclassify restructured loans to substandard immediately). In
this context, NPL ratios have deteriorated only marginally, while other financial soundness indicators
have remained relatively steady (Figure 9).
10. Budget execution accelerated in the last quarter of 2020. The implementation of the PEN
rose from 38.2 percent at end-September to 62.1 percent as of November 25, 2020, but with uneven
execution across the six subprograms. More than 80 percent of allocations on the social safety net
and on micro-, small-, and medium-sized enterprise (MSME) incentives, and around half of budget
transfers to subnational governments were disbursed, while execution lagged in other sectors,
notably healthcare-related spending and corporate incentives. Regular budget spending was
broadly on track, with the execution rate reaching around 93 percent by end-2020, in line with the
average budget execution rate of the past 5 years.
THE NASCENT RECOVERY, PROSPECTS, AND RISKS
AND VULNERABILITIES
A. Outlook
11. The economy has started recovering gradually. Economic activity rebounded in mid-2020
with the easing of virus containment measures. After an early pickup, mobility indicators moved
mostly sideways, consistent with the unsettled domestic virus situation in the second half of 2020.
8 INTERNATIONAL MONETARY FUND
INDONESIA
Continued strong growth in government
spending is expected with the acceleration in
budget execution. Real GDP increased by
3.2 percent in 2020:Q3 (q/q, s.a.) and a broadly
similar increase is anticipated in 2020:Q4. All
told, the economy is estimated to have
contracted by 1.9 percent in 2020.
12. Macroeconomic policy support and
greater mobility and confidence from an
improving pandemic situation are expected
to sustain the near-term recovery. Real GDP is
projected to grow at 4.8 percent in 2021. The improvement partly reflects a recovery in private
sector demand from continued policy support, including from increased public investment, an
improved global economy, and further economic reopening as the pandemic situation improves,
benefiting from the envisaged vaccination program. Lagged income effects and financial constraints,
however, are expected to weigh on domestic demand for some time. Inflation is projected to
increase gradually, rising from 1.7 percent at end-2020 to 3 percent at end-2021. Credit growth is
expected to pick up in 2021 with stronger activity, albeit remaining below nominal GDP growth, as
banks remain cautious in their lending due to increased risks to asset quality and bank profitability.
13. The medium-term outlook
incorporates persistent effects on output of
the pandemic. In 2025, the level of real GDP is
projected to be 5 percent below the level
envisaged in the January 2020 WEO trajectory.
The persistent if not permanent output level
losses reflect the damage inflicted by the
COVID-19 crisis to productive capacity, including
through labor- and firm-related scarring effects.
Contact-intensive industries such as the hotel
and restaurant industry have been hit particularly
hard and are likely to see persistent reductions in
output. At the same time, there is some evidence of sectoral reallocation of resources during the
pandemic, with low-contact sectors such as information and communication, real estate and
agriculture posting positive growth despite the pandemic.
B. Risks
14. The economic outlook is subject to a larger-than-usual uncertainty, and some
vulnerabilities are expected to increase (Appendix I).
• Risks relating to vaccine distribution and more protracted pandemic. On the upside, a wide
distribution of COVID-19 vaccines in early 2021 could accelerate the recovery. At the same time,
INTERNATIONAL MONETARY FUND 9
INDONESIA
a more protracted COVID-19 outbreak and associated disruptions to demand and supply or
delays in the vaccination program could hold back the recovery, increasing risks associated with
economic scarring and weakened balance sheets.
• Increased banking and nonfinancial corporate sector risks. Neither credit nor liquidity
exposures appear to pose imminent systemic risk to the banking sector, although the underlying
asset quality has deteriorated. Nevertheless, loans at risk have increased, and the fallout of the
pandemic on reported bank asset quality could be larger than expected, especially once the
partial relaxation of loan classification rules and other policy support expire.3 Credit conditions
could be slow to improve, depending in part on the extent of non-provisioned losses in the
banking system or changes in global financial market conditions. A particular concern in this
regard is the vulnerable initial position of the nonfinancial corporate (NFC) sector (Chapter 4,
Selected Issues) and the banking sector’s large exposure to these corporates. Bank deleveraging
to rebuild capital buffers could further worsen credit conditions.
• External risks. Tighter external financial conditions could induce domestic financial stress, given
balance sheet exposures to changes in global financial market conditions. Banks would be
affected indirectly through domestic FX linkages and greater exposure to the sovereign.4
• Climate change risks. Indonesia is among the countries most susceptible to climate
change-related natural hazards, which could lead to more economic disruption and fiscal
pressures over time. Indonesia also faces transition risks on the path to a greener global
economy, given the significance of coal in the economy.
C. External Sector Assessment
15. On a preliminary basis, and adjusting for transitory factors, recent developments
suggest that the external position in 2020 was broadly in line with the level implied by
medium-term fundamentals and desirable policies. However, this assessment is highly uncertain
given the lack of full-year data for 2020 and the COVID-19 crisis, and a complete analysis will be
provided in the 2021 External Sector Report. After narrowing to 0.5 percent of GDP in 2020—mostly
due to a relatively sharper contraction of imports—the current account deficit is projected to
increase to 1.5 percent of GDP in 2021 reflecting the economic recovery and higher imports
(Figure 5). The reduced external financing needs in 2020−21 implied by the lower current account
deficit provide a welcome cushion against capital flow volatility with the pandemic. They also
provide some offset to the negative exchange rate-related valuation effects on external debt and
other stock-related vulnerability indicators. The reserve position remains adequate under the
3
In addition to NPLs and special mention loans, the wider loans at risk concept also considers restructured loans,
irrespective of their current performance. This reflects the expectations that future loan performance risks are higher
for this particular loan category after the pandemic.
4
While NFCs are the largest borrowers abroad on a gross basis, they also have substantial foreign assets, much of
which are liquid deposits (NFCs’ FX deposits abroad and in local banks covered 90 percent of their total FX external
debt in 2018:Q4). Moreover, corporate prudential FX regulations helped increase NFCs’ share of hedged FX loans.
However, banks’ might deplete their FX liquid asset buffers if NFCs drew on their domestic FX deposits buffers and
credit lines, and if the household sector withdrew FX cash.
10 INTERNATIONAL MONETARY FUND
INDONESIA
baseline outlook. The passing of the omnibus law on job creation and the implementation of the
Regional Comprehensive Economic Partnership in Indonesia are, however, expected to boost export
competitiveness and attract more FDI over the medium term.
Authorities’ Views
16. The authorities broadly agreed with the macroeconomic outlook and risks, while
noting the large uncertainty surrounding the baseline outlook. They expect a positive growth
outlook for 2021, led by a targeted deployment of COVID-19 vaccines in early 2021 and a
coordinated policy strategy with the following elements: (1) reopening of priority sectors based on
their contribution to growth and employment; (2) front-loading of government spending;
(3) tackling the credit crunch; (4) maintaining an accommodative monetary and macro-prudential
policy stance; and (5) fostering digitalization. The improvements in mobility and global growth,
together with continued benign global financial conditions, are also expected to support growth
in 2021.
17. The authorities shared staff’s assessment that Indonesia’s external position is in line
with the level implied by medium-term fundamentals and desirable policies. They also agreed
that the current account deficit will likely widen in 2021 with the expected economic recovery,
although it will remain below recent pre-pandemic levels. They also foresee that portfolio inflows
will continue to pick up in 2021, on the back of the projected domestic and global economic
recovery. The authorities believed that ongoing and planned reforms, including the omnibus bill on
job creation and the implementation of the Regional Comprehensive Economic Partnership, would
promote export competitiveness and contribute to attracting more FDI.
POLICIES TO SECURE THE RECOVERY AND BOLSTER
MEDIUM-TERM PROSPECTS
18. The policy discussions focused on how to unwind the exceptional, pandemic-related
policy support in a balanced manner. Within this broad focus, discussions centered on the
following issues:
• A fiscal and monetary policy mix to nurture the recovery. The nature of COVID-19 and its
asymmetric, large economic impact call for continued fiscal support in 2021 since budget
measures can best target the most affected sectors and households. Monetary policy should
also be accommodative and facilitate the fiscal policy response through monetary budget
financing as a backstop. Moving to a framework that clearly delineates the backstop as a
temporary measure on a last-resort basis would help in managing the risks to the credibility of
the monetary policy framework from such financing.
• A medium-term fiscal strategy for the unwinding of the exceptional fiscal policy support
amid uncertainty. Adequate public demand will be essential for the recovery in 2021 and,
possibly, beyond. Indonesia has the fiscal space to deploy contingent supplementary budget
packages if needed. Nevertheless, the unwinding of the exceptional support will be critical for
INTERNATIONAL MONETARY FUND 11
INDONESIA
preserving the policy credibility from Indonesia’s strong, prudent policy track record and
eliminate the need for a central bank backstop for budget financing. An explicit medium-term
fiscal strategy, backed by revenue measures, even if implemented later, would add to the
credibility of the commitment to restore the fiscal rules after their temporary suspension.
• Preparing for financial sector stresses while maintaining credit flows. Commercial banks will
likely face further asset quality deterioration, which, if substantial, would require temporary
intervention to revive credit and stronger frameworks for dealing with distressed institutions.
• Reinforcing the recent structural reform momentum. The passing in October 2020 of the
omnibus bill on job creation could be the beginning of a welcome strengthening of the
investment climate. Efforts now focus on financial sector reform, but broad-based government
revenue reform is also urgently needed.
A. Fiscal Policy
19. The 2021 budget passed by parliament envisages a modest reduction in the deficit
target, with larger deficit reductions planned in 2022 and 2023. The reduction in the deficit
target from 6.3 percent of GDP in the final revised 2020 budget to 5.7 percent in the 2021 budget
reflects the partial unwinding of exceptional spending under the PEN program. All six subprogram
areas under PEN, including health and social protection, will continue to be funded in the budget.
Other spending, including public investment, will increase, both relative to the revised 2020 budget
and the 2019 budget outcome. This reallocation aims to meet longstanding infrastructure needs.
The government plans for larger deficit reductions of around 1½ percent of GDP in each of the
following two years to meet the deficit ceiling of 3 percent of GDP when it is reinstated in 2023.
20. The fiscal policy settings planned for 2021 will provide for a welcome, modest fiscal
impulse to the economic recovery. Staff expects the fiscal stance implied by the 2021 budget to
be moderately expansionary. Some of the unspent 2020 budget allocations are expected to be
authorized as carryovers for spending in 2021, On this basis, staff projects, on a cash basis, a budget
deficit of 5.9 percent of GDP. At the same time, tentative actual figures suggest that because of
underspending, the realized budget deficit in 2020 will be below target at around 5.7 percent of
GDP. The increase in public investment spending, with a focus on labor-intensive projects, will
reinforce the modest positive fiscal impulse. The authorities’ determination to continue
strengthening budget execution capacity will be critical for the positive demand impact to
materialize. The flexibility to reallocate budget resources in 2021 provides a basis to respond rapidly
to shifting needs or to redesign policy responses amid high uncertainty.5
21. Indonesia retains some fiscal space that should be used if downside risks materialize.
Despite the exceptional policy responses to the pandemic in 2020, the public debt ratio is projected
to remain below the 60 percent threshold under the baseline and in DSA risk scenarios despite
temporarily higher budget deficits (Appendix III). Nevertheless, vulnerabilities related to the high
5
In 2021 and, most likely, in 2022, the government still has the exceptional authority to reallocate budgetary
resources without parliamentary approval. This authority was granted under the emergency law for PEN.
12 INTERNATIONAL MONETARY FUND
INDONESIA
share of public debt held by nonresidents are a constraint, and fiscal space is predicated on the
ability of the authorities to secure orderly market debt financing. Staff thus recommend that the
authorities use the space if downside risks to the outlook materialize and budgetary reallocation
proves insufficient to cushion the impact.
22. The plan to return to the budget
deficit ceiling by 2023 is a welcome
commitment to the fiscal rules and should be
backed by a detailed medium-term fiscal
strategy. The planned return to the deficit
ceiling would help preserve the integrity of the
fiscal policy framework and rules. But the current
medium-term fiscal plans lack details and could
raise credibility concerns, given downside risks
to the near-term outlook and the heavy reliance
on expenditure measures.
• Under current policies, reducing the budget
deficit below 3 percent of GDP by 2023 will
rely heavily on expenditure consolidation, as
the cyclical recovery in tax revenue will be
small and partly offset by the impact of the
gradual, permanent reduction in corporate income tax (CIT) rates initiated in 2020 and new tax
facilities (lower income taxes for some taxpayers, broader input VAT credit eligibility, investment
tax incentives) offered by the omnibus bill on job creation. The envisaged annual consolidation
by the authorities in both 2022 and 2023 will be sizeable at around 1½ percent of GDP, well
above the net additional spending on the PEN program remaining in 2021. Risks are that the
consolidation could prevent the warranted increase in spending on development—
infrastructure, education, and social safety nets. While there is scope for reducing other
expenditure, notably on energy subsidies, these reductions would likely be insufficient.
INTERNATIONAL MONETARY FUND 13
INDONESIA
• The credibility of the commitment to the deficit ceiling would be stronger if it were underpinned
by a more detailed medium-term fiscal strategy. A specific plan for the return to the ceiling
detailing the underlying measures could help anchor expectations about the medium-term fiscal
position and reduce risks to policy credibility, especially if also backed by revenue measures. The
latter would lessen the trade-offs between deficit reduction and development expenditure needs
and should be part of the broader set of measures identified for a medium-term revenue
strategy (MTRS). Taking advantage of the current reform momentum to design and adopt an
MTRS would be critical for a higher medium-term growth and reduced reliance on external
sources of financing (Appendix IV). Priority should be given to steps that could compensate for
some of the revenue loss implied by the omnibus bill, including broadening the personal income
tax base; eliminating the special corporate income tax regimes now that the standard CIT rate
has been lowered; introducing excise taxes on fuels; enhancing the compliance of professional
services providers and high-wealth individuals; and eliminating distortionary VAT exemptions.
• The timing of the return to the deficit ceiling should depend on the state of the economy. Risks
to policy credibility from a delay in meeting the target could be reduced with a well-articulated
escape clause or regular progress reviews.
23. To ensure the effectiveness of COVID-19-related fiscal measures, the authorities
adopted a three-pronged approach to foster transparency and safeguard public
accountability. The Ministry of Finance (MOF) officials initiated early consultation with the Audit
Board of Indonesia at the design stage of the programs included in the National Economic Recovery
(PEN) to ensure that the programs and related regulation meet accountability and effectiveness
standards before their rollout. The MOF has also instituted monthly reporting requirements on
COVID-19-related programs to assess the use, the traction and the effectiveness of the programs
with respect to stated objectives. Finally, there are plans for an ex-post evaluation of the
effectiveness of the incentives. The tax expenditure under the PEN program will be part of the
MOF’s 2020 Tax Expenditure Report, which will be published in 2021. These reports, published
since 2018, have provided for a welcome increase in fiscal transparency.
Authorities’ Views
24. The authorities agreed that a premature withdrawal of fiscal support could jeopardize
the recovery. To that end, they will continue to take expansionary policies to support the economic
recovery. In this context, fiscal policy will aim to encourage the effectiveness of the COVID-19
handling and accelerate the economic recovery. Following a data-driven approach, they will seek to
strike a balance between the unwinding of fiscal support and crowding out the private sector
recovery through fiscal deficits. They will take advantage of the flexibility provided by the 2020
budget law to carry over unspent 2020 budget allocations under the PEN to 2021. They are closely
monitoring the execution of PEN and will reallocate spending to the most affected sectors and areas
with higher growth impacts if needed. The state budget will gradually be less expansive and focus
more on consolidation between 2021 and 2023. They confirmed their commitment to return to the
3 percent of GDP budget deficit rule by 2023, through higher spending efficiency, revenue
14 INTERNATIONAL MONETARY FUND
INDONESIA
optimization reforms and encouraging innovative financing (e.g., digital platforms to facilitate sales
of government bonds to retail investors).
25. The authorities concurred with the importance of further revenue mobilization in
supporting medium-term fiscal adjustment. Fiscal policy needs to maintain a balance between
countercyclical policies to strengthen the economic recovery and prudent and sustainable budget
management. The government agrees that a coherent tax reform is crucial to acquire an increasing
tax revenue to fund the State budget. However, the COVID-19 pandemic has disrupted tax policy
plans everywhere, including in Indonesia. Like other countries, Indonesia has taken extraordinary
measures to tackle this crisis. They reiterated their ambition to explore all possible avenues to
improve revenue mobilization despite political constraints. Recent and ongoing revenue reforms are
focusing on a broad range of tax administration (risk-based audits, IT development, and use of
taxpayer bank data to support audits) and tax policy measures (extension of excise taxes, imposition
of VAT on cross border electronic transaction, and reductions in CIT rate). The authorities appreciate
that the Fund stands ready to provide CD support on these issues.
B. Monetary Policy and the Policy Mix
26. The timely adjustment of BI’s policy mix helped ease monetary conditions and support
orderly financial market functioning amid large capital flow volatility. BI cut the policy rate,
including, and in contrast to earlier episodes, during the period of market stress, and it enhanced its
liquidity provision to banks and key markets. BI also allowed for greater exchange rate flexibility
during the global market turmoil in March 2020 than it did in other recent episodes of emerging
market asset selloffs and was able to rely more on interventions in the domestic non-deliverable
forward FX market, thereby preserving FX reserves for potential use in a prolonged stress scenario.6
27. BI has emphasized that its monetary budget financing is supporting the fiscal response
and, thereby, the recovery. While recognizing that it had room for further rate cuts, given price
stability objectives, BI cut the policy interest rate less aggressively than many other EM central banks
in 2020, given perceived risks of excessive currency volatility under prevailing market conditions.
However, under its quantitative easing strategy, BI has purchased rupiah-denominated government
bonds under two different programs, one based on a last resort strategy under a “market
mechanism” and one based on a burden sharing agreement (Appendix V).
6
The DNDF instruments, launched in November 2018, consist of an outright forward transaction with the net
settlement paid out in rupiah. An empirical investigation discussed in Chapter 5 of the Selected Issues shows that
both DNDFs and FX swap interventions were associated with lower FX liquidity pressures during periods of global
market stress.
INTERNATIONAL MONETARY FUND 15
INDONESIA
28. Monetary budget financing as a backstop for fiscal policy is appropriate in the current
exceptional circumstances. Using this tool in combination with the conventional policy rate tool is
more likely to achieve accommodative financial conditions along the rupiah yield curve than relying
on policy rates only.7 Risks of higher yields have increased, given higher budget deficits and
associated financing needs in a relatively shallow domestic bond market and the important but
volatile demand of nonresident investors (Appendix V). Higher domestic yields would constrain the
fiscal policy response and further weigh on domestic credit even with relatively weak monetary
policy transmission.8 Government bond purchases by BI have already contributed to avoiding bond
market disruptions after the large capital outflows in March and early April 2020. They have not only
enabled the fiscal policy response but also contributed to improving banks’ liquidity conditions and
lending capacity—specifically, injections of funds via public expenditure have worked through the
system and partly explain increased private deposits in banks.
29. The monetary budget financing should be guided by a framework to manage
associated risks. Such a framework would have two essential elements. First, it would entail a clear
delineation of the temporary use of the tool in the recovery from the pandemic. Second, the bond
purchases should be triggered by well-defined last resort criteria, based on bond market conditions,
and not involve pre-defined amounts based primarily on fiscal considerations. An explicit objective
for the purchases would facilitate their coherence with the established monetary policy framework
and achievement of monetary policy objectives. With such a framework for bond purchases, risks to
central bank operational independence, including from fiscal dominance, and of balance of
7
While monetary accommodation through a lowering of policy rates could also lower longer-term yields, its effect
would be more limited if increases in the latter reflect higher risk premiums, which is likely given the underlying
shock. At the same time, the transmission of changes in the policy rates to longer-term rates is weak, especially in
times of market stress, given substantial market segmentation and lack of arbitrage. Domestic demand for bonds by
banks, institutional investors, and retail investors centers on the short end of the maturity spectrum, while foreign
investors focus on the long end. Volatility in the demand from foreign investors tends to translate into volatility in
longer-term bond rates and is not mitigated by offsetting shifts in the maturity structure of the bond demand by
domestic investors.
8
The weak transmission is evident in the fragile relationship between bank lending and monetary policy rates (see
Chapter 3, Selected Issues).
16 INTERNATIONAL MONETARY FUND
INDONESIA
payments pressures or crowding out private credit as the recovery advances would be more
contained.
30. The plan to use only bond purchases under the market-mechanism approach in 2021
will help balance the benefits and risks of monetary budget financing. The 2020 burden sharing
agreement was complex, involving different tranches and pre-defined amounts of bond purchases
irrespective of market conditions.9 Under the market-mechanism approach, which was put forward
in April 2020, there are no pre-defined amounts of bond purchases and the BI acts as a backstop in
primary bond market auctions should market demand fall short, using noncompetitive bidding. This
approach includes many elements of the framework laid out above. Building on this framework, BI
could adopt more specific criteria for last resort conditions to further clarify the use of this tool. As
the track record with bond purchases builds, BI should increasingly be able to achieve its objectives
through conventional secondary market operations rather than primary market transactions.
31. The monetary policy stance is appropriately accommodative, and BI should stand
ready to respond to downside risks. If downside risks materialize, BI has room to cut the policy
rate and expand liquidity provision, while the exchange rate should continue to be an important
shock absorber. If exchange rate acts as a shock amplifier, however—for example, in the event of
external market pressures—foreign exchange interventions could appropriately be used to counter
disorderly market conditions and mitigate the impact on balance sheets with currency mismatches.10
32. Possible changes to the BI Law should refrain from limiting BI’s operational
independence and setting unrealistic monetary policy objectives. The BI’s financial stability
mandate places it at the center of some financial sector reforms, leading the authorities to consider
a broader overhaul of the BI Law. In staff’s view, BI’s operational independence has served Indonesia
well and has not impeded policy coordination in exceptional times. An additional growth or
employment objective for BI would need to recognize that monetary policy can only address cyclical
fluctuations in these variables, not longer-term trends.
Authorities’ Views
33. The authorities intend to maintain an accommodative monetary policy stance until
early signs of inflation pressures emerge. With inflation below BI’s target range of 3±1 percent,
the authorities considered that continued monetary accommodation was called for. Considering the
ample liquidity in the banking system, they nevertheless saw the demand-boosting effect of
additional policy rate cuts or liquidity provision to banks as likely being limited in the near term.
They deemed fiscal policy to be a better instrument to boost demand in the current context. The
authorities noted that the burden sharing agreement defined in July 2020 between BI and the
Ministry of Finance was a one-off arrangement for 2020 that would not be continued. Instead,
monetary budget financing in 2021 will follow a market mechanism arrangement defined in
9
See Appendix V for details on the burden sharing agreement.
10
Chapter 4 of the Selected Issues shows that Indonesian nonfinancial firms have recently increased the share of FX
debt on their balance sheets, especially in industries with low foreign sales (e.g., utilities, discretionary consumer
items, and real estate).
INTERNATIONAL MONETARY FUND 17
INDONESIA
April 2020. BI will purchase government bonds in the primary market as a stand-by buyer, on a
last-resort basis, with the maximum amounts per auction capped at prudent levels.
34. The authorities reiterated their commitment to exchange rate flexibility and the
further development of payment systems and money markets. If the exchange rate acted as a
shock amplifier rather than a shock absorber, they were prepared to use foreign exchange
interventions to counter disorderly FX market conditions. The authorities will also accelerate the
implementation of the Indonesian Payment System Blueprint 2025 as well as the deepening of the
money market according to the Money Market Deepening Blueprint 2025.
C. Financial Sector Policies
35. The financial sector and monetary policy responses have kept the banking system
stable, but bank asset quality needs to be closely monitored. The capital adequacy ratio of
commercial banks has remained well above 20 percent (Figure 9), and their liquidity position has
strengthened. The easing of macroprudential policies and loan classification rules have facilitated
the adjustment of banks and corporates to
pandemic-related disruptions, but have not
resolved initial financial vulnerabilities of the
nonfinancial corporate sector or those
stemming from the economic downturn.11 So
far, NPL ratios have remained stable, and loan
loss allowances as a share of NPLs have been
high, 160 percent on average as of 2020:Q3.
There is, however, considerable variation across
banks, leaving some more vulnerable to losses.
At the same time, loans at risk have increased
sharply, and key bank ratios, including capital
adequacy ratios, could be biased due to the
relaxation of loan classification requirements. Overall, risks of a deterioration in asset quality have
increased. The eventual deterioration will depend, among other factors, on the viability of the
restructured loans and the pace of the recovery.
36. The credit slump could hold back the recovery. To counter adverse credit supply effects,
BI has injected liquidity into the banking system while the Financial Services Authority (OJK) has
eased prudential regulations.12 Nevertheless, overall bank credit growth has continued to slow, with
the year-on-year rate being in negative territory since September. The credit slump partly reflects
weak credit demand after the economic downturn. But it could also reflect credit supply frictions.
Banks temporarily tightened credit standards in the first half of 2020 and could remain reluctant to
extend credit, particularly if they anticipate increases in losses on their assets. The authorities have
11
The relaxation includes simplified assessments of credit quality and allows banks to classify debtors who receive
the restructuring scheme to remain as Stage 1 borrowers, without additional provisions.
12
The easing includes relaxing the obligation to fulfill the Liquidity Coverage Ratio and Net Stable Funding Ratio
requirements and allowing the use of the Capital Conservation Buffer.
18 INTERNATIONAL MONETARY FUND
INDONESIA
established programs supporting credit to corporates and MSMEs in view of adverse credit supply
conditions, including through interest subsidies and credit guarantees.
37. Against this backdrop, policies should aim to support credit and prepare for potential
banking problems in the recovery.
• The general regulatory relief measures for borrowers should be supplemented by
provisioning requirements and incentives for banks to use their capital buffers. OJK
recently extended the partial relaxation of loan reclassification standards for another year, until
March 2022. While helping the recovery, the extension raises risks to bank balance sheets. To
address these risks, banks should provision for credit losses early and continue to properly
classify and monitor loans, including restructured loans, with guidance from OJK. As the
pandemic uncertainty subsides, loan restructuring should increasingly be tied to businesses with
a high likelihood of post-pandemic viability. Moreover, general distribution restrictions (e.g., on
dividends) and greater supervisory clarity and flexibility for rebuilding prudential buffers could
help incentivize banks to draw on their buffers to lend.13
• If aggregate credit does not recover, additional government support measures to viable
firms, including through credit guarantees, should be considered. With the economic
recovery underway, credit to the private sector should rebound. Nevertheless, with continued
uncertainty and underlying vulnerabilities in the nonfinancial corporate sector, credit standards
might become stricter than usual. Under such a scenario, the authorities’ plan to provide greater
policy certainty through guidance on sectoral priorities in the economic reopening and policy
support measures for nonfinancial corporates might not provide adequate incentives for bank
13
See “Special Series on Financial Policies to Respond to COVID-19: Main Operational Aspects for Macroprudential
Policy Relaxation.”
INTERNATIONAL MONETARY FUND 19
INDONESIA
lending.14 An upgrade of the loan guarantee program (e.g., a longer time horizon for such
guarantees) or other targeted support measures could then be considered. Such an upgrade
could be especially effective for larger corporates that do not qualify for current, more extensive
MSME support and that are not part of a conglomerate structure.
• Changes to crisis management and resolution frameworks should be a high priority. Some
smaller banks have faced significant deposit outflows since the onset of the pandemic,
amplifying pre-pandemic legacy issues at a few, mostly small, and rural banks. Some of the
outflows seem related to concerns about banks’ eventual compliance with minimum capital
standards, which will increase to IDR 2 trillion (about US$143 million) by end-2021 and
IDR 3 trillion (about US$220 million) by end-2022. OJK has addressed issues related to failing
small banks through consolidation and intends to continue using this approach. To maintain a
sound banking system and avoid adverse confidence effects, solvency or capital adequacy issues
in individual banks need to be recognized and addressed upfront.15 Addressing failing banks
through consolidation can be a solution, but it may not always be feasible or it may be too slow
a process, and resolution might be needed. The PEN program has alleviated the impediments on
the effectiveness of emergency liquidity framework identified in the 2017 FSAP, but other steps
toward the recommended strengthening of the crisis management and resolution frameworks
are still under consideration (Table 11).
38. The accelerated efforts at promoting financial deepening are welcome. BI’s blueprint on
payment systems will support digital economic and financial integration in order to improve
monetary policy transmission, as well as economic and financial inclusion. More broadly, laying the
foundations for new financial market products and broader market participation, including by
institutional investors, would help mobilize long-term savings and reduce the reliance on volatile
foreign funding. Meanwhile, the digital revolution in the financial sector calls for an upgrade of the
regulatory framework, to promote better understanding of financial products by market participants
and safeguard financial stability.
39. The financial sector omnibus bill underway represents an opportunity to lay the legal
foundation for further financial deepening and tackle regulatory reforms. On the latter, the bill
could include the remaining steps needed for a stronger crisis management and resolution
frameworks noted above, address other FSAP recommendations, and update the regulatory
framework to accommodate fintech.
14
The sectoral priorities involve (i) identifying those sectors that are important to growth and employment, and can
be safely opened if a supportive health protocol is in place; and (ii) providing more information to banks on the safe
reopening of the those sectors, their prospects after the pandemic, and support measures available to firms in those
sectors.
15
Undercapitalized banks should provide supervisors with clear plans to return to capital adequacy, while insolvent
banks should be resolved. See “Special Series on Financial policies to Respond to COVID-19: Supervisory Actions and
Priorities in Response to the COVID-19 Pandemic Crisis.”
20 INTERNATIONAL MONETARY FUND
INDONESIA
Authorities’ Views
40. The authorities shared the assessment that while the systemic risk in the financial
sector had remained contained so far, vulnerabilities were yet to be addressed. They agreed
that banks should continue to monitor loans and provision for credit loss from restructured loans.
They noted that credit conditions could be slow to improve, given the low credit demand during the
pandemic. The authorities did not see any notable financial strain for nonfinancial firms in the formal
sector, as indicated by their improving performance recently, but were carefully monitoring small-
and medium-sized firms in labor-intensive industries. The authorities emphasized the role that
policymakers can play in terms of reducing the asymmetric information between the banks and
borrowers to facilitate credit expansion. The authorities considered that the prudential regulation
relaxation could be gradually withdrawn as the economy recovers, but also acknowledged the great
uncertainty ahead and that the normalization of prudential policies may take longer than expected.
41. The authorities were considering a broad range of reforms of financial regulation and
financial markets. On the regulatory front, the reforms would aim to strengthen financial oversight
and crisis management. They would include legislative amendments to clarify institutional
responsibilities for the supervisory entities (OJK, BI, MoF, the Indonesia Deposit Insurance
Corporation (LPS)) and to improve interagency cooperation and coordination, addressing issues
raised in the 2017 FSAP; however, the government emphasized that any changes would safeguard
the operational independence of BI. The authorities also reiterated their commitment to financial
deepening with appropriate prudential standards, as laid out in their blueprint for money market
development. The closing of the financial market infrastructure gap was seen as a necessary
condition for broadening the set of financial instruments in Indonesia, which would help attract
domestic and international investors and enhance monetary policy transmission. The establishment
of central clearing counterparty (CCP) was urgently needed, to help reduce both counterparty risks
and market segmentation. The authorities expected a better anchoring of the short-term end of the
yield curve and further deepening in the repo and foreign exchange derivatives markets as the
financial market infrastructure develops.
D. Other Structural Reforms
42. The passing of the omnibus bill on job creation should help lower obstacles to
job-creating investment and boost productivity. The omnibus approach combines several
reforms in one bill and entails changes across many laws, reflecting the authorities’ goal of achieving
a significant easing of the regulatory burden on private sector activity and restrictions on investment
in one sweep. If successfully implemented, and on the back of Indonesia’s favorable demographics,
this easing would help in attracting productive foreign capital, reducing the cost of investment, and
promoting export competitiveness. The implementation of the Regional Comprehensive Economic
Partnership in Indonesia could reinforce these benefits. High-quality governance and transparency
standards for regulatory settings and changes therein will also be critical for the effectiveness of the
reforms and their traction. The easing of labor market restrictions included in the bill will be
beneficial in the longer term, although the pace of implementation should consider the phase of the
recovery to help prevent short-term costs in terms of activity and employment.
INTERNATIONAL MONETARY FUND 21
INDONESIA
43. The Nusantara Investment Authority (NIA) is designed to channel institutional and
corporate investment towards infrastructure. The NIA, established by the omnibus bill on job
creation, will be an equity fund focused on financing infrastructure projects with foreign, private, and
Indonesian government participation. The NIA would start with relatively low risk, mature
infrastructure investments, such as completed toll roads, and move on to higher risk green- and
brownfield investment. Considering that such a financing structure entails quasi-fiscal risks, strong
governance settings and focus on areas where other forms of financing will be less competitive will
be important for its success.
44. A medium-term revenue strategy (MTRS) centered around revenue-raising tax policy
reform should be a macro-structural reform priority. Indonesia has an urgent need to increase
government spending on development—education, infrastructure, health, and social safety nets—to
unlock its growth potential and meet the Sustainable Development Goals.16 The tax reform initiated
in 2017 remains incomplete as it specified only tax administration initiatives and reduced the
corporate income tax rate. The omnibus bill on job creation contains important tax policy incentives
to improve the business climate, but it will be critical for the regulations implementing the incentives
not to introduce additional legal loopholes in the tax system. Moreover, the omnibus bill does not
include measures that would enhance the base of major taxes, or streamline tax schedules and
exemptions. Such measures should all be integrated into the MTRS, to coherently address the root
causes of the weak revenue performance (Appendix IV).
45. Digitalization could be harnessed to mitigate the economic impact of the pandemic,
and support the recovery. The adoption of e-commerce and digital financial services has increased
rapidly amidst COVID-related lockdowns and social distancing, mitigating the economic fallout. The
authorities have facilitated this expansion through regulatory measures. However, to tap its
potential, important challenges need to be addressed in the areas of digital infrastructure, worker
skills, regulations, with due regard to financial stability and integrity, and consumer protection (see
Chapter 6, Selected Issues).
46. Indonesia has been proactively tackling climate change but could consider further
reforms toward a greener economy. A comprehensive transition plan toward a greener economy
should be part of the policy strategy underpinning the recovery. The plan could include
reforestation incentives, greater support for building renewable energy generation capacity and
reducing reliance on coal, and reforms of energy subsidy schemes. Further progress in the
monitoring and execution of adaptation plans to increase the resilience to climate change would be
desirable, given the high exposure to related natural hazards (see Chapter 7, Selected Issues).
Authorities’ Views
47. Structural reforms are a central part of the government’s policy strategy towards a
sustained economic recovery. The omnibus bill on job creation overhauls Indonesia’s investment
policy in order to attract investment and build confidence. The authorities highlighted that the
16
See IMF Policy Paper, ASEAN Progress Towards Sustainable Development Goals and the Role of the IMF
(Washington, DC, 2018).
22 INTERNATIONAL MONETARY FUND
INDONESIA
Nusantara Investment Authority, which is mandated in the job creation omnibus bill, would seek to
attract foreign investment to finance infrastructure projects and stimulate economic growth, based
on a funding model that attracts equity rather than debt. It would be based on best practice in good
governance. The authorities also expected digital transformation to become an important driver of
growth. They are seeking to promote digitalization in several areas, including government services,
open banking, retail payments, financial market infrastructure, public data infrastructure, and
regulatory frameworks. Finally, the authorities concurred with the need to act on climate change
related risks and agreed on the necessity of transitioning to a greener economy. They are
committed to continuous policy efforts to achieve the objectives set out in Indonesia’s nationally
determined contribution (NDC) to emission reduction under the Paris Agreement, as well as to
formulating policies and developing instruments to deal with climate change issues.
STAFF APPRAISAL
48. Indonesia has responded with a bold and comprehensive policy package to cushion
the impact of the COVID-19 pandemic. As elsewhere, the COVID-19 pandemic has led to
socio-economic hardship and an economic downturn. The policy response has helped to save lives
and livelihoods, and to preserve macro-financial and external stability through the downturn and a
period of global market stress.
49. The Indonesian economy is positioned for recovery under currently appropriate
accommodative monetary and fiscal policy settings. In the near term, strong policy support
measures will be the main driver, including through a widening of COVID-19 vaccine distribution
and the associated increase in mobility, and improved global economic and financial conditions.
Ongoing reforms aimed at promoting investment are expected to help mitigate the scarring effects
from the pandemic.
50. The economic outlook is subject to a larger-than-usual uncertainty, and some
vulnerabilities are expected to increase. An early distribution of COVID-19 vaccines would be an
upside risk, while delays in the vaccination program and a protracted pandemic would be downside
risks. The underlying asset quality in the banking system has deteriorated with the economic
downturn, but the systemic risks picture in the banking sector is unlikely to be materially affected,
given the sound initial position of the sector. Nevertheless, credit conditions could remain slow to
improve, depending in part on the extent of non-provisioned losses in the banking system. While
recent developments suggest that, on a preliminary basis and after adjusting for transitory factors,
the external position in 2020 was broadly in line with the level implied by medium-term
fundamentals and desirable policies, the large share of portfolio investment in external liabilities
exposes the economy to fluctuations in global financial conditions.
51. The fiscal policy settings planned for 2021 would help foster the recovery. The budget
implies a moderately expansionary fiscal stance, given preliminary 2020 fiscal outcomes, reinforced
by the envisaged increase in public investment. The flexibility to reallocate budget resources in 2021
also provides a basis to respond rapidly to shifting needs or redesign policy responses amid high
uncertainty.
INTERNATIONAL MONETARY FUND 23
INDONESIA
52. The plan to return to the budget deficit ceiling by 2023 is a welcome commitment to
fiscal rules and should be backed by a detailed medium-term fiscal strategy. The return to the
ceiling could be challenging in the absence of revenue measures, as it will require substantial
expenditure consolidation of around 1½ percent of GDP in both 2022 and 2023. A specific
medium-term fiscal strategy could help anchor expectations and reduce risks to policy credibility
amid high uncertainty around the outlook, especially if it is also backed by revenue measures,
preferably in the form of an MTRS.
53. The plan for BI to conduct bond purchases under the market mechanism in 2021 will
balance the benefits and risks of monetary budget financing. Pursuing accommodative
conditions along the broader rupiah yield curve through BI bond purchases could be an appropriate
strategy under current exceptional circumstances, provided adequate safeguards are in place. The
market mechanism framework would reaffirm a monetary policy framework in which such purchases
would be used only temporarily and on a last-resort basis in exceptional circumstances, thereby
containing risks to monetary policy credibility. BI could consider enhancing the framework by
clarifying the last resort criteria, based on bond market conditions.
54. Proactive management of credit risks will be essential to ensuring banks can support
the recovery. The credit restructuring has helped the adjustment to pandemic-related disruptions
but cannot per se resolve underlying vulnerabilities. With the partial relaxation of loan classification
rules until March 2022, OJK should provide guidance for appropriate provisioning. Additional,
targeted policy steps to revive credit might also be needed. With a larger-than-expected
deterioration in asset quality a possibility, banks might keep up tighter credit standards, which, in
turn, could hold back credit and the recovery. If credit continues to slump, an upgrade to the loan
guarantee program or other targeted measures could be considered.
55. The accelerated efforts at promoting financial deepening are welcome, and the
financial sector omnibus bill underway represents an opportunity to advance these efforts.
Financial deepening would help mobilize long-term savings and reduce reliance on volatile foreign
funding. The digital revolution in the financial sector also calls for an upgrade of the regulatory
framework. Regulatory issues related to crisis management, resolution, and the financial safety net
should also be addressed. Possible changes to the BI Law under the umbrella of the omnibus law
should not limit BI’s operational independence or set unrealistic monetary policy objectives.
56. The passing of the omnibus bill on job creation could be an important step toward
boosting investment, but high-quality governance standards will be required for success. The
Nusantara Investment Authority that is being set up could be a useful conduit for infrastructure
investment. Since it entails quasi-fiscal risks, strong governance settings will be important for an
effective, transparent use of public resources and its success.
24 INTERNATIONAL MONETARY FUND
INDONESIA
57. A medium-term government revenue strategy is a macro-structural reform priority,
and preparations should begin without delay. A coherent strategy addressing the root causes of
the weak revenue performance is essential for securing the higher government revenue needed for
sustained increases in spending on development to harness the growth potential.
58. Indonesia’s proactive policies tackling climate change could put further emphasis on a
greener economy. A comprehensive transition plan would contribute to the economic recovery.
Further progress in the monitoring and execution of adaptation plans would provide a welcome
increase in resilience to climate change, given Indonesia’s high exposure to related natural hazards.
59. It is recommended that the next Article IV consultation take place on a standard
12-month cycle.
INTERNATIONAL MONETARY FUND 25
INDONESIA
Figure 1. COVID-19 Developments
Indonesia has seen significant spread of COVID-19. Daily new cases have started picking up recently.
COVID-19 testing has increased substantially, although the Mobility fell less than in ASEAN peers in the early stage of the
positivity rate of daily tests remains elevated. pandemic but has also been slower to recover.
Daily new cases increased for longer than in other ASEAN Indonesia’s social restrictions were generally less stringent
countries. initially than ASEAN peers, but remain substantial.
26 INTERNATIONAL MONETARY FUND
INDONESIA
Figure 2. Recent Economic Developments
Real GDP growth rebounded in 2020:Q3... …led by government consumption and net exports.
Private consumption appears to be slowly recovering… …together with manufacturing production.
… while the volume of non-oil and gas merchandise trade has
Consumer sentiment remains weak…
just returned to the pre-pandemic levels.
INTERNATIONAL MONETARY FUND 27
INDONESIA
Figure 3. Inflation Dynamics
Inflation has fallen below the lower limit of the target band… ...reflecting weak domestic demand and a strong harvest.
Disinflationary pressures appear to be broad-based, both
…and across regions.
across products…
Capacity utilization has increased but is still well below the PPI inflation rebounded somewhat in 2020:Q3, following
pre-pandemic levels. gradual disinflation since late 2018.
28 INTERNATIONAL MONETARY FUND
INDONESIA
Figure 4. Capital Flows and Market Developments
Portfolio investment flows have stabilized after a bout of large The share of foreign investors’ holdings of rupiah government
outflows in February and March 2020. bonds has yet to recover its pre-pandemic levels.
Markets interest rates have declined recently… …partly reflecting lower sovereign premium.
Although stock prices have increased since April, they remain
…and exchange rate appreciation.
below the pre-pandemic levels.
INTERNATIONAL MONETARY FUND 29
INDONESIA
Figure 5. External Sector
The current account balance turned to surplus in 2020:Q3, The drop of export growth in 2020 has been broad based,
driven by an increase in the non-oil and gas trade surplus. although significantly stronger for oil and mining.
Imports declined sharply, particularly capital goods and raw In 2020:Q3, the NIIP improved since end-2019, mainly due to
material, on the back of weak domestic activity. a decline in portfolio liabilities.
Indonesia’s foreign reserves in 2019 stood at an adequate External financing needs are projected to increase in 2021
level. mainly due to a widening of the current account deficit.
30 INTERNATIONAL MONETARY FUND
INDONESIA
Figure 6. Fiscal Sector
The primary deficit is expected to have widened in 2020, Total revenue-to-GDP ratio decreased in 2019 and is expected
reflecting fiscal measures to tackle the COVID-19 crisis. to have declined further in 2020.
Indonesia’s tax-to-GDP ratio lags behind EM peers in Asia. Social spending is expected to have more than doubled
in 2020.
Commercial banks and BI have increased their relative shares Public debt is expected to have increased in the medium term
of rupiah government bond holdings in 2020. but remain at a moderate level.
INTERNATIONAL MONETARY FUND 31
INDONESIA
Figure 7. Monetary Sector
BI has reduced its policy rate five times by a cumulative …and purchased government bonds to support the national
125 bps in 2020… economic recovery program.
Monetary base has declined in 2020, reflecting a cut in the … while broad money has expanded.
reserve requirement ratio and BI’s liquidity absorption...
The banking system as a whole has ample liquidity… …although small banks continue to experience deposit
outflows.
32 INTERNATIONAL MONETARY FUND
INDONESIA
Figure 8. Macrofinancial Developments
Credit growth, which was slowing down even prior to the
The loan-to-deposit ratio has declined in 2020.
pandemic, has fallen sharply in 2020…
The credit gap has widened from −1.6 percent in 2019:Q4 to Financial conditions have eased after a brief tightening in
−3.6 percent in 2020:Q3. March.
Property prices remain stable... …although real estate loan growth has slowed in 2020.
INTERNATIONAL MONETARY FUND 33
INDONESIA
Figure 9. Selected Emerging Market Economies: Financial Soundness Indicators
…and although declining, profitability remains at a high level
Indonesia’s banking system capital remains adequate…
in comparison to peers reflecting large interest margins.
Nonperforming loans have increased since the pandemic and System-wide bank liquidity remains ample and around the
remain moderate compared to peers. median for emerging economies.
34 INTERNATIONAL MONETARY FUND
INDONESIA
Table 1. Indonesia: Selected Economic Indicators, 2016–21
INTERNATIONAL MONETARY FUND 35
INDONESIA
Table 2. Indonesia: Selected Vulnerability Indicators, 2016–20
36 INTERNATIONAL MONETARY FUND
INDONESIA
Table 3. Indonesia: Balance of Payments, 2015–21
(In percent of GDP)
INTERNATIONAL MONETARY FUND 37
INDONESIA
Table 4. Indonesia: Medium-Term Macroeconomic Framework, 2017–25
38 INTERNATIONAL MONETARY FUND
INDONESIA
Table 5. Indonesia: Summary of Central Government Operations, 2015–21
(In trillions of rupiah)
INTERNATIONAL MONETARY FUND 39
INDONESIA
Table 6. Indonesia: Summary of Central Government Operations, 2015–21
(In percent of GDP, unless otherwise indicated)
40 INTERNATIONAL MONETARY FUND
INDONESIA
Table 7. Indonesia: Summary of General Government Operations, 2015–21
INTERNATIONAL MONETARY FUND 41
INDONESIA
Table 8. Indonesia: Monetary Survey, 2016–21
42 INTERNATIONAL MONETARY FUND
INDONESIA
Table 9. Indonesia: Financial Soundness Indicators, 2016–20
(In percent; unless otherwise indicated)
INTERNATIONAL MONETARY FUND 43
INDONESIA
Table 10. Indonesia: Key Poverty and Social Indicators
44 INTERNATIONAL MONETARY FUND
INDONESIA
Table 11. Indonesia: Key FSAP Recommendations
INTERNATIONAL MONETARY FUND 45
INDONESIA
Table 11. Indonesia: Key FSAP Recommendations (Concluded)
46 INTERNATIONAL MONETARY FUND
INDONESIA
Table 12. Integrating Fund Surveillance and Capacity Development
Area Surveillance Recommendations Capacity Development Recent Actions/Plans
Monetary policy Clear and focused communication on monetary and The Fund provided technical assistance
and central bank financial policy is critical, especially during times of covering communication on monetary policy
communication financial stress and financial stability.
Statistics Use of big data for timely economic monitoring The Fund provided technical assistance on the
could support prompt policy decision making. use of big data to develop an enhanced
residential property price index and on
developing the integrated sectoral accounts
and balance sheets statistics. The Fund also
provided virtual-format assistance on
expanding the coverage of the producer price
index to include additional service activities.
Tax policy and Implement a medium-term revenue strategy (MTRS) The Fund provided technical assistance in
administration to raise revenue by at least 3 percent of GDP over August 2017 to set a strategy, which includes
five years to finance spending on infrastructure, specific recommendations on tax policy and
education, and health. administration reforms.
Public financial Improve fiscal governance, including infrastructure The Fund conducted Indonesia’s PIMA in
management governance and public investment management. February 2019, which lists priority actions to
improve public investment management, and a
Public Sector Balance Sheet Analysis in
October 2019.
Financial sector Improve financial oversight, crisis management The Fund provided technical assistance on
framework, and the monitoring of corporate financial conglomerate supervision, risk-based
vulnerabilities. supervision, financial crisis management, and
on strengthening bank and corporate stress
testing frameworks and systemic risk analysis
Financial sector Preparation and timely implementation of financial The Fund provided technical assistance on
supervision during regulatory and supervisory response to the financial supervision, IFRS9 implementation
COVID-19 pandemic. and supervisory treatment under COVID-19.
INTERNATIONAL MONETARY FUND 47
INDONESIA
Appendix I. Risk Assessment Matrix1
Source of Risks Likelihood Expected Impact Policy Recommendation
Unexpected shift in the COVID-19
pandemic
• Prolonged pandemic 1/ Medium High. Larger economic scarring effects Fiscal stance should be loosened
(e.g., higher structural unemployment and further in 2021. Monetary and
persistent underinvestment); a decline in capital macroprudential policies should be
inflows, leading to currency depreciation and loosened further. The exchange
tighter domestic credit conditions; higher rate should remain flexible and
poverty rate. market driven.
• Faster containment 2/ Medium Medium-High. Investment and employment Accelerate the implementation of
recover; capital inflows resume, leading to the MTRS. Increase infrastructure
currency appreciation and easier domestic credit investment and social spending.
conditions. Monetary policy should be on hold
or gradually tightened in line with
the inflation outlook. Regulatory
relief measures should be let
expire.
Global • Asynchronous progress 3/ Medium Medium. Higher volatility in global financial Expedite the inoculation of COVID-
markets leads to currency depreciation and 19 vaccines. Additional
slower capital inflows or outflows. Exports to government support measures to
economies at advanced stages of vaccination viable firms should be considered.
increase.
Sharp rise in global risk premia Medium High. Lower GDP growth; larger economic Fiscal stance should be loosened
exposes financial and fiscal scarring effects; a decline in capital inflows, further in 2021. Monetary and
vulnerabilities. 4/ leading to currency depreciation and further macroprudential policies should be
tightening of domestic credit conditions. loosened further. The exchange
rate should remain flexible and
market driven.
Accelerating de-globalization 5/ Medium Medium. Weaker exports; reduced FDI inflows; Augment trade liberalization
increased uncertainty leading to weaker efforts within the ASEAN region.
investment. Accelerate structural reforms aimed
at promoting competition and
financial deepening.
Sharper deterioration in banks' asset Medium High. Lower GDP growth; larger economic Solvency and capital adequacy
quality and funding positions to scarring effects; a decline in capital inflows, issues should be recognized and
Provision of credit is significantly High leading to currency depreciation and further addressed upfront. Banks should
impaired by larger-than-expected tightening of domestic credit conditions. start provisioning against credit
COVID-19-related credit losses and the losses even under the relaxed loan
expected weakening of nonfinancial standards, which will be critical for
Domestic
firms’ debt service capacity. banks’ ability to weather the
deterioration in asset quality.
Natural disasters Medium Low. Disruption in economic activity in the Prioritize expenditure to the
Major natural disasters (e.g., volcano affected region; slower economic growth affected region. If the economy
eruptions and/or earthquakes) disrupt accompanied by a decline in portfolio inflows. slows significantly, ease monetary
economic activity and affect sentiment, policy, provide support to banks,
resulting in higher fiscal expenditure. and monitor corporate borrowers
at risk.
1
The disease proves harder to eradicate (e.g., due to new virus strains, short effectiveness of vaccines, or widespread unwillingness to take them), requiring
costly containment efforts and prompting persistent behavioral changes rendering many activities unviable. For countries with policy space, prolonged
support—while needed to cushion the economy—exacerbates stretched asset valuations, fueling financial vulnerabilities. For those with limited space,
especially EMs, policy support is insufficient.
2
Pandemic is contained faster than expected due to the rapid production and distribution of vaccines, boosting confidence and economic activity.
3
Limited access to, and longer-than-expected deployment of, vaccines in some countries—combined with dwindling policy space—prompt a
reassessment of their growth prospects (for some Emerging and Frontier Markets triggering capital outflows, depreciation and inflation pressures, and
debt defaults).
4
A reassessment of market fundamentals (e.g., in response to adverse Covid-19 developments) triggers a widespread risk-off event. Risk asset prices fall
sharply and volatility spikes, leading to significant losses in major nonbank financial institutions. Higher risk premia generate financing difficulties for
leveraged firms (including those operating in unviable activities) and households, and a wave of bankruptcies erode banks’ capital buffers. Financing
difficulties extend to sovereigns with excessive public debt, leading to cascading debt defaults.
5
Despite renewed efforts to reach multilateral solutions to existing tensions, geopolitical competition leads to further fragmentation. Reshoring and less
trade reduce potential growth.
1
The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most
likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks
surrounding the baseline (“low” is meant to indicate a probability below 10 percent, "medium” a probability between
10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source
of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks
may interact and materialize jointly.
48 INTERNATIONAL MONETARY FUND
INDONESIA
Appendix II. External Assessment
Overall Assessment: On a preliminary basis, and adjusting for transitory factors, recent developments suggest that the external position
in 2020 was broadly in line with the level implied by medium-term fundamentals and desirable policies. However, this assessment is highly
uncertain given the lack of full-year data for 2020 and the COVID-19 crisis, and a complete analysis will be provided in the 2021 External
Sector Report. Exchange rate flexibility and structural policies should help contain the current account deficit over the medium-term. External
financing needs appear sustainable. However, they are sizeable, and with a large share of foreign portfolio investment, they expose the
economy to fluctuations in global financial conditions.
Potential Policy Responses: Maintaining external balance will require structural reforms to boost competitiveness. Reforms should include
higher infrastructure and social spending aimed at fostering human capital development (while maintaining fiscal sustainabili ty through
revenue mobilization); fewer restrictions on FDI and external trade (nontariff trade barriers), and labor market flexibility (e.g., streamlining
stringent job protection, improving job placement services). Flexibility of the exchange rate should continue to support external stability in a
context of increased market volatility associated with the COVID-19 pandemic.
Foreign Asset Background. At end of September 2020, Indonesia’s net international investment position (NIIP) was −24 percent of GDP,
and Liability improving from −30 percent at the end of 2019. The improvement in the NIIP is mainly explained by a decline of
Position and 4.5 percentage points of GDP in portfolio equity liabilities. In September 2020, gross external assets reached 34.5 percent
Trajectory of GDP (of which, 35 percent were reserve assets) and gross external liabilities, 58 percent of GDP. Indonesia’s gross
external debt was moderate at 38 percent of GDP at end-September 2020 and 84 percent was maturing after one year.
Assessment. The level and composition of the NIIP and gross external debt indicate that Indonesia’s external position is
sustainable and subject to limited roll-over risk. The share of nonresident holdings of rupiah denominated government
bonds declined from 38 percent of the total stock at the end of 2019 to 27 percent (or 5.6 percent of GDP) at end-
September 2020 but remains sizeable, making Indonesia vulnerable to global financial volatility, higher U.S. interest rates,
and a stronger U.S. dollar. Staff projections for the current account suggest that the NIIP as a percent of GDP will continue
to strengthen over the medium term.
2020:Q3 (% GDP) NIIP: –23.7 Gross Assets: 34.5 Res. Assets: 12.1 Gross Liab.: 58.2 Debt Liab.: 34.3
Current Background. Indonesia’s current account deficit narrowed to 2.7 percent of GDP in 2019, from a 2.9 percent deficit
Account in 2018, driven mainly by weak import growth. On a cumulative basis as of the third quarter of 2020, the current account
deficit narrowed compared to 2019 as the softening in domestic demand led to an import contraction that more than
compensated the decline in exports that was associated with low commodity prices and a weak external demand. The CA
deficit is projected to narrow to 0.5 percent in 2020, driven by a contraction in domestic demand and imports, partly
compensated by the negative impact on tourism of the COVID-19 pandemic. Structural policies are expected to help limit
the current account deficit in the medium-term.
Assessment. Staff estimates a CA gap of 0.9 percent for 2020, consistent with an estimated cyclically adjusted CA deficit
of −0.7 percent of GDP and a staff-assessed norm of −0.5 percent of GDP.1 Considering uncertainties in the estimation of
the norm, the CA gap for 2020 is in the range of −0.6 percent to 2.4 percent of GDP.2 Maintaining external balance will
require structural reforms to strengthen health, education, infrastructure, and increase labor market flexibility, which is
consistent with the suggested room for higher fiscal spending identified by the policy gaps.
2020 (% GDP) Actual (Proj.) CA: –0.5 Cycl. Adj. CA: –0.7 EBA CA Norm: –0.5 EBA CA Gap: -0.2 Staff Adj.: 1.06 Staff CA Gap: 0.9
Real Exchange Background. In 2019, the average REER appreciated by 4.3 percent relative to the 2018 average, following an easing of
Rate global financial conditions and an inflow of capital. With the COVID-19 shock, the REER depreciated by about 10 percent
between February and April, before recovering towards the middle of the year. As of October 2020, the REER had
depreciated by 1.3 percent compared to the 2019 average.
Assessment. The REER index and level REER models point to 2020 REER gaps of about 4.9 percent to −6.8 percent
respectively, with an upward shift in the range of the estimated gaps compared to 2019. Meanwhile, the staff CA gap
estimate of 0.9 percent of GDP implies an REER gap of −4.8 percent with standard elasticities. 3 In staff’s assessment, the
EBA Index and CA models are most relevant for Indonesia. Considering all inputs as well as the REER moderate
depreciation in 2020, staff assesses the REER gap in the −4.9 to 5.1 percent range, with a midpoint of -0.3 percent.4
Capital and Background. In 2019, net capital and financial account inflows (3.3 percent of GDP) were sustained by net FDI inflows
Financial (1.8 percent of GDP), net portfolio inflows (1.9 percent of GDP), and net other investment inflows of -0.5 percent of GDP.
Accounts: Flows Starting in March 2020, Indonesia faced large capital outflows from the sales of rupiah denominated securities by
and Policy nonresident investors, although these outflows were largely offset by inflows from the subsequent issuance of foreign
Measures currency denominated government bonds.
Assessment. Net and gross financial flows continue to be prone to periods of volatility. The broadly contained current
account deficit and strengthened policy frameworks, including exchange rate flexibility since mid-2013 have helped
reduce capital flow volatility. Continued strong policies, focused on safeguarding the fiscal position, keeping inflation in
check, advancing financial deepening and easing supply bottlenecks would help sustain capital inflows in the medium
term.
FX Intervention Background. Since mid-2013, Indonesia has had a more flexible exchange rate policy framework. At end-2019, reserves
and Reserves were US$129.2 billion, compared with US$120.7 billion at end-2018. The reserve accumulation reflects mainly the net
Level capital inflows and foreign exchange receipts from oil/gas and other sectors. In addition, contingencies and swap lines
amounting to about US$95 billion are in place. In a context of increased market volatility associated with the COVID-19
pandemic, Bank of Indonesia (BI) intervened in the non-spot and spot FX markets in March and April 2020 and introduce
daily FX swap auctions to ensure adequate market liquidity. International reserves recovered from April 2020 onward and
reached US$136 billion in December 2020.
Assessment. The current level of reserves (equal to 12.5 percent of GDP, about 121 percent of the IMF’s reserve adequacy
metric, and about 8 months of prospective imports of goods and services) should provide sufficient buffer against a wide
range of possible external shocks, with predetermined drains also manageable. Exchange rate flexibility should continue
to play its role as a shock absorber. If external pressures result in disorderly market conditions in the exchange rate
market, the use of FXI can be appropriate to mitigate the negative impact on balance sheet exposures.
1/ The 2020 assessment includes an adjustment for tourism and oil sectors for all countries to account for the temporary impact of the crisis.
For Indonesia, these adjustors are -0.27 percentage points and 0.11 percentage points, respectively, leading to an adjustment of
0.16 percentage points of GDP. As Indonesia is among the few outlier countries regarding adult mortality rates, the demographic indicators
are adjusted to account for the younger average prime age and exit age from the workforce. This results in an adjustor of 0.9 percentage point
being applied to the model-estimated CA norm. The sum of these adjustments is equal to 1.06 percentage points of GDP.
2/ A range of ±1.5 percent is added to reflect the fact that the EBA regression estimates are subject to normal uncertainty (the standard error
of the EBA norm is 1.3 percent).
3/ The semi-elasticity of CA/GDP with respect to REER, based on trade adjustment, is estimated to be −0.18 for Indonesia.
4/ The mid-point of the REER range is calculated by taking the average of the estimated gap from the EBA index model (i.e., 4.9 percent) and
the REER gap implied by the staff CA gap estimate of 0.9 percent of GDP (i.e., −4.8 percent). To obtain the width of the range for the REER
gap, the standard +/-5 percent interval was applied to the midpoint of 0.1 percent, leading to a range of −4.9 to 5.1.
INTERNATIONAL MONETARY FUND 49
INDONESIA
Appendix III. Debt Sustainability Analysis
Indonesia’s external and public debt remain moderate and sustainable. However, potentially weaker-
than-expected revenue, contingent liabilities from state-owned enterprises (SOEs) and public-private
partnerships (PPPs) should be carefully monitored. The reduction in nonresident participation in the
local currency bonds markets has contributed to a reduction of vulnerabilities, but the reliance on
foreign investors remains sizable.
External Debt Sustainability
1. Indonesia’s external debt has remained broadly stable in recent years. External debt
reached 36.1 percent of GDP in 2019, about the same level as in 2018 when it was 36.0 percent of
GDP. General government external debt remained stable, only showing a small shift in its
composition, with a small increase in the share of internationally issued bonds compensated by a
decline in the holdings of domestic bonds by nonresidents. External debt is estimated to have
increase to 38.3 percent of GDP by end-2020 (Figure 1 and Table 1), driven mainly by an increase in
government borrowing.
2. External debt is projected to gradually decline in the medium term. In the baseline
scenario, external debt would reach 35 percent of GDP in 2025, reflecting lower needs to finance the
declining current account and fiscal deficits.
3. External debt sustainability is robust to interest rate and GDP shocks, but is more
sensitive to current account and exchange rate shocks (Figure 2). A widening of the current
account deficit from current levels would cause external debt to rise moderately (a one standard
deviation shock would increase external debt to 38 percent of GDP by 2025). Exchange rate
depreciation would have the largest impact—a 30 percent depreciation in 2021 would raise external
debt to 53.6 percent of GDP in 2021 and it would remain above 49 percent of GDP until 2025.
Public Debt Sustainability
4. Indonesia’s public sector debt remains low. General government debt has declined
steadily from 87 percent of GDP in 2000 to 30.6 percent in 2019, owing to a prudent fiscal stance
that has been anchored by fiscal rules since 2003.1 On the composition of debt, foreign-currency
denominated debt stays at about 38 percent. Dependence on foreign investors remains sizable, with
nonresidents holding around 58 percent of general government debt.
5. Public sector debt is projected to stabilize at around 41 percent of GDP over the
medium term (Figure 3). The fiscal rule is suspended for 2020−22. The baseline scenario envisages
the general government deficit to increase up to 5.9 percent in 2021 before declining to 2.3 percent
of GDP over the medium term. The primary deficit is estimated to reach 4.0 percent of GDP in 2021,
and thereafter converging to 0.5 percent over the medium term. Despite a negative interest rate-
1
The rules cap general government deficit at 3 percent of GDP and debt at 60 percent.
50 INTERNATIONAL MONETARY FUND
INDONESIA
growth differential (of around −1.3 percent) over the medium term, public debt would rise from
35.7 percent in 2020 to around 41.3 percent of GDP in 2025, mainly driven by the relatively higher
primary deficits. Gross financing needs are expected to remain moderate, gradually falling from a
peak of 8.3 percent of GDP in 2020 to around 4.8 percent of GDP in 2025.
6. Public debt dynamics are robust to both standard shocks and stress tests (Figures 4
and 5). Even under the most severe scenario with a combined macro-fiscal shock, total government
debt would stabilize at around 48.4 percent of GDP or 359.7 percent of revenue by 2025, while gross
financing needs would gradually decline to around 6.1 percent of GDP. Nonetheless, fiscal risks
arising from potentially weaker-than-expected revenue, expanding balance sheets of SOEs, and
PPPs, will need to be managed carefully, especially as the recovery could be slower than projected in
the baseline.
Authorities’ Views
7. The authorities agreed with the external and public debt sustainability analysis.
INTERNATIONAL MONETARY FUND 51
INDONESIA
Figure 1. Indonesia: External Debt and Debt Service
52 INTERNATIONAL MONETARY FUND
INDONESIA
Figure 2. Indonesia: External Debt Sustainability: Bound Tests 1/ 2/
(External debt in percent of GDP)
INTERNATIONAL MONETARY FUND 53
54
INDONESIA
Table 1. Indonesia: External Debt Sustainability Framework, 2015−2025
INTERNATIONAL MONETARY FUND
(In percent of GDP, unless otherwise indicated)
INDONESIA
Figure 3. Indonesia: Public Sector Debt Sustainability Analysis (DSA)—Baseline Scenario
(In percent of GDP unless otherwise indicated)
INTERNATIONAL MONETARY FUND 55
INDONESIA
Figure 4. Indonesia: Public DSA—Composition of Public Debt and Alternative Scenarios
56 INTERNATIONAL MONETARY FUND
INDONESIA
Figure 5. Indonesia: Public DSA—Stress Tests
INTERNATIONAL MONETARY FUND 57
INDONESIA
Figure 6. Indonesia: Public DSA—Risk Assessment
58 INTERNATIONAL MONETARY FUND
INDONESIA
Appendix IV. Designing a Medium-Term Revenue Strategy for
Stronger and More Sustainable and Inclusive Post-Pandemic
Growth in Indonesia1
Indonesia is facing large spending needs in human capital, infrastructure and social safety nets that
can only be fulfilled by a substantial and sustainable increase in revenue mobilization. The pandemic
has exacerbated these needs, providing the opportunity for policymakers to mobilize stakeholders’
support for a comprehensive Medium-Term Revenue Strategy (MTRS) that should complete the
ongoing tax administration initiatives with the needed tax policy measures. This note discusses key
reform priorities and shows that the design of an MTRS should start now for it to be ready for
implementation once the recovery is firmly underway.
1. The ratio of general government Revenue mobilization is lagging EM peers, and has been decreasing
tax revenue to GDP in Indonesia is the in recent years.
lowest among G-20 countries and is
trailing behind emerging market (EM)
and ASEAN peers. Averaging around
11 percent of GDP, the tax revenue to
GDP ratio has been low and relatively flat
over the last two decades. Moreover, it
has been declining since 2014, primarily
reflecting a decline in oil and gas tax
revenue from an average of around
0.9 percent of GDP in 2010−2014 to
0.4 percent in 2015−2019. Tax revenue
mobilization in Indonesia has also
persistently underperformed compared to
EM peers and other ASEAN countries.
2. The low government revenue reflects a narrow tax base, inefficient collection, weak
compliance, and the complexity of the tax system. The basic structure of the tax system and the
headline rates of the most important taxes (corporate income tax, personal income tax, value added
tax) are broadly in line with ASEAN peers. But weaknesses in the tax policy framework generate
weaker revenue performance and create inefficiencies, leading to suboptimal outcomes, inequities,
and complexities in administration and compliance. For example, the myriad of sector-based special
regimes in the corporate income tax (CIT) system along with multiple discretionary incentives
prevent a level playing field across sectors and firms, distorting factor allocation across sectors. High
basic exemption threshold for the personal income tax (PIT) excludes a large share of the
population, notably the growing middle class, from sharing the tax burden. A very long number of
value-added tax (VAT)-exempt activities combined with an exceptionally high registration threshold
partially explains the low VAT revenue, which have been declining as a percent of GDP since 2014.
1
Prepared by William Gbohoui (FAD).
INTERNATIONAL MONETARY FUND 59
INDONESIA
Beyond their revenue effects, these exemptions distort production patterns, reduce welfare, and
create breaks in the VAT chain which, in turn, reduces voluntary compliance. Moreover, Indonesia
levies only 1.2 percent of GDP in excise revenue, mainly on tobacco, in contrast to other ASEAN
countries where excise taxes on a broader range of products yield close to 2 percent of GDP.
Simulations suggest that Indonesia could raise up to 0.3 percent of GDP by bringing the diesel
excise to the ASEAN average (De Mooij and others, 2018).
3. Low government revenue intake has led to underinvestment both in public physical
and human capital. Averaging around 3.6 percent of GDP in the last two decades, public
investment has been low in Indonesia, and the gap with other ASEAN countries has been widening
since 2015. Public expenditures in health and education also remain below other EM and ASEAN
peers. Despite a strong commitment to achieve the Sustainable Development Goals (SDG),
expenditure needs as of 2020 remain sizable across sector sectors, especially in health,
infrastructure, and sanitation. Indonesia’s water and sanitation SDG index is only 66.4 against
72.8 and 77.2 for the average among ASEAN countries and the median for EM peers, respectively.
Indonesia is also trailing behind other EMs and ASEAN countries in terms of the SDG health index.
Moreover, the lack of modern transport infrastructure is a major bottleneck for sustainable growth.
Public investment in infrastructure is low,… …as are public expenditures in education and…
…health, where Indonesia is… …trailing behind peers regarding the SDG.
60 INTERNATIONAL MONETARY FUND
INDONESIA
4. Substantially higher revenue mobilization is crucial for fostering long-term
development in Indonesia. Previous studies suggest that significant increases in public
expenditures, both to invest in human capital (health and education) and to expand public
infrastructure are necessary to unlock Indonesia’s growth potential, to secure sustainable economic
growth and to mitigate inequalities (see e.g., Kinda and Doumbia, 2019, AIPEG 2016, IMF 2016).
Spending gaps analysis in 2018 estimated additional government spending needs, necessary to
achieve SDGs, of up to 5½ percent of GDP per year, with health and road infrastructure accounting
for two-thirds of the additional needs (IMF 2019). But with a very low revenue ratio, Indonesia does
not have the debt capacity to accommodate such a large stepping-up of investment, despite
relatively low debt to GDP ratio. Increasing revenue mobilization is then a critical prerequisite for
Indonesia to afford the needed public expenditures.
5. The tax-system reform underway lacks overarching coherence, which would be critical
for success. Several reforms of the tax system sought to enhance revenue performance in the past
and generated mostly temporary increases in the tax revenue ratio. General government tax revenue
to GDP ratio reached 12.5 percent in 2012, but fall subsequently, to 11 percent in 2019, around the
same level as in 2001. While the ongoing reform initiated in 2017 had promising features, it has
remained incomplete. So far, the authorities have mainly specified tax administration measures,
reduced the corporate income tax rate, increased the excise on tobacco, extended VAT to imports of
digital goods and services, and imposed an excise on plastic bags. But they have not taken the main
measures needed for a coherent MTRS, especially in the tax policy domain. Also, the reform agenda
lacks clearly identified specific initiatives in tax policy and administration to lift taxpayer compliance.
Without addressing all the contributing factors to the low revenue intake, it is unlikely that the
reform will succeed in achieving substantial revenue increases on a sustained basis.
6. A medium-term revenue strategy could help increase the revenue intake. The
advantage of using a MTRS is that it would address all the root causes of the lower revenue
performance and would provide for the overarching coherence across measures required for a
successful revenue reform. An MTRS that builds on current tax administration initiatives (e.g., Core
Tax project framework) and includes the additional steps, and tax reforms needed could
substantially and sustainably increase revenue mobilization.2 In that respect, previous IMF technical
assistance has proposed a strategy, summarized in Table 1, involving both tax policy, tax
administration, and institutional reforms, including changes to the legal framework. For instance:
• Priority tax policy measures encompass reducing VAT exemption to standard services like
education, and healthcare, lowering the registration threshold, and later gradually increasing the
rate. A uniform CIT rate should be applied to all corporations, discretionary incentives
eliminated, and preferential treatment abolished while any revenue gain from these CIT
measures could be used to reduce the CIT rate. The PIT structure should shift to an individual
2
Baseline simulations suggest that a well-designed MTRS could increase revenue by to 5 percent of GDP over a
period of 5 years (De Mooij and others 2018).
INTERNATIONAL MONETARY FUND 61
INDONESIA
base (rather family base), the base exemption threshold lowered to broaden the PIT base, and
the brackets re-calibrated to further strengthen progressivity.
• The excise tax base should also be broadened beyond tobacco in line with ASEAN peers. In that
respect, the sales tax on luxury goods should be replaced by a specific price-independent
vehicle excise tax based on the engine size of the vehicle. A net tax3 should be levied on
gasoline, and the diesel excise rate be brought to the ASEAN average.
• Appropriate tax administration measures are crucial to ensure that businesses comply with their
obligations to withhold and remit tax on their wage payments, and to enhance the compliance
of professional services providers and high-wealth individuals. It is also critical to foster and
enforce VAT registration, filing, correct reporting, and payment.
• Institutional reforms are necessary to provide additional flexibilities to the DGT to manage its
budget and workforce, as well as to enhance its organizational structure, office network and
information systems.
7. Beyond the revenue goal, an MTRS could also reduce other distortions that have held
back growth. Streamlining the business income tax structure, reducing special regimes and
discretionary exemptions in the VAT system would also help to improve the allocation of capital and
labor for increased productivity. By leveling the playing field among businesses, these measures
would improve the investment climate, thereby fostering competition and increasing the
attractiveness of Indonesia as destination of FDI. Increasing the progressivity of the PIT and an
annual publication of tax expenditure assessments could also increase the perceived fairness of the
tax system and foster self-compliance.
8. The government should seize the opportunity of the crisis to design and endorse an
MTRS now, although the implementation of the tax policy reforms should wait until the
recovery is firmly underway. The crisis has further highlighted the importance to increase public
expenditures on infrastructure, health care, and other social services, bringing to the forefront the
criticality of increasing revenue mobilization. While the government has focused on providing tax
incentives to support the recovery during the COVID-19 crisis, it should also use this opportunity to
build the momentum necessary to mobilize stakeholders’ support for an MTRS. Moreover, the MTRS
would not hurt the recovery because even if work on its design starts now, it will take time to bring
it to the legislative and implementation stages. For instance, the design of an MTRS encompasses
significant preparatory work, which could be time-consuming as it requires drafting of tax policy and
administration regulations and would involve several stakeholders, including government,
parliament, civil society, businesses, and other stakeholders.
9. In the short term, the fiscal strategy should encompass revenue measures to avoid
pressure for premature withdrawal of fiscal support measures. In the near-term, it is necessary
to safeguard tax revenues to avoid a precipitate unwinding of support measures that could fragilize
3
The net tax is defined as the difference between the consumer price and the supply cost.
62 INTERNATIONAL MONETARY FUND
INDONESIA
the recovery. To avoid further erosion of tax revenue, it is critical to ensure that the regulations
implementing the job creation omnibus law are carefully designed to avoid abuse of the new tax
facilities and mitigate their negative revenue effects. Strategies to protect revenue mobilization
include designing a formal business continuity plan if Indonesia gets hit by subsequent COVID-19
waves, assisting taxpayers and facilitating compliance burdens, and swiftly implementing fiscal
packages while ensuring that support measures are not abused. Revenue administrations should
also redirect their effort from arrears collection to focus on emerging compliance risks and
industries less affected by the crisis. Customs administration should maintain a minimum of risk-
based inspections to monitor and enforce anti-smuggling while easing the flow of essential goods.
As the pandemic abates, the strategy should be adjusted to ensure an effective collection of tax
arears that might have built up during the crisis.
INTERNATIONAL MONETARY FUND 63
64 Table 1. Proposed Indonesia’s Medium-Term Revenue Strategy
INDONESIA
Tax Policy Reform Tax Administration Reform Legal Framework Reform
INTERNATIONAL MONETARY FUND
Value-Added Tax Taxpayers’ Compliance Management KUP Changes
• Remove several exemptions. Launch a Compliance Improvement Program (CIP) • Modernize General Provisions Procedures law (RUU
• Reduce the registration threshold. with targeted, well-resourced, and supervised plans KUP) to improve its structure by simplifying and
• Removal of the sales tax on luxury goods. for: clarifying provisions and procedures to ensure a
• Increase (gradually) the standard rate • Value-added tax. proper balance between revenue collection and the
by 2 percentage points. • Employer withholding obligations. rights of taxpayers.
• Ultra-high wealth individuals. • Substantially relax the requirement for auditing all or
• Wealthy Indonesians—High-income earners most refund audits in favor of a more risk-based
Excise Taxes and high-wealth individuals, and approach.
• New excises on vehicles. professionals. Substantive Law Changes
• New excises on fuel. Underpin the CIP with five supporting initiatives: • VAT Law (RUU PPN) to strengthen revenue
• Strengthening audit. performance through measures that improve
Corporate Income Tax • Building a powerful data matching capability. VAT system design.
• Replace the myriad of special regimes for • National deployment of compliance • Income Tax Law to simplify the law and eliminate
corporate businesses by one single CIT risk management (CRM). distortions; and broaden the base to include the
regime. • Increasing efficiency of support and supervision. middle class while improving progressivity.
• Introduce alternative minimum tax. • Leveraging the tax amnesty and AEOI intelligence. • Eliminate the requirement to file a tax return for
employees whose only source of income is from
Personal Income Tax Institutional Reforms in Tax Administration a single job.
• Broaden PIT base by including the middle • Grant greater autonomy within the auspices • Excise Laws for revenue mobilization and addressing
class. of the Ministry of Finance. environmental externalities.
• Strengthen the progressivity of PIT. • Modernize HR management (gradually), • Property tax changes to boost local revenue—enabling
• Reduce the threshold of the SME regime. prioritizing policies in operational areas to the central government to reduce its transfers.
support the CIP. Decrees and Regulations
Property Tax • Revamp and relaunch the code of conduct. • Strengthen the governance framework for tax system
• Allow higher rate, while reducing • Streamline organization following reform to ensure effective implementation of the
local transfers. international trends. MTRS.
• Deploy a program of ICT improvements to • Provide authority to MOF to change internal structure,
Institutional Reforms in Tax Policy support CIP, in anticipation of the full ICT allocate staff, and re-grade positions.
• Strengthen capacity for revenue analysis in redevelopment.
the Tax Policy Unit of the BKF.
Political Support External Resources
• Strengthen reform governance and management. • Identify capacity requirements to reform development and implementation.
• Commit to multi-year budgets to secure reform implementation. • Identify available external support from CD partners to fill capacity constraints.
• Ensure government-led effort based on a whole-of-government approach. • Formalize an agreement with CD partners to support the government-led MTRS.
• Involve a wide base of stakeholders to achieve a country-owned effort.
• Launch an ‘Amnesty-like’ socialization campaign for the MTRS.
INDONESIA
References
Australia Indonesia Partnership for Economic Governance, 2016, “Indonesia's Macro-Fiscal
Challenges and Opportunities in International Perspective,” paper presented at the
MOF/BKF-AIPEG Workshop on Medium Term Macro-Fiscal Revenue Strategies.
De Mooij, Ruud, Suahasil Nazara, and Juan Toro, 2018, “Implementing a Medium-Term Revenue
Strategy,” Chapter 6 in Realizing Indonesia’s Economic Potential, eds. by Luis Breuer, Jaime
Guajardo and Tidiane Kinda (Washington: International Monetary Fund).
Gaspar, Vitor, David Amaglobeli, Mercedes Garcia-Escribano, Delphine Prady, and Mauricio
Soto, 2019, “Fiscal Policy and Development: Human, Social, and Physical Investment for the
SDGs,” IMF Staff Discussion Note No. 19/03 (Washington: International Monetary Fund).
International Monetary Fund, 2020, “Tax and Customs Administration Responses,” IMF Special Series
on Fiscal Policies to Respond to COVID-19 (Washington).
———, 2019, “Operationalizing a Medium-Term Revenue Strategy,” in Indonesia—Selected Issues,
IMF Country Report No. 19/251 (Washington).
———, 2018, ASEAN Progress Towards Sustainable Development Goals and the Role of the IMF, IMF
Policy Paper (Washington).
———, 2016, “Infrastructure Development in Indonesia,” in Indonesia—Selected Issues, IMF Country
Report No. 16/82 (Washington).
Kinda, Tidiane, and Djeneba Doumbia, 2019, “Reallocating Public Spending to Reduce Income
Inequality: Can It Work?,” IMF Working Paper No. 19/188 (Washington: International
Monetary Fund).
Sachs, J., G. Schmidt-Traub, C. Kroll, G. Lafortune, G. Fuller, and F. Woelm, 2020, Sustainable
Development Report 2020: The Sustainable Development Goals and COVID-19 (Cambridge;
United Kingdom: Cambridge University Press).
INTERNATIONAL MONETARY FUND 65
INDONESIA
Appendix V. COVID-19, Exceptional Policies, and Monetary
Budget Financing in Indonesia
Context
1. Indonesia, like many other emerging market economies, faces higher budget deficits
in the next few years because of the policy responses to and as a result of COVID-19.
Inevitably, domestic bond issuance will be higher, given constraints and risks on external foreign
currency financing. BI has provided direct budget financing; initially, financing was provided on a
last-resort basis in primary markets in end-March, with BI as a non-competitive bidder.
Subsequently, the arrangement was changed to a three-tranche “burden sharing” arrangement
(BSA) for 2020, with pre-defined amounts of BI bond purchases by tranche (each tranche associated
with a different type of expenditures) and seignorage transfers designed to lower effective interest
cost to the budget, depending on the tranche.
Burden Sharing Agreement
What Has Been Achieved?
2. The direct budget financing by BI has helped to avoid bond market uncertainty and
contributed to a normalization of local currency bond yields after the spike experienced
during the global financial market turmoil in March. As a result, broad financial conditions have
eased, lowering credit costs, notably also for the government, while the rupiah has remained broadly
stable.1 The lower interest costs for the additional financing needs allow for even higher primary
expenditure by the government for a given deficit target. The government has thus greater scope to
1
This is in line the early evidence on asset purchases by emerging market central banks during COVID-19. These
purchases have been effective in reducing bond yields and have not contributed to currency depreciation (IMF, 2020;
Fratto and others 2021; and Arslan and others, 2020).
66 INTERNATIONAL MONETARY FUND
INDONESIA
respond to the COVID-19 pandemic, especially
when considering the pandemic asymmetric
impact across economic sectors. In addition, as
funds injected through the monetary budget
financing of public expenditure work through the
economy, deposits in banks have increased,
boosting bank liquidity and, in principle,
supporting a recovery in bank lending.
What Are the Risks?
3. There are well-known risks from direct
budget financing by central banks. If the financing leads to a large expansion of the monetary
base, it might not be consistent with price and currency stability objectives, depending on money
demand. While monetary operations could, in principle, reconcile large financing with price stability
objectives, the implied increase in interest rates could lead to an increase in budgetary financing
costs, one of the key outcomes that BI budget financing was seeking to avoid. If fiscal policy
considerations have priority over monetary policy objectives under such conditions, often referred
to as “fiscal dominance,” BI’s operational independence would be impaired, thereby damaging its
credibility and leading to both higher inflation expectations and nominal interest rates, also implying
that BI financing would not achieve its objective.
Assessment
4. There is a case for BI bond purchases on a last-resort basis. Nonresident investors hold a
substantial share of rupiah-denominated government bonds, especially at the longer maturity
spectrum, but have not been willing for further
increase their exposure. Domestic bond demand
is more inelastic and limited in size, especially
for longer durations, given few institutional
investors. While domestic banks have nearly
doubled their holdings of government bonds
in 2020, the scope for further increases seems
more limited. The high growth has largely
reflected one-off, pandemic related factors,
notably increased risk aversion. Higher net
issuance in domestic markets by the
government will thus come with risks of market
dislocation and higher yields.
5. Indonesia’s public debt ratio is relatively low, and the change in budgetary interest
cost from the higher budget deficits is small, around 0.1 percent of GDP. As such, risks of fiscal
dominance seem small. On the other hand, despite the relatively small impact of the increased,
exceptional budget deficits on budgetary interest costs, the pre-defined tranche-based design of
INTERNATIONAL MONETARY FUND 67
INDONESIA
the BSA centers around budget considerations, while monetary policy considerations seem less
prominent. Moreover, the pre-defined amounts of BI purchases in the BSA are relatively large
compared to base money, suggesting a possible need for sterilization by BI to meet price and
external stability objectives. If so, BI seignorage would be smaller, highlighting the potential
inconsistencies with the tranche approach.
6. The possibility of further direct budgetary financing in the next few years, given
continued larger-than-usual budget deficits, raises uncertainty about modalities and time
horizon of exceptional monetary policy. The BSA only covers 2020.
7. Going forward, the monetary budget financing scheme should not be pre-defined and
should be guided by well-defined last resort criteria, based on bond market and broader
financial conditions. Such an approach could be integrated into the established monetary policy
framework, which would reduce risks from these exceptional policies.
68 INTERNATIONAL MONETARY FUND
INDONESIA
References
Arslan, Yavuz, Mathias Drehmann, and Boris Hofmann, 2020, “Central Bank Bond Purchases in
Emerging Market Economies,” BIS Bulletin, No. 20.
Fratto, Chiara, Brendan Harnoys Vannier, Borislava Mircheva, David de Padua, and Helene Poirson
Ward, 2021, “Unconventional Monetary Policies in Emerging Markets and Frontier
Countries,” IMF Working Paper No. 21/14 (Washington: International Monetary Fund).
International Monetary Fund, 2020, “Emerging and Frontier Markets: Managing Portfolio Flows,”
Chapter 3 in Global Financial Stability Report, April (Washington).
INTERNATIONAL MONETARY FUND 69
INDONESIA
STAFF REPORT FOR THE 2020 ARTICLE IV
January 29, 2021 CONSULTATION—INFORMATIONAL ANNEX
Prepared By Asia and Pacific Department
CONTENTS
FUND RELATIONS _______________________________________________________________________ 2
RELATIONS WITH OTHER INTERNATIONAL FINANCIAL INSTITUTIONS ___________ 4
STATISTICAL ISSUES ____________________________________________________________________ 5
INDONESIA
FUND RELATIONS
(As of December 31, 2020)
Membership Status: Joined February 21, 1967; Article VIII
General Resources Account
SDR Millions Percent of Quota
Quota 4,648.40 100.00
IMF’s holdings of currency (holding rate) 3,860.13 83.04
Reserve tranche position 788.27 16.96
SDR Department
SDR Millions Percent of Allocation
Net cumulative allocation 1,980.44 100.00
Holdings 1,114.59 56.28
Outstanding Purchases and Loans: None
Financial Arrangements
Amount Amount
Approval Expiration Approved Drawn
Type Date Date (SDR Millions) (SDR Millions)
EFF 02/04/00 12/31/03 3,638.00 3,638.00
EFF 08/25/98 02/03/00 5,383.10 3,797.70
Stand by 11/05/97 08/25/98 8,338.24 3,669.12
Projected Payments to Fund (SDR millions; based on existing use of resources and present
holdings of SDRs):
Forthcoming
2021 2022 2023 2024 2025
Principal
Charges/Interest 0.75 0.72 0.72 0.72 0.72
Total 0.75 0.72 0.72 0.72 0.72
Exchange Arrangements
The rupiah has had a de jure free floating exchange arrangement since August 14, 1997, and the
current de facto arrangement is floating. The market exchange rate was Rp 14,050 per U.S. dollar as
of December 31, 2020. Indonesia has accepted the obligations of Article VIII, Sections 2, 3, and 4,
and maintains an exchange system free of restrictions on payments and transfers for current
international transactions.
2 INTERNATIONAL MONETARY FUND
INDONESIA
Article IV Consultation
The last Article IV consultation report (IMF Country Report No. 19/250) was discussed by the
Executive Board on July 3, 2019.
Resident Representative
Mr. James Walsh replaced Mr. John Nelmes as the Senior Resident Representative in August 2020.
INTERNATIONAL MONETARY FUND 3
INDONESIA
RELATIONS WITH OTHER INTERNATIONAL FINANCIAL
INSTITUTIONS
• World Bank: https://financesapp.worldbank.org/en/countries/Indonesia/
• Asian Development Bank https://www.adb.org/countries/indonesia/main
4 INTERNATIONAL MONETARY FUND
INDONESIA
STATISTICAL ISSUES
I. Assessment of Data Adequacy for Surveillance
General: Data provision is broadly adequate for surveillance with some shortcomings in fiscal and external sector statistics.
National accounts: Statistics Indonesia (BPS) disseminates annual and quarterly GDP (QGDP) by economic activity and expenditure
components at current prices and in volume terms at 2010 prices regularly. In general, GDP estimates are based on the latest international
methodologies following the System of National Accounts 2008. The QGDP estimates are based on a limited set of indirect indicators. Some
sectors are influenced strongly by seasonality, with seasonally adjusted data prepared but not published. A TA mission to evaluate the
methods used to compile quarterly volume measures of household consumption and taxes on products is planned for 2021. BPS has been
leading the work on developing sectoral accounts and balance sheets jointly with Bank Indonesia (BI) with TA from STA. BPS and BI expect
to finalize the provisional data for the years 2010–2019 at the end of January 2021. BPS also expects to finalize the 2015 supply and use
tables in 2021
Price statistics: An updated CPI with weight and index reference periods of 2018 was introduced in January 2020. This update improved
the CPI representativeness of current consumer expenditure patterns and incorporated improved imputation methods and expanded
coverage of ecommerce transactions. The PPI is released quarterly with an index and weight reference period for PPI is 2010. The weights
should be updated to better reflect current production. BPS has expanded PPI coverage to include some services activities, including
passenger transport and hotel and restaurants. A July 2020 mission supported the BPS with creating a workplan to further expand PPI
coverage to freight transportation and telecommunications. In 2019, STA assisted Bank Indonesia with the development of an enhanced
Residential Property Price Index (RPPI) using Internet property listings datasets.
Government finance statistics (GFS): The Ministry of Finance (MOF) is committed to keeping the requirements of fiscal statistics at the
forefront of ongoing fiscal reforms, with better statistical monitoring one of the goals of the current efforts. The authorities are continuing
their efforts to adopt the GFSM 2001/2014 standards, with assistance from STA as part of a regional GFS project. Significant progress has
been made in these areas and, Indonesia now reports to STA annual general government data (including balance sheet data) covering the
period from 2008 onwards. Annual general government GFS are currently available within 12 months after the end of the reference period
and these data are published on the GFS website: http://www.gfs.djpbn.kemenkeu.go.id/en. Aggregated monthly data on the budget of the
central government are available with a one-month lag.
In late 2015, the authorities have started to compile quarterly general government data based on estimates of local government data.
Quarterly general government GFS (operations statement) are available 6 months after the end of the reference quarter. The quarterly
general government data are yet to be published on the GFS website because the authorities are improving these data in terms of coverage
of local governments and timeliness with the development of new regional financial information system. Limited quarterly general
government GFS data are published in IFS. The coverage and timeliness of public debt statistics are generally adequate with quarterly data
published in the World Bank’s Quarterly Public Sector Debt Database.
Monetary and financial statistics (MFS) and financial soundness indicators (FSIs): Good quality monetary statistics are compiled by BI
on a timely basis. BI compiles and reports monetary data using the Standardized Report Forms (SRFs), from which an integrated database
and alternative presentations of monetary statistics can be drawn to meet the needs of BI and the IMF. Additional challenges include timely
revisions of published banking sector data after supervisory verification. BI also reports the OFCs survey, which since January 2015 includes
finance companies, insurance companies, pension funds, the state-owned pawn shop (PT Pegadaian), and the Indonesian export financing
institution (Eximbank). MFS data are reported on a monthly basis. A Fund TA mission in October 2014 also assisted BI in advancing the
production of flow-based monetary statistics and quarterly financial accounts. BI compiles and reports to the Fund all (12) core and
12 encouraged financial soundness indicators (FSIs) for deposit takers, all (two) encouraged FSIs for OFCs, two encouraged FSIs for
nonfinancial corporations, one encouraged FSI for households, two encouraged FSIs for market liquidity, and four encouraged FSIs for the
real estate sector, which are published quarterly on the Fund’s FSI website. Indonesia reports data on some key series and indicators of the
Financial Access Survey (FAS), including mobile money and the two indicators adopted by the UN to monitor Target 8.10 of the Sustainable
Development Goals (SDGs).
External sector statistics (ESS): Trade data have been improved in recent years. Import and export transactions of free trade zones and
bonded warehouses are captured in goods data of balance of payments (BOP) statistics.
For financial account, the methodological basis for the compilation of direct investment (DI) data needs substantial improvement. Inflows
are currently calculated based on loan disbursements to companies that have foreign equity using a fixed ratio to estimate equity inflows.
The errors and omissions in BOP has been large and predominantly negative and could be related to the under coverage of imports in
current account or assets in the financial account. Financial transactions data are reconciled with changes in the international investment
position (IIP), except data on DI.
IIP data are compiled and published annually and quarterly. External debt statistics improved considerably with the introduction of an
External Debt Information System (EDIS) in 2002 and the subsequent initiative to publish monthly indicators. Also, as a result of the ongoing
reconciliation of data conducted by BI, the IIP and external debt data are fully consistent. However, improvements are still needed with
respect to components of private corporate sector data, particularly in distinguishing between scheduled and actual debt service, in
estimating the accumulation/reduction of private sector payments arrears, and in estimating reschedulings/debt reductions received by the
private sector from external creditors.
II. Data Standards and Quality
Indonesia has subscribed to the Special Data Dissemination
Standard (SDDS) since September 1996. Indonesia uses the SDDS
flexibility options for the timeliness of the labor market categories
(employment, unemployment, and wages/earnings) and general
government operations.
INTERNATIONAL MONETARY FUND 5
INDONESIA
Indonesia: Table of Common Indicators Required for Surveillance
(As of January 5, 2021)
Memorandum Items:
Data
Quality—
Date of Frequency Frequency Data Quality— Accuracy
Latest Date of of Frequency of Methodological and
Observation Received Data1 Reporting1 Publication1 Soundness2 Reliability3
Exchange rates 1/5/2020 1/5/2021 D D D
International reserve assets and M M M
reserve liabilities of the monetary 11/2020 12/2020
authorities4
Reserve/base money 10/2020 12/2020 W/M W/M W/M O, LO, O, O LO, O, O, LO,
O
Broad money 10/2020 12/2020 M M M
Central bank balance sheet 10/2020 12/2020 M M M
Consolidated balance sheet of the 10/2020 12/2020 M M M
banking system
Interest rates 5 1/5/2021 1/5/2021 D D D
Consumer price index 12/2020 1/2021 M M M
Revenue, expenditure, balance 11/20 12/20 M M Mid-year LNO, LNO, LO, LNO, LO, LO,
and composition of financing6— LNO LO, LNO
central government
Stocks of central government and 11/20 12/20 Q Q Q
central government–guaranteed
debt
External current account balance Q3/2020 11/2020 Q Q Q LO, LO, LO, LO LO, O, LO, O,
O
Exports and imports of goods and Q3/2020 11/2020 Q Q Q
services
GDP/GNP Q3/2020 11/2020 Q Q Q LO, LO, O, LO LO, LO, LO,
LO, LNO
Gross external debt 7 10/20 12/20 M M M
International investment position8 Q3/2020 12/2020 Q Q Q
1 Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); NA: Not Available.
2 Reflects the assessment provided in the data ROSC published on July 20, 2005 (based on the findings of the mission that took place during
March 28-April 11, 2005), for the dataset corresponding to the variable in each row. The assessment indicates whether international standards
concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O); largely observed (LO);
largely not observed (LNO); not observed (NO); and not available (NA).
3 Including currency and maturity composition, except referring to international standards concerning source data, assessment of source
data, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.
4 Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term
liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive
foreign currency, including those linked to a foreign currency but settled by other means.
5 Both market based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
6 Foreign, domestic bank, and domestic nonbank financing.
7 Including currency and maturity composition.
8 Includes external gross financial assets and liability positions vis-à-vis nonresidents.
6 INTERNATIONAL MONETARY FUND
Statement by Alisara Mahasandana, Executive Director for Indonesia;
Firman Mochtar, Alternative Executive Director; and
Dian Susiandri, Advisor to Executive Director
February 12, 2021
On behalf of Indonesian authorities, we would like to thank the IMF mission team for a
comprehensive and effective mission under an exceptional circumstance. We value staff’s
deep dive into Indonesia’s economic development to build a constructive policy dialogue
during the 2020 Article IV consultation. The authorities found the discussions valuable and
broadly share staff’s analysis and recommendations, in particular on how to navigate the
recovery.
A. Recent Economic Development and Outlook
The COVID-19 outbreak has generated unprecedented pressures on the health and
socio- economic conditions, but the prompt and bold policy responses have successfully
mitigated the fallouts. Economic growth has contracted sharply in the second quarter
of 2020, before rebounding in the following quarter owing to gradual economic reopening
and a package of policy supports. GDP growth in 2020 recorded at -2.07 percent was better
than the estimated regional average of -3.7 percent. External sector has exhibited resilience
supported by higher capital inflows and lower current account deficit (CAD) resulting in the
balance of payment recording a surplus in 2020 and a strong international reserves position.
Exchange rate has remained flexible and continued to play a role as a shock absorber to the
economy. Consumer Price Index (CPI) inflation has declined to 1.68 percent at the end
of 2020, below the target range of 3.0±1.0 percent, mainly due to a positive food supply
shock reflecting a strong harvest and weak demand. Financial system stability was also
maintained backed by adequate buffers built prior to the pandemic and ongoing liquidity
support by the central bank, Bank Indonesia (BI). The stress-test result indicated that the
capital adequacy ratio (CAR) of the banking industry and finance companies remains
sufficient to offset higher credit and financing risk, even under severe macroeconomic
conditions. Nonetheless, waning domestic demand and increasing risk perception of banks
amid the pandemic shock have become a challenge to spur credit growth.
Economic recovery is expected to strengthen in 2021. Staff’s GDP projection of
4.8 percent for 2021 lies within the lower bound of the authorities’ forecast (4.8 –
5.8 percent). The sanguine outlook is underpinned by global economic recovery, accelerated
vaccines rollout, and continued strong policy stimulus packages. Inflation is expected to be
well-contained within the target band of 3.0±1.0 percent. CAD is predicted to be within 1.0-
2.0 percent of GDP in 2021, a slight increase compared to 2020 in line with the expected
economic recovery. Financial system stability continues to be well-maintained with the credit
growth projected to accelerate to 7.0–9.0 percent. In the medium term, Indonesia’s economic
growth will continue to recover in the range of 5.5 – 6.1 percent in 2025, consistent with
improved productivity and buttressed by ongoing structural reforms.
2
The authorities, however, remain vigilant amid the uncertainties surrounding the
pandemic and measures were adopted to mitigate the risks. With their adequate policy
space as a result of credible policy framework, the authorities stand ready to undertake
necessary policy actions as needed to preserve macroeconomic stability. In dealing with the
pandemic, the Government is committed to providing free vaccines to all citizen in two
stages. The first stage (Jan-April 2021) is targeted for health workers and public service
officers, while the second stage (April 2021- March 2022) will be delivered to the rest of
population. In this regard, they have secured a large amount of vaccines (more than
300 million doses) from various producers and are closely monitoring its distribution
nationwide. On the non-financial corporate (NFC) sector, the authorities viewed that the risk
remains manageable, in line with recent positive developments. The data show that corporate
sales started to pick up in the third quarter of 2020, followed by improving corporates buffer
as reflected in their accelerated deposit growth in banks. In addition, many of those
corporates are conglomerate firms, which enables them to receive intra-group financing
supports. To facilitate corporate revival, the authorities have provided guidance on gradual
reopening of priority sectors in accordance with their productivity and safety level. Going
forward, the authorities will continue to closely monitor the situation and stand ready to
provide further support if needed. On external risks, the corporates’ balance sheet FX risk has
declined significantly due to the authorities’ prudential regulation imposing hedging
requirement on corporate FX loans. Recent data showed that more than 90 percent of
corporates complied with this regulation, making corporates’ balance sheet less susceptible to
currency risk.
B. Policy Responses
As highlighted in the Staff Report, the authorities have taken a bold, comprehensive,
and coordinated policy response to mitigate the unprecedented impact of the crisis and
to steer the economic recovery. To enhance policy efficacy, the authorities enacted Law
No. 2 of 2020 as the legal basis for undertaking extraordinary responses in a swift,
transparent, and accountable manner during the COVID-19 pandemic. This law provides for
a temporary relaxation of the budget deficit ceiling which can be widened beyond 3 percent
of GDP until 2022. BI is also permitted to purchase government bonds (SBN) in the primary
market from the Government, in accordance with the prudential principles cited in the Act.
The law also includes financial system stability policies aimed at enhancing the role of the
financial service authority (Otoritas Jasa Keuangan/OJK) and deposit insurance corporation
(Lembaga Penjaminan Simpanan/LPS).
Going forward, the authorities remain committed to supporting economic recovery and
advancing structural reforms. In the near-term, the authorities are expediting the
deployment of the vaccines. These essential policies would be buttressed by five-coordinated
policy strategies, namely (i) reopening of productive and safe sectors; (ii) expediting fiscal
stimuli; (iii) stimulating bank lending on the supply and demand sides; (iv) maintaining
monetary and macroprudential stimuli, and (v) accelerating economic and financial
3
digitalization. These policies will be tied in with structural reforms to boost long-term
growth.
Fiscal Policy
The Government has implemented an expansionary fiscal policy in 2020 as a
countercyclical policy to cushion the impact of the COVID-19 crisis and support
economic recovery. Government expenditures were significantly increased to support the
COVID-19 and the national economic recovery program (Program Pemulihan Ekonomi
Nasional/PEN) amounting to Rp. 695.2 trillion (4.2 percent of GDP), for public goods (i.e.
health, social assistance, and public services) as well as non-public goods (i.e. incentives to
MSMEs, business and corporations). These large fiscal stimuli have widened the budget
deficit to 6.1 percent of GDP in 2020 from 2.2 percent of GDP in 2019. To ensure the
effectiveness of fiscal measures related to the COVID-19 as well as to safeguard
accountability, staff has rightly pointed out the three-pronged approach adopted by the
Government, namely to initiate early consultation with the Audit Board of Indonesia, to
institute monthly reporting requirements on COVID-19-related programs, and to plan for an
ex-post evaluation of the effectiveness of the incentives.
In 2021, the Government will continue to adopt countercyclical fiscal policy to secure
economic recovery, followed by a gradual reduction of budget deficit to ensure fiscal
sustainability. In this regard, overall budget deficit is expected to be around 5.7 percent of
GDP in 2021. The authorities would like to reiterate their commitment to gradually bring the
budget deficit back below 3 percent of GDP in 2023, supported by further revenue
mobilization and enhanced spending efficiency.
The Government will continue to enhance revenue mobilization and improve spending
efficiency to support medium-term fiscal adjustment. As the authorities acknowledge the
importance of the Medium-term Revenue Strategy (MTRS), their intention to continue
improving fiscal revenue has been set out on a 2020-2024 strategic plan, which is formally
adopted in the Minister of Finance regulation (PMK) number 77/PMK.01/2020. Several
strategic initiatives would be undertaken to increase potential sources of revenue (i.e. tax,
duty, excise and other non- tax revenue), including (i) improving tax compliance, in
particular taxation (VAT) of e- commerce transaction, (ii) developing digital-based tax and
other revenue services, (iii) expanding tax-base and non-tax base, and (iv) modernizing
revenue administration. The revenue reforms will be underpinned by enhancement in many
aspects, such as institution, human resources, IT and databases, business processes, and tax
regulations. These initiatives would be complemented by regulatory reforms related to
taxation, such as the Omnibus bill. On the expenditure front, government spending will be
prioritized to facilitate the resilient recovery with a focus on health, education, infrastructure,
food security, social safety net, tourism, and MSMEs. The authorities underscore that fiscal
policy will be flexibly implemented within the 2021 budget spending envelope following a
data-driven approach, along with more targeted subsidy and effective social assistance to
4
protect the most vulnerable group. Also, excess financing (SiLPA) from the 2020 State
Budget amounting to Rp. 234.7 trillion, in part (Rp. 50.9 trillion) will be carried over to 2021
to finance the vaccination program and support SMEs and corporate sectors, meanwhile the
rest will remain in the cumulative financing surplus (SAL).
Monetary and Exchange Rate Policy
In dealing with the extraordinary crisis, BI has pursued an accommodative monetary
policy, utilizing all available policy instruments. BI has lowered its policy rates (BI7DRR)
five times by 125 bps to 3.75 percent in 2020, the lowest level in history. BI has also injected
large amounts of liquidity into the banking system, particularly through a 300 bps reduction
in the statutory reserve requirement and monetary expansion by buying government bonds in
the secondary market. Amidst global financial market uncertainties, exchange rate
stabilization policy has been adopted such that the value of the Rupiah is in line with its
fundamentals and market mechanism. Stabilization policy to manage excessive volatility was
undertaken through a ‘triple intervention’ via outright buying and selling of foreign exchange
in the spot market, Domestic Non-Deliverable Forward (DNDF), and purchases of SBN from
the secondary market.
In accordance with Law No.2 of 2020, the purchase of SBN in the primary market has
been conducted prudently, consistent with good governance principles, so as to preserve
macroeconomic stability. The purchase of SBN in the primary market by BI to finance
the 2020 State Budget deficit is carried out through 2 mechanisms. As laid out in the first
joint agreement between the Minister of Finance and the Governor of BI (April 16, 2020),
the purchase of SBN will follow four main principles, namely: (i) using market mechanism;
(ii) considering the impact on inflation; (iii) purchasing only tradable and marketable SBN;
and (iv) BI purchasing SBN on a last-resort basis. Under this first Joint Agreement, BI has
purchased SBN in the primary market amounting to Rp. 75.86 trillion. There was also a
second joint agreement between the Minister of Finance and the Governor of BI (on
July 7, 2020), where BI purchased SBN directly from the Government for public goods
financing in the 2020 State Budget amounting to Rp. 397.56 trillion, with the interest to be
borne by BI. Under this second Joint Agreement, BI also bear a portion of the interest burden
to finance non-public goods related to MSMEs and corporate incentives, amounting to Rp.
177 trillion. The authorities have confirmed that this second joint agreement is a one-off
policy and thus only applicable in 2020. BI's support for fiscal financing in the context of
handling Covid, which was carried out by adhering to the principles of governance,
prudence, and monetary discipline, has succeeded in maintaining the confidence of investors
and rating agencies. This can be seen in the return of capital inflows, particularly to SBN and
the retention of Indonesia's rating by the major rating agencies.
Looking ahead, monetary policy in 2021 would continue to support economic recovery,
while safeguarding macroeconomic stability. Low interest rates and ample liquidity will be
maintained while closely keeping an eye on inflationary pressures. Liquidity will remain
5
loose to support bank lending and financial system stability. Moreover, the stability of the
Rupiah exchange rate will be maintained in accordance to its fundamentals and market
mechanism. The FXI will be adopted as needed to address any disorderly market conditions.
The Government’s effort to continuously develop the retail bond market to widen domestic-
based investor will contribute positively to exchange rate stabilization. In addition, several
reform initiatives to attract long term investment, particularly through FDI, will eventually
improve capital flows composition as well as enhance external sector resiliency.
BI and the Government will continue to closely coordinate their monetary and fiscal
stimulus to accelerate the economic recovery. The direct purchase of SBN by BI in
accordance with the second joint agreement will not be continued in the 2021 State Budget.
However, as the recovery in the post COVID-19 episode is still underway, the first joint
agreement is extended until December 31, 2021, in which the purchase of SBN will be in
accordance with the four aforementioned main principles to ensure price stability.
Macroprudential and Financial Sector Policy
BI continues to pursue accommodative macroprudential policies to mitigate the adverse
impact of the pandemic-related shock on the financial system as well as to support the
economic recovery. Since April 1, 2020, BI has lowered the reserve requirement ratio by
50 bps─in addition to the 300 bps reduction in the statutory reserve requirement─for banks’
lending to export-oriented businesses, SMEs, or priority sectors and has extended this policy
until June 2021. To stimulate banking intermediation, BI kept the Countercyclical Capital
Buffer at 0 percent and relaxed the Macroprudential Intermediation Ratio. BI has also
strengthened banking liquidity through the regulation on Macroprudential Liquidity Support.
In addition, BI relaxed the provision for the Loan to Value ratio for environmentally friendly
motor vehicle loans to 0 percent.
OJK and LPS have also embarked on various policies to dampen the impact of the
pandemic. OJK has deployed a policy package that aims at relaxing certain regulatory
provisions in the banking sector to alleviate financial and liquidity pressure during the crisis.
The policy package for banks include relaxation measures related to reporting, credit
treatment, and governance of restructured credit, as well as postponement of the
implementation of Basel III reforms. As of December 2020, restructured credit has reached
Rp. 971 trillion (18 % of total credit). In this context, partial relaxation of loan classification
rules will also be extended until March 2022. The extension of loan restructuring relaxation
is expected to minimize the potential cliff effects due to tighter risk management
requirements. Banks are required to ensure debtors’ viability throughout the relaxation period
by implementing continuous assessment of debtors’ conditions. In this context, banks must
build provisions accordingly. Furthermore, banks have adequate capital to absorb the
possible increase in provisions going forward. In addition, LPS has relaxed the penalty for
late premium payments to ease the liquidity pressures during the crisis.
6
Going forward, financial sector policy will remain accommodative to boost credit
growth during the recovery process, while preserving financial system stability. BI will
assess the possibility to further ease a number of existing and new macroprudential policy
instruments. To promote MSMEs-based growth, BI will issue a macroprudential policy by
expanding the target and coverage of inclusive financing, provide incentives for banks that
encourage the corporatization of MSMEs (particularly in the priority sectors), and promote
the securitization of MSMEs loans. This will be complemented by OJK’s microprudential
supervision, as described in the Indonesian Financial Services Sector Master Plan
(MPSJKI) 2021-2025. This will address the short-term challenges related to the COVID-19
shock as well as the long-term structural challenges to promote a stable, contributive and
inclusive financial industry. In addition, coordination through the Financial System Stability
Committee will also be fortified, including enhancing the crisis management protocol in the
financial system. Crisis management and resolution frameworks along with maintaining
financial stability have become a high priority for the authorities.
Structural Reforms
The authorities will continue their reform agenda to improve productivity and to
achieve a strong, sustainable and inclusive growth, while also steering towards a
greener economy. Continuous efforts are underway in the multi-dimensional aspects of the
reforms. Recent notable reforms are on the financial sector, regulatory reform through the
omnibus bill, establishment of the Sovereign Wealth Fund (SWF), and green economy
policies.
On the financial sector, BI continues to accelerate money market deepening and
digitalization of the payment system. BI has formulated the 2025 Money Market
Deepening Blueprint that could strengthen monetary policy transmission as well as support
financing for the economy. Moreover, BI has launched the 2025 Indonesian Payment System
Blueprint to speed up the digitalization of the payment system. Payment system regulatory
reforms directed at the establishment of end-to-end digital economy and finance ecosystem
between digital banking, FinTech, e-commerce, merchants and consumers are also underway.
Simplifying regulations is the top reform agenda to enhance business climate and create
jobs. The authorities have enacted the omnibus bill on job creation on November 2, 2020,
which includes tax related matters. This entails a massive process of synchronization of
existing laws, including the revision of 80 laws and 1.200 articles. The bill will streamline
business permits, improve the ease of doing business, create employment opportunities as
well as protect employees. It also includes tax incentives for businesses, including through
adjustment of the corporate income tax rate. The enactment of the bill together with the
implementation of the Regional Comprehensive Economic Partnership (RCEP) will benefit
the Indonesian economy. Meanwhile, the omnibus bill to develop and strengthen the
financial sector is still under discussion, and the authorities underscored that the bill will
secure the central bank’s independence.
7
Following the enactment of Omnibus Law on Job Creation, the government has
established a new SWF called the Indonesia Investment Authority (INA). This aims at
deepening access to finance to boost investment and accelerate infrastructure projects and
other priority sectors, which in turn will generate new job opportunities and improve
productivity. Under Government Regulation No. 72 of 2020, the Government provides initial
capital to INA amounting to Rp. 15 trillion (or around US$ 1 billion).
The authorities are committed to strengthening ongoing efforts towards a greener
economy. In the wake of the 2011 National Action Plan for Greenhouse Gas Emission
Reduction, the authorities have established an Environmental Fund Management Agency
(BPLDH) in 2019 to attract national and international donors as well as to effectively
mobilize public and private funds in order to support the programs. Recently, the Medium-
Term Development Plan 2020- 2024 reflects Indonesia’s strong commitment to shift to a low
carbon economy and a more climate resilient path, through several key initiatives such as
renewable energy and energy efficient development, forest conservation and reforestation,
waste management, land intensification, and others. Indonesia has also continued to develop
a green bond market through the issuance of the Green Sukuk (Islamic bonds) since 2018.
File and source
- File
- u099_idn_english-1idnea2021001-pdf.pdf
- Size
- 6,981,291 bytes
- SHA-256
- 564f2077d2869aaab3dda0cda2286e9e782351f3d4c91600abe6b910e2b0be5a
- Original
- www.imf.org