World Bank, "Indonesia Economic Prospects: The Long Road to Recovery" (July 2020)
Summary
The July 2020 edition of the World Bank's six-monthly Indonesia Economic Prospects, prepared by the Jakarta office with data through July 3, 2020, assesses the economy's response to COVID-19. Its section headings report that economic growth fell to its slowest pace in almost two decades, that portfolio investment saw record outflows, and that fiscal policy reacted quickly to boost spending on health and livelihoods. Part B's figures state that the crisis hit Indonesian firms hard in almost every sector, that only 7 percent of firms had received assistance from the government, and that firms were largely not aware that assistance may be available.
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“World Bank, ‘Indonesia Economic Prospects: The Long Road to Recovery’ (July 2020).”
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I NDONESI A ECONOMI C PROSPECTS
T he L ong R oa d to R ecovery
July 2020
Preface
The Indonesia Economic Prospects (IEP) is a six-monthly World Bank report that aims to provide an impartial and up-to-date assessment of
recent global and domestic macroeconomic developments, outlook and risks, as well as specific development challenges for the Indonesian
economy. In doing so, the IEP informs public policy debate, not only for the government but also for the private sector, civil society organizations,
and other domestic and international stakeholders.
The IEP has two main objectives. First, it highlights key developments in the Indonesian economy over recent months, and places these in a
longer-term context. Based on these developments, and on policy changes over the period, the IEP regularly updates the outlook for Indonesia’s
economy. The ongoing COVID-19 pandemic highlights the continued need for sound macroeconomic monitoring to help the economy weather
the impact of the crisis. Second, the report provides an in-depth examination of selected economic and policy issues, and an analysis of the
country’s medium-term development challenges. It is intended for a wide audience, including policy makers, business leaders, financial market
participants, and the community of analysts and professionals engaged in Indonesia’s evolving economy.
The IEP is a product of the World Bank’s Jakarta office and receives guidance from an editorial board chaired by Satu Kahkonen, Country Director
for Indonesia and Timor-Leste. The report is prepared by the Macroeconomics, Trade and Investment (MTI) Global Practice team, under the
guidance of Ndiame Diop (Practice Manager), Sebastian Eckardt (Acting Practice Manager) and Frederico Gil Sander (Lead Economist). Led by
Derek H. C. Chen (Senior Economist and lead author), the core project team comprises Dwi Endah Abriningrum, Rabia Ali, Arsianti, Hilda
Choirunnisah, Deviana Djalil, Indira Maulani Hapsari, Ahya Ihsan, Assyifa Szami Ilman, Angella Faith Lapukeni, Yus Medina, Juul Pinxten,
Anthony Obeyesekere, Ratih Dwi Rahmadanti, and Virgi Agita Sari. Dissemination is organized by Jerry Kurniawan and GB Surya Ningnagara
under the guidance of Lestari Boediono Qureshi.
Part A of this edition of the IEP was coordinated by Indira Maulani Hapsari, with contributions from Anthony Obeyesekere (Section A.1), Angella
Faith Lapukeni and Ratih Dwi Rahmadanti (Section A.2), Dwi Endah Abriningrum (Section A.3), Ratih Dwi Rahmadanti (Section A.4), Yus
Medina (Section A.5), Juul Pinxten, Sara Giannozzi, Josefina Posadas and Hamidah Alatas (Section A.6), Rabia Ali and Virgi Agita Sari (Section
A.7), Indira Maulani Hapsari (Section A.8), Dwi Endah Abriningrum and Magda Adriani (Box A.1), Ririn Salwa Purnamasari (Box A.2), Hilda
Choirunnisah and Indira Hapsari (Box A.3), Josefina Posadas and Hamidah Alatas (Box A.4), and Muhammad Fajar Nugraha (Box A.5).
Part B was coordinated by Anthony Obeyesekere, with contributions from Anthony Obeyesekere (Section B.1), Pandu Harimurti and Somil
Nagpal (Section B.2), Aufa Doarest, Bertine Kamphuis, and Massimiliano Cali (Section B.3), Francesco Strobbe, Ketut Kusuma and Neni Lestari
(Section B.4), Anthony Obeyesekere, Sara Giannozzi, Juul Pinxten, and Josefina Posadas (Section B.5 and Section B.6), Anthony Obeyesekere
(Section B.7 and Section B.8), Andhyta Firselly Utami, Massimiliano Cali and Bertine Kamphuis (Box B.1). Excellent research assistance was
provided by Hilda Choirunnisah. The Appendix was provided by Assyifa Szami Ilman.
The report also benefited from discussions with, and in-depth comments from Jaffar Al-Rikabi, Gillian Brown, Jeffrey Delmon, Camilla Holmemo,
Ergys Islamaj, Anna C. O’Donnell, Ririn Salwa Purnamasari, Changqing Sun, Sailesh Tiwari, Ralph Van Doorn, Ekaterina T. Vashakmadze,
Hassan Zaman, and Janani Kandhadai (editorial assistant).
This report is a product of the staff of the International Bank for Reconstruction and Development/the World Bank and is supported by funding
from the Australian government under the Support for Enhanced Macroeconomic and Fiscal Policy Analysis (SEMEFPA) program.
The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the Executive Directors of the World
Bank or the governments they represent, or the Australian government. The World Bank does not guarantee the accuracy of the data included in
this work. The data cut-off date for this report was July 3, 2020. The boundaries, colors, denominations, and other information shown on any
map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or
acceptance of such boundaries.
Photographs by Robertus Pudyanto and Komari Komari/shutterstock.com. All rights reserved.
This report is available for download in English and Indonesian via: worldbank.org/iep
Previous report editions:
• December 2019: Investing in People
• June 2019 : Oceans of Opportunity
• December 2018: Strengthening Competitiveness
To receive the IEP and related publications by email, please email ddjalil@worldbank.org. For questions and comments, please email
ihapsari@worldbank.org and aobeyesekere@worldbank.org.
For information about the World Bank and its activities in Indonesia, please visit:
www.worldbank.org/id instagram.com/worldbank
@BankDunia #IEQBankDunia www.linkedin.com/company/the-world-bank
BankDunia
Abbreviations
APD Alat Pelindung Diri MoH Ministry of Health
ASEAN Association of Southeast Asian Nations MoPWH Ministry of Public Works and Housing
Askrindo Asureansi Kredit Indonesia MoSA Ministry of Social Affairs
BI Bank Indonesia MSME Micro Small Medium Enterpise
BLT Bantuan Langsung Tunai MTI Macroeconomics, Trade and Investment
BLU Badan Layanan Umum NBFIs Non-Bank Financial Institutions
BoP Balance of Payments NCD Non Communicable Disease
BPJS Badan Penyelenggara Jaminan Sosial NPL Non-Performing Loan
BPK Badan Pemeriksaan Keuangan NTI Net Trade-commodity price Index
BPS Biro Pusat Statistik OECD Organization for Economic Co-operation and
Development
BPUI Bahana Pembinaan Usaha Indonesia O&G Oil and Gas
BUMN Badan Usaha Milik Negara OJK Otoritas Jasa Keuangan
CAD Current Account Defisit OSC Standard occupational classification
CAR Capital Adequacy Ratio OTJ On-the-job
CNBC Consumer News and Business Channel PEN Pemulihan Ekonomi Nasional
COVID-19 Corona Virus Disease PKH Program Keluarga Harapan
COICOP Classification of Individual Consumption PERPRES Peraturan Presiden
According to Purpose
CPI Consumer Price Index PERPU Peraturan Pemerintah Pengganti Undang-
Undang
DAK Dana Alokasi Khusus PIT Personal Income Tax
DAU Dana Alokasi Umum PLN Perusahaan Listrik Nasional
DBH Dana Bagi Hasil POJK Peraturan OJK
DGT Directorate General of Taxation PNBP Penerima Negara Bukan Pajak
DID Dana Insentif Desa PPI Private Participation in Infrastucture
DNDF Domestic non-Deliverable Forward PPP Private Public Partnership
DTKS Data Terpadu Kesejahteraan Sosial PVC Photovoltaic Panels
DTU Diklat Teknis Umum R&D Research and Development
ECB Europeans Central Bank RHS Right Hand Side
EMBI Emerging Market Bond Index RPJM Rencana Pembangunan Jangka Menengah
EMRP Ex-Mega Rice Project SA Social Assistance
EWARS Early Warning Systems SAL Saldo Anggaran Lebih
FDI Foreign Direct Investment SBH Survey Biaya Hidup
FHH Female Headed Households SBI Sertifikat Bank Indonesia
FLFP Female Labor Force Participation Sembako Sembilan Bahan Pokok
GDP Gross Domestic Product SEMEFPA Support for Enhanced Macroeconomic and
Fiscal Policy Analysis
GoI Government of Indonesia SJSN Sistem Jaminan Sosial Nasional
ICT Information & Communications Technology SNG Sub-National Governments
IEP Indonesia Economic Prospects SNI Standar Nasional Indonesia
IMF International Monetary Fund SOE State-owned Enterprises
IT Information Technology SOC Standard Occupational Classification
ITDC Indonesia Tourism Development Corporation SUN Surat Utang Negara
Jamkrindo Jaminan Kredit Indonesia SUPAS Intercensal Population Survey
JKN Jaminan Kesehatan Nasional SUSENAS Survei Sosial Ekonomi Nasional
KBJI Klasifikasi Baku Jenis Pekerjaan Indonesia TA Technical Assistance
KEM-PPKF Kerangka Ekonomi Makro dan Pokok-Pokok ToT Terms of Trade
Kebijakan Fiskal
LGST Luxury Goods Sales Tax TVET Technical and Vocational Education and
Training
LHS Left Hand Side UHC Universal Health Coverage
LNG Liquefied natural gas USTR United States Trade Representative
LPS Deposit Insurance Corporations VAT Value Added Tax
LSSR Large Scale Social Restrictions WEF World Economic Forum
MoEC Ministry of Education and Culture WHO World Health Organization
MoF Ministry of Finance
Table of Contents
PREFACE ................................................................................................................................... I
ABBREVIATIONS ..................................................................................................................... II
TABLE OF CONTENTS .......................................................................................................... III
EXECUTIVE SUMMARY: THE LONG ROAD TO RECOVERY ................................................. 1
A. ECONOMIC AND FISCAL UPDATE ..................................................................................... 4
1. Economic growth fell to its slowest pace in almost two decades .............................................................................. 4
2. The current account deficit narrowed, while portfolio investment saw record outflows ........................................... 8
3. Headline inflation edged up modestly in Q1 on higher food prices ......................................................................... 13
4. Authorities responded to financial market volatility with easing measures ............................................................. 14
5. Fiscal policy reacted quickly to the shock to boost spending on health and livelihoods ......................................... 15
6. Labor market conditions deteriorated sharply.......................................................................................................... 19
7. Without emergency social assistance, COVID-19 could push millions into poverty ................................................ 21
8. Economic outlook and risks .................................................................................................................................... 28
B. COVID-19 IMPACT AND RESPONSES ................................................................................ 34
1. Introduction: Overcoming COVID-19 ..................................................................................................................... 34
2. Health: Safely adjusting to the New Normal ........................................................................................................... 36
3. Rejuvenating the private sector: Helping firms to stay afloat and facilitating the creation of new enterprises....... 39
4. Financial Sector: Increasing liquidity to the private sector and protecting lending portfolios to preserve financial
stability ................................................................................................................................................................... 44
5. Skilling Indonesians to get them back into jobs ...................................................................................................... 46
6. Strengthening the safety net and ensuring a healthy and productive labor force .................................................... 47
7. Infrastructure: Closing the gap for higher potential growth .................................................................................... 50
8. Fiscal: Reigning in debt through fiscal reform ........................................................................................................ 53
BOXES ...................................................................................................................................... 58
REFERENCES ......................................................................................................................... 69
APPENDIX: A SNAPSHOT OF INDONESIAN ECONOMIC INDICATORS ........................... 75
FIGURES
Figure ES.1: GDP growth slowed sharply, with substantially weaker investment and private consumption ............... 3
Figure ES.2: Current account deficit narrowed in Q1 in line with the slowdown in domestic demand ........................ 3
Figure ES.3: Massive portfolio flight-to-safety from emerging markets in Q1 amid global financial volatility ............ 3
Figure ES.4: Supply and demand shocks affected headline inflation in Q1 .................................................................. 3
Figure A.1: Global production and trade fell sharply as COVID-19 spread rapidly around the globe........................... 4
Figure A.2: GDP growth slowed sharply, with substantially weaker investment and private consumption ................. 5
Figure A.3: Consumption of transportation contracted as Indonesians limited their mobility ..................................... 5
Figure A.4: Investment growth decelerated sharply as investments in buildings and structures decelerated .............. 6
Figure A.5: Exports growth nudged into positive territory with a large contribution from non-oil and gas exports .... 6
Figure A.6: Import growth was less negative on higher imports of oil and gas for inventory-building ........................ 6
Figure A.7: The slowdown in growth was broad-based across the sectors with agriculture showing flat output ......... 7
Figure A.8: Current account deficit narrowed in Q1 in line with the slowdown in domestic demand .......................... 8
Figure A.9: Goods exports of processed commodities improved whilst exports of oil and gas declined ...................... 9
Figure A.10: Goods imports contracted by less than that in Q4 as imports of raw materials and fuel were resilient .... 9
Figure A.11: Imports and exports plummeted in May ................................................................................................... 9
Figure A.12: FDI was remarkably stable amid global uncertainty ............................................................................... 10
Figure A.13: Global financial volatility peaked at the end of Q1 with the spread of COVID-19 infection… ................10
Figure A.14: …which led to large portfolio outflows from Indonesia in Q1 but which has since recovered ................10
Figure A.15: Bond yields jumped as foreign investors sold government bonds… ....................................................... 11
Figure A.16: …and the Rupiah depreciated the most among regional peers in real effective terms ............................ 11
Figure A.17: The balance of payments swung to a deficit as portfolio outflows more than offset a smaller CAD .......12
Figure A.18: Headline inflation edged up in Q1 driven by higher volatile foods inflation ........................................... 13
Figure A.19: Despite currency depreciations, Bank Indonesia eased the policy rate twice in Q1 ................................ 14
Figure A.20: Credit growth saw an uptick in March, after OJK announced relaxation measures ................................ 14
Figure A.21: Banking system remains sound ............................................................................................................... 15
Figure A.22: Spending increased in June following increases across almost all spending types ................................. 18
Figure A.23: Almost all expenditure types grew yoy in June except personnel and energy subsidy ............................ 18
Figure A.24: Revenue collection in June increased largely due to non-tax revenue from SOEs’ shared dividend and
BI surplus ................................................................................................................................................................ 19
Figure A.25: Revenue collection plunged in June compared to last year as the economic downturn took hold amid
stricter containment measures ................................................................................................................................ 19
Figure A.26: The employment and unemployment rates remained constant between February 2019 and 2020 ......... 20
Figure A.27: Underemployment has fallen, driven by an increase in voluntary unemployment. ................................ 20
Figure A.28: Significant increases in those not working versus employment shares in February 2020 is found in both
industry and service sectors..................................................................................................................................... 21
Figure A.29: Those not working more often reside in DKI Jakarta and, urban areas and hold lower education
credentials ............................................................................................................................................................... 21
Figure A.30: COVID-19 would cause income shocks, with the largest drop among urban households ..................... 22
Figure A.31: Without Government social assistance measures, seven years of accumulated gain in poverty reduction
would be erased ...................................................................................................................................................... 24
Figure A.32: Full government responses could offset increase in poverty due to COVID-19 ..................................... 24
Figure A.33: Government responses could mitigate impact on the poor, mainly among rural households ................ 25
Figure A.34: The new poor would mainly engage in traditional services, one of the most affected sectors due to
COVID-19 ............................................................................................................................................................... 25
Figure A.35: More than half of the new poor also reside in rural parts of Indonesia................................................... 25
Figure A.36: Current social assistance package does little in protecting households above the bottom 40 (percent
change in per capita consumption over the benchmark scenario) ......................................................................... 26
Figure A.37: Current SA package covers over half of households in the 5th-8th deciles that rely on informal sector
jobs, yet many of them remain with no access to any kind of government assistance ........................................... 27
Figure A.38: Indonesia’s term of trade is projected to strengthen in 2020 .................................................................. 29
Figure A.39: The fiscal deficit is expected to widen to 6.3 percent of GDP in 2020 with higher expenditures and
lower revenues ........................................................................................................................................................ 30
Figure A.1.1: Reclassifications in the 2018 CPI ............................................................................................................ 59
Figure A.3.1: Agriculture and traditional services accounted for 66 percent of the female labor force, higher than that
of males .................................................................................................................................................................. 60
Figure A.3.2: The prevalence of food insecurity is higher among FHH ...................................................................... 61
Figure A.4.1: Percentage of jobs that are estimated to be amenable to be done at home (percent) ............................ 62
Figure A.4.2: Share of tele-workable jobs by… ............................................................................................................ 63
Figure A.5.1: Select categories of U.S. good imports from Vietnam, Thailand, and Indonesia increased in 2019 ...... 65
Figure A.5.2: Direct investment from China surged in 2019 ........................................................................................ 65
Figure A.5.3: China is a major importer of Indonesian coal ........................................................................................ 65
Figure A.5.4: Indonesia faces increasing export losses from the trade deal ................................................................ 65
Figure A.5.5: Mining sector investment realization in Indonesia, 2015–2019 .............................................................. 66
Figure B.1: The evolution of the outbreak in Indonesia and major policy responses ................................................. 35
Figure B.2: Flattening of the infection curve ............................................................................................................... 36
Figure B.3: A low rate of testing can hinder the calibration of the Government’s crisis response .............................. 37
Figure B.4: The COVID crisis has hit Indonesian firms hard … ................................................................................ 39
Figure B.5: …in almost every sector of the economy .................................................................................................. 39
Figure B.6: Many Indonesian firms are struggling to make ends meet, particularly micro firms............................... 39
Figure B.7: Only 7 percent of firms have received assistance from the government ................................................... 42
Figure B.8: Firms are largely not aware that assistance may be available................................................................... 42
Figure B.9: The loan-to-deposit ratio (LDR) has been falling since December 2019.................................................. 44
Figure B.10: Indonesia’s development prospects are impeded by a USD 1.6 trillion public infrastructure gap… ...... 50
Figure B.11: …while its existing infrastructure is perceived to be of a lower quality than in ASEAN peers ............... 50
Figure B.12: Indonesia imposes exceptionally tight regulatory restrictions on foreign investment ............................. 51
Figure B.13: Fiscal measures have been implemented across the globe in response to the downturn ....................... 54
Figure B.14: Revenues have fallen during the downturn ............................................................................................. 54
Figure B.15: Spending on subsidies is still high relative to social assistance .............................................................. 54
Figure B.16: Indonesia’s VAT registration threshold as a share of per capita GDP is the highest in the world ......... 56
Figure B.1.1: Indonesia has high potential-to-actual yield ratios, underscoring the opportunity for expanding
production in the current land base ....................................................................................................................... 67
TABLES
Table ES.1: Real GDP growth is projected to fall to zero percent in 2020 as COVID-19 impacts both domestic
demand and supply, and the external sector ............................................................................................................ 1
Table A.1: Indonesia’s Balance of Payments (BOP) .................................................................................................... 12
Table A.2: World Bank estimates of the fiscal impact of the announced fiscal measures in the revised 2020 budget .16
Table A.3: Government’s full response package to COVID-19 ................................................................................... 23
Table A.4: Key economic indicators ............................................................................................................................ 28
Table A.5: A wider deficit and a structurally higher debt ratio is projected over the medium term ............................. 31
Table A.6: Indonesia’s gradual reopening plan ........................................................................................................... 32
Table A.1.1: Weights of various CPI components........................................................................................................ 58
Table A.1.2: Weights of categories in consumer basket of goods and services ........................................................... 58
BOXES
Box A.1: 2018 Rebasing of the Consumer Price Index ................................................................................................. 58
Box A.2: Near-real-time insights on the socio-economic impact of COVID-19 on households in Indonesia (HiFy) 59
Box A.3: Economic effects of the COVID-19 pandemic through a Gender Lens ....................................................... 60
Box A.4: The dynamics of working from home ........................................................................................................... 62
Box A.5: Indonesia, Trade Tensions, and the Phase One Trade Deal ........................................................................ 64
Box B.1: Minimizing externalities from post-crisis economic recovery policies ......................................................... 67
APPENDIX TABLES
Appendix Table 1: Budget outcomes .......................................................................................................................... 75
Appendix Table 2: Balance of payments ..................................................................................................................... 75
Appendix Table 3: Indonesia’s historical macroeconomic indicators at a glance ...................................................... 76
Appendix Table 4: Indonesia’s development indicators at a glance ........................................................................... 77
The Long Road to Recovery Indonesia Economic Prospects
Executive Summary: The Long Road to Recovery
The COVID-19 pandemic and associated containment Following massive easing by global central banks, external
measures triggered the deepest global recession in eight liquidity conditions improved significantly in the second
decades. As many countries implemented lockdowns and quarter, which led the Rupiah to appreciate and bond
travel restrictions, global demand for goods and services yields to fall. This global easing, together with the relatively
plummeted along with tourism flows and commodity benign inflation rate (Figure ES.4), allowed Bank
prices; supply chains were disrupted; and financial market Indonesia (BI) to cut the policy rate by a cumulative 50
volatility spiked. The Government of Indonesia also bps in Q1.
implemented mobility restrictions from mid-March and
then a partial lockdown from April to June, preventing To mitigate the economic impacts of COVID, the
many firms and shops from operating, and discouraging Government has announced a package of IDR 695.2
many consumers from shopping. trillion, with an overall estimated impact on the budget
of 4.3 percent of GDP, including new spending of 3.0
Hit by severe external and domestic shocks, economic percent of GDP. Together with lower revenues, the fiscal
activity tumbled. Real GDP growth slumped from 5.0 deficit is expected to widen to 6.3 percent of GDP. The
percent yoy in Q4 2019 to 3.0 percent in Q1 2020, the package includes larger allocations to the health sector,
lowest quarterly growth since 2001 (Figure ES.1). Private significant increases in social assistance, large tax
consumption slowed as mobility restrictions and personal incentives for corporates, bailouts of SOEs, credit
avoidance behavior curbed household consumption. programs for SMEs and equity injections for banks that
Investment growth also declined with heightened restructure SME loans, and additional spending by local
uncertainty and lower commodity prices. There was governments and line ministries.
broad-based slowdown across sectors. Manufacturing,
construction and low value-added service sectors The impact of COVID-19 on livelihoods has been severe,
including transport, storage, hotels and restaurants, with workers in heavily affected sectors such as transport
sectors that employ a larger number of workers, all saw a and construction reporting large declines in income.
near halving in their sectoral growth rates from Q4 2019. Without measures to mitigate the shock, the pandemic
In contrast, growth of modern, knowledge-intensive would lead poverty to increase by 2.0 percentage points.
services sectors, including digital, financial, education and The substantial increase in social assistance spending as
health services accelerated. part of the Government’s mitigation package is therefore
critical: if appropriately targeted and fully disbursed with
The slowdown in domestic demand and the unexpected minimal leakage, the package would significantly mitigate
growth in some manufactured exports helped narrow the the impact of the pandemic on poverty.
current account deficit (CAD) to 2.5 percent of GDP in
Q1 2020 from 2.7 percent of GDP in Q4 2019 (four- Table ES.1: Real GDP growth is projected to fall to zero
quarter rolling basis; Figure ES.2). The goods trade surplus percent in 2020 as COVID-19 impacts both domestic
soared, as some diversion of manufacturing production demand and supply, and the external sector
from China and higher palm oil prices earlier in the year 2019 2020 2021 2022
propped up export values, while imports contracted due (Annual
Real GDP percent 5.0 0.0 4.8 6.0
to lower consumption and, investment and falling oil change)
prices. With the sudden stop in global travel and transport, Consumer
(Annual
percent 2.8 2.6 2.8 3.0
both services exports and imports plunged. price index
change)
Current
(Percent
Amid global financial volatility, sharp and sudden account
of GDP)
-2.7 -1.9 -2.0 -2.1
balance
portfolio outflows, larger than those during the Global Government
(Percent
Financial Crisis and the Asian Financial Crisis, brought the budget
of GDP)
-2.2 -6.3 -4.1 -3.1
financial account to its first quarterly deficit since 2011 balance
Source: BI; Central Bureau of Statistics (BPS); Ministry of Finance;
(Figure ES.3). As a result, government bond yields surged World Bank staff calculations
by 57 basis points and the Rupiah depreciated by 17.7 Note: 2020-2022 are estimated and forecast figures
percent in Q1. Despite the smaller CAD, the larger
financial account deficit led to an overall Balance of Despite an expansionary monetary and fiscal policy, the
Payments deficit and international reserves fell to USD negative domestic and external shocks will dissipate only
121.0 billion at the end of March. gradually and Indonesia’s real GDP in 2020 is expected to
July 2020 THE WORLD BANK | BANK DUNIA
1
The Long Road to Recovery Indonesia Economic Prospect
be unchanged from 2019 (Table ES.1). Private subsequent waves are very real, and consumer confidence
consumption is expected to slow sharply and investment may remain low even if mobility restrictions are removed.
to contract. Government consumption growth will Safely and sustainably reopening thus requires continued
accelerate but cannot fully offset the weakness in other improvements in health system capacity and readiness,
components of domestic demand. Export and import including continued expansion of testing and surveillance.
volumes are projected to slump on adverse external
conditions, with imports projected to shrink more rapidly Many businesses will require continued support to ride out
on sharply weaker domestic demand. Net exports are the economic downturn. Firms will need support to
therefore expected to make a positive contribution to gradually re-start or expand production, while conditions
overall headline growth. need to be in place to facilitate the entry of new firms;
these include addressing long-standing constraints to
Predicated on a gradual but steady reopening of the investment. The Government has taken steps in this
economies in Indonesia and abroad, the baseline growth direction, most notably through the investment and trade
outlook foresees a recovery spanning the next two years, reforms proposed through the Omnibus Bill on Job
with private consumption recovering first, followed by Creation. The Bill, however, also proposes reforms that
private investment. Real GDP is projected to grow by 4.8 could have adverse effects on people’s health and safety,
percent in 2021 on recovering private consumption, and the environment and labor rights. Finally, a sound
by 6.0 percent in 2022 due to strong investment growth financial system is a foundation of a sustainable recovery,
and the low base of previous years. and ensuring adequate liquidity and oversight is a priority.
This baseline projection assumes that global GDP will With millions of jobs destroyed during the crisis, and the
contract by around 5.2 percent this year, 1 and that the possible acceleration of trends in labor demand that favor
Government will ease mobility restrictions as announced the skilled, the unemployed need to be supported in their
in five stages through June and July, with the economy job search and upskilling to meet employer needs.
fully open in August. Downside risks to these assumptions Moreover, rectifying newly identified gaps in Indonesia’s
are significant. If flare-ups occur or subsequent waves social protection coverage, building on COVID-driven
emerge, necessitating an extension or re-imposition of expansions in the system, and expediting the delivery of
partial lockdowns, private consumption and investment appropriately funded universal health care for all, will help
are likely to slow and contract further. Meanwhile, if build, employ, and protect Indonesia’s human capital.
external conditions also worsen and the global economy
slips into a more severe recession where world real GDP At the same time, COVID-driven cuts to public capital
shrinks by 7.8 percent in 2020, 2 investment and exports spending and postponements of infrastructure projects
would be further hit. In such a scenario, the Indonesian need to be reversed to avoid putting at risk the
economy would contract by 2 percent in 2020. Government’s growth-enabling infrastructure agenda.
Efforts to catalyze private sector participation in
The twin public health and economic crises have infrastructure are paramount, but additional spending will
confronted the Government with new challenges while also be necessary.
exacerbating older ones. As Indonesia considers the road
ahead, there is a need to care for the sick and contain Given these expenditure needs, as well as the imperative
infections while cushioning the effects of the economic of flattening the debt curve, temporary fiscal measures
downturn and repositioning the economy for a rapid and need to be gradually unwound, and revenues increased.
full economic recovery. The economic downturn’s heavy fiscal burden has put
public debt on an elevated trajectory entailing higher debt
The focus of this edition of the Indonesia Economic Prospects is servicing costs that, if not reversed through revenue-
therefore on overcoming these challenges and setting up Indonesia for enhancing reforms, will eventually crowd out priority
a sustainable and inclusive economic recovery. spending or risk Indonesia’s hard-earned investment-
grade credit ratings.
To support a safe (and sustainable) reopening of the
economy, the priority remains to have in place a robust
health system. As recently seen in other countries, the risks
of an acceleration in infection rates or the emergence of
1 World Bank (2020a). 2 Ibid.
July 2020 THE WORLD BANK | BANK DUNIA
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The Long Road to Recovery Indonesia Economic Prospects
Figure ES.1: GDP growth slowed sharply, with Figure ES.2: Current account deficit narrowed in Q1 in
substantially weaker investment and private line with the slowdown in domestic demand
consumption (USD billions)
(contribution to growth yoy, percentage points)
Private consumption Government consumption Goods Services
Investment Net exports Primary income Secondary income
9 Current account
Stat. discrepancy Change in inventories
8 GDP 6
6 3
0
4
-3
2
-6
0
-9
-2 -12
Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20
Source: Central Bureau of Statistics (BPS); World Bank staff Source: BI; World Bank staff calculations
calculations
Figure ES.3: Massive portfolio flight-to-safety from Figure ES.4: Supply and demand shocks affected headline
emerging markets in Q1 amid global financial volatility inflation in Q1
(USD billion) (change yoy, percent)
6
8
Ramadan
4 7
2 6
0 5
4
-2
Gov global bonds 3
-4 Headline Core
SUN 2
-6
SBI 1
Administered
-8 Equities -1 Volatile goods
-10 Main net portfolio inflows -2
-12
Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20
Mar-19 Jun-19 Sep-19 Dec-19 Mar-20
Source: BI, World Bank staff calculations Source: BPS; World Bank staff calculations
Note: Sertifikat Bank Indonesia (SBI) and Surat Utang Negara (SUN)
are local currency bonds
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The Long Road to Recovery Indonesia Economic Prospects
A. Economic and Fiscal Update
1. Economic growth fell to its slowest pace in almost two decades
COVID-19 and This year has seen a deterioration in Figure A.1: Global production and trade fell sharply as
related policy global economic conditions that is COVID-19 spread rapidly around the globe
responses led to unprecedented in modern times. (yoy, percent)
unprecedented COVID-19 spread globally at an 6 World Industrial
disruptions to world alarming speed and governments Production
demand, responded with measures to
international trade, contain the virus including stringent 0
investment and domestic mobility and international World Trade
finance travel restrictions. On a global level,
-6
these containment measures led to
an acute contraction in global
demand, a sudden stop in tourism -12
flows, sharply falling commodity
prices, supply chain disruptions,
and heightened financial market -18
volatility, which culminated in a
contraction in global GDP in Q1
and likely Q2 (Figure A.1). Source: CPB World Trade Monitor; World Bank staff calculations
Indonesia’s economy Indonesia’s real GDP growth slowed from 5.0 percent year-on-year (yoy) in Q4 2019 to 3.0
slowed in Q1 as the percent in Q1 2020 (Q1 2019: 5.1 percent), the lowest quarterly growth since 2001 (Figure A.2),
shutdown of tourism, as the COVID-19 shock hit the economy through both domestic and external channels. Adverse
weaker commodity global conditions were exacerbated by a sharp fall in domestic economic activity, as the
prices and domestic Government of Indonesia also implemented mobility restrictions from mid-March and then a
July 2020 THE WORLD BANK | BANK DUNIA
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The Long Road to Recovery Indonesia Economic Prospects
mobility restrictions partial lockdown from April to June. Many firms and shops were prevented from operating,
weighed on while many consumers were either unable or unwilling to shop given the heightened uncertainty
economic activity about income prospects and infection risks.
Figure A.2: GDP growth slowed sharply, with Figure A.3: Consumption of transportation contracted as
substantially weaker investment and private consumption Indonesians limited their mobility
(contribution to growth yoy, percentage points) (contribution to growth yoy, percentage points)
Private consumption Government consumption F&B, excl. restaurant Apparel, ftwr & maintnce
Investment Net exports Equipments Health & education
Stat. discrepancy Change in inventories Transportation & comm Restaurant & hotel
GDP Others Non-profit institutions
8 Total private consumption
6
6 5
4
4
3
2 2
1
0
0
-2 -1
Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20
Source: BPS; World Bank staff calculations Source: BPS; World Bank staff calculations
Mobility restrictions Consumption growth dropped from 4.2 percent yoy in Q4 to 2.8 percent in Q1, also the lowest
that began in mid- since 2001. Private consumption growth fell from 4.9 percent yoy in Q4 to 2.7 percent in Q1.
March resulted in a Lower consumption of transport services because of mobility restrictions was the main driver
significant of the slowdown (Figure A.3). Restaurant and hotel consumption growth was weaker, while
deceleration of some categories of consumption contracted. In contrast, increased demand for health products
household and services led to higher spending on health & education. There was a decline in spending by
consumption in Q1 non-profit institutions serving households, which includes spending by political parties, partly
that is likely to have due to a high base effect on account of the strong pre-election spending in Q1 2019. High-
deepened in the frequency indicators for private consumption in April and May signal further deterioration in
second quarter economic activities in Q2. Retail, motorcycle, and passenger car sales all posted double-digit
contractions, with passenger car sales declining 97 percent yoy in May. In contrast, Government
consumption rose 3.7 percent yoy in Q1 compared to a 0.5 percent increase in the previous
quarter, supported by fiscal measures that front-loaded some expenditures.
Investment growth Fixed investment growth declined from 4.1 percent yoy in Q4 2019 to 1.7 percent in Q1 2020
fell by more than (Q1 2019: 5.0 percent), as commodity prices, 3 domestic demand, and investor confidence
half, as heightened slumped. Buildings and structures, which accounts for three quarters of total fixed investment,
uncertainty, travel saw growth drop from 5.5 percent yoy in Q4 2019 to 2.8 percent in Q1 2020, consistent with
restrictions, and the 50 percent slash in construction sector growth, as investors postponed projects (Figure
lower commodity A.4). 4,5 Machine and equipment investment declined for the second consecutive quarter, in line
prices discouraged with weakness in the manufacturing and the mining and quarrying sectors, hindered by supply-
investors and led to chain bottlenecks and lower commodity prices. Concomitantly, nominal capital goods imports
project delays declined 13.4 percent yoy in Q1 from -8.3 percent in Q4. 6 Leading indicators of investment
3 Prices of Indonesia’s main export commodities, which include coal, crude oil, palm oil, rubber, liquefied natural gas and base metals, on
average contracted 8.9 percent yoy in Q1 2020.
4 Reuters (April 20, 2020). UPDATE 1-Indonesia warns of investment delays as Q1 FDI shrinks on virus hit.
5 Mongabay (March 31, 2020). Mining activity in Indonesia takes a hit from COVID-19 pandemic
6 Based on Balance of Payments data from Bank Indonesia.
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The Long Road to Recovery Indonesia Economic Prospects
indicate significant further Figure A.4: Investment growth decelerated sharply as
deterioration in Q2. Business investments in buildings and structures decelerated
sentiment, as captured by the (contribution to growth yoy, percentage points)
Purchasing Managers’ Index for Buildings & structures Machine & equipment
Vehicles Other equipments
manufacturing, collapsed to a Cultivated bio. res. Intellectual property
Total fixed investment
record-low of 27.5 in April but 8
picked up in June as domestic 7
containment measures eased,
6
leading to a Q2 average of 31.7, far
below the 50 threshold. 7 5
Meanwhile nominal capital goods 4
imports continued to contract, 3
falling 40.0 percent yoy in May. 8
2
1
0
-1
Mar-18 Sep-18 Mar-19 Sep-19 Mar-20
Source: BPS; World Bank staff calculations
Figure A.5: Exports growth nudged into positive territory Figure A.6: Import growth was less negative on higher
with a large contribution from non-oil and gas exports imports of oil and gas for inventory-building
(contribution to growth yoy, percentage points) (contribution to growth yoy, percentage points)
20 20
Services Services
Goods: Oil & Gas Goods: Oil & Gas
15 Goods: Non-Oil & Gas 15 Goods: Non-Oil & Gas
Export of Goods and Services Import of Goods and Services
10 10
5 5
0 0
-5 -5
-10 -10
Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20
Source: BPS; World Bank staff calculations Source: BPS; World Bank staff calculations
Exports grew, Service exports contracted as expected from the global transport and tourism freeze, but goods
buoyed by a surprise exports were surprisingly robust amid the shock to global demand, partly due to production
jump in exports of dislocation from China. 9 Overall, export volumes of goods and services grew modestly at 0.2
manufactured items percent yoy in Q1, after contracting 0.4 percent in Q4 (Q1 2019: -1.6 percent). Services exports
that more than offset contracted by 18.3 percent yoy in Q1, with transport and tourism hit hard by flight restrictions
a slump in tourism in overseas jurisdictions, heightened caution by travelers, and the suspension of numerous
foreign carrier connections to Indonesia. 10 Overseas visitor arrivals were down 64.9 percent yoy
7 An index value of 50 represents an even balance between survey respondents reporting better conditions and those reporting worse
conditions. The April result indicates that worse conditions have become much more prevalent. It is the lowest result on record for the series,
well below the previous record-low of 45.3 which was reported a month earlier.
8 Based on foreign trade data from BPS.
9 See detailed discussion in Section A.2
10 The Jakarta Post (March 9, 2020). More than 12,000 flights canceled in two months over virus fears, says Angkasa Pura I.
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The Long Road to Recovery Indonesia Economic Prospects
in March and 31.1 percent for the quarter. On the other hand, non-oil and gas goods exports,
which represent the majority of Indonesia’s export basket, expanded by 4.7 percent and offset
the decline in service exports (Figure A.5). Export growth was driven largely by manufactured
products (iron and steel, footwear, paper, vehicles and electrical machinery). Oil and gas exports
extended its long-running decline, 11 as plunging global demand, 12 a global LNG supply glut, 13
the Russia-Saudi Arabia crude oil price war, 14 and depleting domestic gas fields 15 weighed on
commodity prices and domestic production.
Imports contracted Indonesia’s import volumes shrank by 2.2 percent in Q1 2020, after falling 8.0 percent in Q4
less than in Q4 2019 2019 (Q1 2019: -7.5 percent). This deceleration in import contraction was primarily driven by
higher oil and gas imports as importers took advantage of the plunge in oil prices to build
inventories (Figure A.6). Moreover, non-oil and gas imports contracted by less than that in Q4
2019, partly due to the pick-up in export growth that required imported raw material inputs and
partly offset by slower raw material imports for domestic consumption. Meanwhile, services
imports declined sharply, partly due to fewer Indonesians travelling overseas.
Growth slowed in Growth slowed across most major Figure A.7: The slowdown in growth was broad-based
labor-intensive, low- sectors (Figure A.7). Agricultural across the sectors with agriculture showing flat output
value-added sectors production was the weakest, (contributions to growth yoy, percentage points)
Other services Other industry
such as recording zero growth, and was Construction Manufacturing
manufacturing, constrained by a 10.3 percent Agriculture Trade, transport & hospitality
Health, edu. & public admin Info., comm., financial & biz
construction and decline in farm food crops due to Gross value added
retail, whereas climate-driven delays to the main 6
knowledge-intensive annual harvest of various crops 5
sectors such as including rice paddy. 16
finance and health Manufacturing slowed to 2.1 4
were resilient percent, largely because of slower 3
growth in food and beverage 2
manufacturing, linked to a
combination of the weak 1
performance in food crop 0
production and mobility -1
restrictions. Some manufacturing Mar-18 Sep-18 Mar-19 Sep-19 Mar-20
subsectors were relatively resilient Source: BPS; World Bank staff calculations
(paper, basic metals and transport
equipment all grew by at least 4 percent yoy), in line with the unexpected export growth in those
sectors. Traditional services (trade, transport and hospitality), which employ many workers in
informal jobs and were particularly hard-hit by mobility restrictions, saw a significant slowdown
from 5.7 percent in Q4 2019 to 2.0 percent in Q1. On the other hand, health, education and
public administration – sectors closely associated with the delivery of core public services – saw
an uptick in growth, while information, communication, financial and business services also
performed well, underpinned by significant strength in financial & insurance activity and
information & communication as some businesses started moving to work-from-home
arrangements.
11 Oil and gas exports have been declining in yoy terms since Q3 2018.
12 World Bank (2020e).
13 Natural Gas Intel (April 29, 2020). LNG Supply Glut Likely to Outlast Demand for Years, Says IGU.
14 CNBC (April 1, 2020). 5 charts that explain the Saudi Arabia-Russia oil price war so far.
15 Asia Times (February 4, 2020). Time winds down on Indonesia’s oil and gas future.
16 Republika (May 5, 2020). Harvest shifts, agriculture sector slows down.
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The Long Road to Recovery Indonesia Economic Prospects
2. The current account deficit narrowed, while portfolio investment saw record outflows
The current account Largely due to the strong Figure A.8: Current account deficit narrowed in Q1 in line
deficit narrowed to a performance of manufacturing with the slowdown in domestic demand
three-year low due to exports, the current account (USD billion)
a wider goods trade deficit (CAD) narrowed to USD Goods Services
surplus 3.9 billion in Q1 2020 from 9
Primary income Secondary income
USD 8.1 billion in Q4 2019 (Q1 Current account
6
2019: USD 6.6 billion) (Table
A.1 and Figure A.8). As a share 3
of GDP on a four-quarter
rolling sum basis, the CAD 0
continued to improve to 2.5 -3
percent of GDP in Q1 from 2.7
percent in Q4 (Q1 2019: 3.1 -6
percent). A wider goods trade -9
surplus (USD 4.4 billion from
USD 0.3 billion in Q4 2019) was -12
the main driver of the CAD Mar-18 Sep-18 Mar-19 Sep-19 Mar-20
narrowing. The services account Source: BI and World Bank staff calculations
deficit narrowed slightly (from
USD 2.0 to 1.9 billion), while the income account deficit was relatively flat at USD 6.4 billion.
In addition to the In line with higher volumes, goods export values increased by 1.3 percent yoy compared to a
temporary pickup in 3.4 percent decline in Q4 2019 (Q1 2019: -7.1 percent) (Figure A.9). The temporary increase in
manufactured export exports was mainly from manufactured products (iron and steel, footwear, paper, vehicles and
volumes, higher electrical machinery) and processed commodities. Due to the shutdown of most Chinese
palm oil prices manufacturing production during most of Q1 due to COVID-related restrictions, some of
through most of Q1 Indonesia’s export growth represented a re-direction of production away from China. 17 Among
contributed to processed commodities, crude palm oil and base metals were the key drivers, with the latter
growth in export supported by both higher prices and volumes (Q1: +3.9 and +29.7 percent yoy, respectively);
values and the former largely by stronger prices (Q1: +32.8 percent yoy) that offset a contraction in
volumes (Q1: -17.1 percent yoy) 18. In contrast, export values of oil and gas and other raw
commodities, such as coal, contracted largely on lower prices. 19
Despite the Also similar to the trend in volumes, goods import values contracted by less than that in the
slowdown in previous quarter (Q1 2020: -6.5 percent; Q4 2019: -9.2 percent yoy) (Figure A.10). Raw
domestic demand, material 20 imports contracted by less than that in Q4, possibly because of the increase in exports,
reduced exports from but still made the largest contribution to the decline; raw materials for the food and beverages
China, and a weaker industry 21 was especially weak. Fuel import values also contracted less than in Q4, with crude
Rupiah, contraction oil imports increasing in Q1 as importers took advantage of low prices to stock up. 22 In line
in goods imports with slow investment growth, capital goods imports contracted 13.4 percent yoy, the largest
decelerated decline since March 2016, and were the second largest contributor to the import contraction.
17 Categories of Indonesian goods exports that recorded higher nominal growth to destinations in Q1 that concurrently saw substantial
contractions in imports from China within the same goods category include “Base Metals and Articles” to Malaysia, Singapore, and Taiwan,
China; and “Electrical Machinery & Equipment” to Hong Kong SAR, United Kingdom, Germany, and the United States.
18 Coal prices declined 28.9 percent yoy in Q1. Source: Table 3, in Bank Indonesia (2020). Balance of Payments Report, Q1 2020.
19 Crude oil prices fell 18.8 percent yoy in Q1. Similarly, coal prices plunged 28.9 percent in Q1.
20 This is the raw materials net of fuels, including primary and processed.
21 Bank Indonesia (2020). Balance of Payments Report, Q1 2020. This is partly due to the slowing of the food and beverage manufacturing
sector, which eased to 3.9 percent yoy in Q1, down from 8.0 percent yoy in Q4 2019.
22 Crude oil import values rose 22.3 percent yoy in Q1, compared to a decline of 2.6 percent in Q4 2019, despite Brent oil prices falling 20.1
percent yoy over Q1.
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The Long Road to Recovery Indonesia Economic Prospects
Figure A.9: Goods exports of processed commodities Figure A.10: Goods imports contracted by less than that in
improved whilst exports of oil and gas declined Q4 as imports of raw materials and fuel were resilient
(contribution to growth yoy, percentage points) (contribution to growth yoy, percentage points)
30 Others 30 Other
Automotive & computers
25 Textile, clothing & footwear 25 Fuel
Processed commodities Capital
20 20 Raw materials net of fuel
Other mining
15 Coal Consumer goods net of fuel
15
Oil and gas Imports
10 Exports 10
5 5
0 0
-5 -5
-10 -10
-15 -15
Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20
Source: BI and World Bank staff calculations Source: BI and World Bank staff calculations
With the sudden stop As flight and entry restrictions were imposed globally, Indonesia’s inbound and outbound
in global travel, both travelers in Q1 were down by 30.6 percent and 32.7 percent yoy, 23 respectively. Accordingly,
services exports and services exports contracted by 18.8 percent yoy from an increase of 5.2 percent in Q4 2019 (Q1
imports plunged 2019: -6.5 percent), while services imports declined by 12.1 percent from an increase of 8.1
percent in Q4 (Q1 2019: -3.1 percent). The sudden freeze on global mobility had a two-fold
impact on the services trade deficit. While the deficit in transportation services 24 declined by
USD 596 million relative to Q4 2019, the surplus in travel services 25 also declined by USD 191
million from Q4 2019. Therefore, the overall services deficit narrowed modestly.
The monthly goods With production in China Figure A.11: Imports and exports plummeted in May
trade balance posted coming back online and global (USD billion)
another surplus in demand plummeting, 21 4
May, with imports Indonesia’s goods exports fell
18 3
contracting more back into negative territory in Imports
than exports May, contracting by 28.9 15
2
percent yoy. Goods imports fell Exports 1
more steeply than exports at 12
0
42.2 percent, as mobility 9
restrictions weighed on -1
domestic demand. As a result, 6 -2
the monthly goods trade Trade balance (RHS)
3 -3
balance posted a surplus of
USD 2.1 billion in May,
bringing the year-to-May
Source: BPS and World Bank staff calculations
cumulative trade balance to a
surplus of USD 4.3 billion (Figure A.11).
23 Using Bank Indonesia’s Balance of Payments data. Overseas visitor arrivals data from BPS also gave similar information, where the number of
international visitors decreased by 31.1 percent yoy in Q1 2020.
24 Transportation includes passenger, freight (movement of goods), and other transport services. International flight services are treated as
transportation-passenger services, whereas domestic flight services are treated as travel services. More details are in IMF’s BoP Manual (BPM6).
Freight constitutes the largest share of transportation service imports in Indonesia and averaged at nearly 80 percent in 2019.
25 Travel services exports cover expenditures of non-residents when traveling, such as accommodation, local transport, food-serving services
and others. It excludes expenditure on international passenger transport, as noted above. More details are in IMF’s BoP Manual (BPM6).
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The Long Road to Recovery Indonesia Economic Prospects
FDI was relatively Despite heightened global economic Figure A.12: FDI was remarkably stable amid global
stable in Q1 uncertainty, foreign direct investment uncertainty
(FDI) declined only slightly to USD (USD billion)
4.5 billion (1.6 percent of GDP), from Other Financial Intermediation
USD 4.6 billion in Q4 2019 (Q1 2019: Wholesales and retail trade
Mining and Quarrying
Manufacturing
Agriculture and Forestry
USD 6.7 billion). Mirroring the Total
surprisingly positive outcome in 8
manufactured goods exports, there 6
were healthy FDI inflows to the 4
manufacturing sector, driven by debt
2
withdrawals made by several
0
manufacturing firms, 26 and which
offset lower FDI elsewhere. -2
Manufacturing remained the main -4
destination for direct investment, -6
followed by mining and quarrying,
which together accounted for 60.2
percent of total FDI (Figure A.12). As Source: BI and World Bank staff calculations
the decline in Indonesian direct
investment abroad was larger than the small decline in FDI inflows, net direct investment (direct
investment in Indonesia less Indonesian direct investment abroad) rose by USD 0.3 billion to
USD 3.5 billion in Q1, to finance 90 percent of the CAD.
Figure A.13: Global financial volatility peaked at the end Figure A.14: …which led to large portfolio outflows from
of Q1 with the spread of COVID-19 infection… Indonesia in Q1 but which has since recovered
(LHS: number of countries; RHS: index) (USD billion)
Number of countries above 5% growth in daily 6
140 190
COVID confirmed cases
Volatility at record highs 170 4
120
Fed Rate cut 2 150 2
100 Fed Rate cut 1
Fed announced 130 0
80 unlimited QE -2
110
90 -4 Gov global bonds
60
SUN
70 -6
40 SBI
50 -8 Equities
20 MOVE
(RHS) 30 -10 Main net portfolio inflows
VIX (RHS)
0 10 -12
Dec-19 Feb-20 Apr-20 Jun-20 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
Source: Deutsche Bank Global Research, Johns Hopkins University, Source: BI and World Bank staff calculations
Bloomberg, and World Bank staff calculations Note: Sertifikat Bank Indonesia (SBI) and Surat Utang Negara (SUN)
Note: The VIX index measures volatility in the U.S. equity market, while are local currency bonds
the MOVE index measures volatility in the U.S. bond market
Surging global The COVID-induced spike in global financial volatility (Figure A.13) led to a sudden stop in
financial volatility capital flows to all emerging economies, leading portfolio investment to swing to a record net
resulted in massive outflow of USD 5.8 billion in Q1 from a net inflow of USD 7.1 billion in Q4 2019 (Q1 2019:
portfolio outflows +USD 5.2 billion). Portfolio outflows over the quarter were larger than those during the peak
from Indonesia in Q1 of the Global and Asian financial crises, with USD 9.0 billion (3.3 percent of GDP) worth of
26 Bank Indonesia (2020). Balance of Payments Report, Q1 2020.
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The Long Road to Recovery Indonesia Economic Prospects
leading to a large government bonds sold within weeks (Figure A.14). This resulted in the 10-year government
deficit in financial bond yields surging by 57 basis points (bps) 27 (Figure A.15), the Rupiah depreciating by 17.7
account in Q1 percent in nominal terms, 28 and by 5.7 percent in real effective terms 29 in Q1 (Figure A.16),
both relative to Q4 2019. Outflows were partially offset by inflows of USD 4.2 billion to global
bonds issued both by the Government 30 and public corporations.31 As global central banks
aggressively eased monetary policy, including the U.S. Fed cutting its benchmark rate twice to
near-zero and the ECB implementing the EUR 750 billion Pandemic Emergency Purchase
Programme in March, BI moved in tandem and lowered the policy rate twice in Q1. 32
The unprecedented portfolio outflows led to a USD 2.9 billion deficit in the financial account,
from a USD 12.6 billion surplus in Q4 2019 (Q1 2019: +USD 9.9 billion). Other investment
saw a turnaround and posted a deficit of USD 0.5 billion in Q1 2020, mostly driven by an
increase in private sector deposits in overseas banks.
Figure A.15: Bond yields jumped as foreign investors sold Figure A.16: …and the Rupiah depreciated the most
government bonds… among regional peers in real effective terms
(LHS: IDN 10-yr and EMBI+, percent; RHS: U.S. 10-yr, percent) (percent change)
9.0 3.0 Q4 2019 Q1 2020 YTD (Jan - May 2020)
5
8.5 IDN 10yr
2.5 3
8.0
1
7.5
2.0
7.0 -1
6.5 US 10yr 1.5 -3
(RHS)
6.0 -5
1.0
5.5 -7
EMBI+
5.0 -9
0.5
Japan India
Thailand
Korea
Singapore Malaysia Vietnam
Philippines
China
Indonesia
4.5
4.0 0.0
Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20
Source: JP Morgan and CEIC Source: JP Morgan Real Effective Exchange Rate, CPI based
Note: EMBI+ is a JP Morgan emerging market bond index yield to (2010=100), and World Bank staff calculations
maturity Note: Downward movement represents depreciation
27 In comparison, the Emerging Markets Bond Index Plus (EMBI+) increased 121 bps during Q1, as some other emerging markets experienced
a steeper increase in their bond yields. For example, 10-year bond yields of Turkey rose by 226 bps, Mexico rose by 96 bps, and Philippines rose
by 76 bps.
28 In response to the weakening Rupiah, since March, Bank Indonesia has actively stabilized the currency by intensifying triple interventions: in
spot market, domestic non-deliverable forward (DNDF) market, and buying government bonds in the secondary market. Until March 20th, BI
has bought IDR 163 trillion worth of government bonds in the secondary market. However, despite these large-scale interventions, the Rupiah
ended in Q1 was worse than other emerging market (EM) currencies, with JP Morgan’s EMCI depreciating by 12.9 percent in Q1.
29 Real effective exchange rates are based on trade weighted averages of bilateral exchange rates and adjusted by consumer prices.
30 DG Financing and Risk Management. MoF (January 14, 2020). The government issued dual-currency bonds in January 2020, with total
amount of USD 2 billion and EUR 1 billion.
31 With half of it coming from Pertamina. Investor (February 16, 2020). Pertamina sold a USD 1.5 billion global bond to finance its capital
expenditure.
32 The 7-day Reverse Repo Rate was lowered in February and March by 25 bps each time, to reach 4.5 percent and has been held steady since
then.
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The Long Road to Recovery Indonesia Economic Prospects
With the wider The overall BoP booked a deficit Figure A.17: The balance of payments swung to a deficit
financial account of USD 8.5 billion in Q1 (Figure as portfolio outflows more than offset a smaller CAD
deficit more than A.17 and Table A.1), after a USD (USD billion)
offsetting a narrower 4.3 billion surplus in Q4 (Q1 2019: Current account Direct investment
CAD, reserves +USD 2.4 billion). Consequently, Portfolio investment Other investment
declined international reserves fell to USD Overall balance Basic balance
20
121.0 billion at the end of March 15
2020, from USD 129.2 billion at
10
the end of December 2019 (Q1
2019: USD 124.5 billion). 5
Notwithstanding this decline, 0
reserves are adequate to finance -5
7.0 months of imports and -10
external debt repayments, well
-15
above the import coverage of 4.0 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20
months at the end of 2008 during Source: BI and World Bank staff calculations
the Global Financial Crisis. Note: Basic Balance is the sum of current account balance and direct
investment
Table A.1: Indonesia’s Balance of Payments (BOP)
(USD billion, unless otherwise indicated)
2018 2019 Q1-2019 Q4-2019 Q1-2020
Nominal GDP 1,042.2 1,119.2 267.7 285.7 275.6
Overall Balance of Payments -7.1 4.7 2.4 4.3 -8.5
As percent of GDP -0.7 0.4 0.9 1.5 -3.1
As percent of GDP, four-quarter rolling sum -0.7 0.4 -0.1 0.4 -0.6
Current Account -30.6 -30.4 -6.6 -8.1 -3.9
As percent of GDP -2.9 -2.7 -2.5 -2.8 -1.4
As percent of GDP, four-quarter rolling sum -2.9 -2.7 -3.1 -2.7 -2.5
Goods trade balance -0.2 3.5 1.3 0.3 4.4
Services trade balance -6.5 -7.8 -1.6 -2.0 -1.9
Income -23.9 -26.1 -6.3 -6.4 -6.4
Capital and Financial Accounts 25.2 36.7 9.9 12.6 -2.9
As percent of GDP 2.4 3.3 3.7 4.4 -1.1
As percent of GDP, four-quarter rolling sum 2.4 3.3 3.1 3.3 2.1
Direct Investment 12.5 20.1 6.0 3.2 3.5
Portfolio Investment 9.3 21.7 5.2 7.1 -5.8
Other Investment 3.3 -5.4 -1.4 2.4 -0.5
Source: BI, World Bank staff calculations
Global financial The COVID-19 shock has led many central banks to implement an quantitative easing at an
volatility eased since unprecedented scale 33, which stabilized capital flows to emerging countries. These interventions
April, supporting the moderated global financial volatility, helped the government 34 and SOEs 35 issue nearly USD 10
recovery of the billion worth of global bonds in April and May, and in Indonesia, supported the recovery of the
Rupiah and bond Rupiah and bond prices. Accordingly, in Q2 compared to Q1, USD 6.8 billion worth of capital
yields
33 This was led by the Fed, whose weekly purchase of Treasury securities annualize to USD 2.5 trillion. Institute of International Finance (May
14, 2020). Global Macro Views – QE in Emerging Markets
34 Reuters (April 7, 2020). Indonesia raises USD 4.3 billion in first ‘pandemic bond’.
35 CNBC (May 19, 2020). Global bonds flooded the market. There was at least USD 5.6 billion worth of global bonds issued by SOEs: Inalum
(USD 2.5 billion), BNI (USD 2 billion), Hutama Karya (USD 600 million), and Bank Mandiri (USD 500 million).
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The Long Road to Recovery Indonesia Economic Prospects
flows returned to Indonesia, the Rupiah appreciated by 12.6 percent, and the 10-year bond yield
fell by around 62 bps.
3. Headline inflation edged up modestly in Q1 on higher food prices 36
Lower food crop In Q1 2020, headline consumer price Figure A.18: Headline inflation edged up in Q1
production led to a inflation edged up to an average of 2.9 driven by higher volatile foods inflation
pick-up in food percent yoy from 2.7 percent in Q4 (change yoy, percent)
inflation 2019 (Q1 2019: 2.7 percent; Figure 8
A.18), still well within BI’s targeted Ramadan
inflation band of 2.0 to 4.0 percent. 6
The uptick in headline inflation was
driven by higher food inflation. Food 4
prices increased an average of 5.8
percent yoy in Q1, close to double of 2 Headline Core
the average of 3.1 percent in Q4, due
to import delays 37 and disruptions to 0 Administered
domestic supply due to adverse
Volatile goods
weather conditions and damaged
38
-2
harvest crops 39 in production centers.
Beyond Q1 and in the face of both Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20
demand and supply shocks, headline
Note: Calculated using 2018 base
inflation fell to a twenty-year low of 2.0 Source: Haver Analytics; World Bank staff calculations
percent in June and a Q2 average of 2.3
percent, despite Ramadan and Eid festivities.
Core and Amid low energy prices, core inflation, 40 which excludes volatile and administered prices, ticked
administered down to an average of 2.8 percent yoy in Q1 from an average 2.9 percent in the previous quarter
inflation eased in Q1 (Q1 2019 average: 2.9 percent) despite a weaker Rupiah, buoyant prices for health and personal
care services, and rising gold prices. 41 Meanwhile, administered price inflation was subdued at
0.4 percent yoy, down from an average of 1.6 percent in the previous quarter, partly driven by
a high base effect stemming from higher domestic airfares a year ago 42 and airfare promotions
to support dwindling demand. 43 Core inflation fell to 2.6 percent in Q2 as downward price
pressures from slumping domestic demand outweighed upward pressures from supply shortages
on the back of factory closures, input shortfalls, and a weaker Rupiah. 44
36 Data and analysis in this inflation section is based on the new 2018 CPI base series (see Box A.1).
37 There were delays in the issuance of import licensing for sugar and garlic. The chairman of the Onion Import Association claimed the delay in
the issuance of Horticultural Product Import Recommendation (Rekomendasi Impor Produk Hortikultura) and the Import Approval Letter (Surat
Persetujuan Impor) by the Ministry of Agriculture and the Ministry of Trade were the main factors behind the price increase as Indonesia imports
95 percent of its domestic garlic supply from China. Tirto (February 5, 2020).
38 The culprit in the chili price increase was the rainy season at the end of 2019 which had caused delays in the chilies planting season. Kompas
(April 2, 2020).
39 Shallot prices increased due to a 10 percent decrease in production at the Brebes production center in Central Java as the extended rainy season
and pests decreased yields and damaged previous harvest stock. Kompas (April 30, 2020).
40 Following Bank Indonesia’s definition, energy prices are included in core inflation, which consists of everything except foods and administered
prices. Included in core is the international commodity prices. https://www.bi.go.id/en/moneter/inflasi/pengenalan/Contents/Disagregasi.aspx.
41 Gold prices have been rallying with double-digit growth since Q3 2013, supported by low interest rates and safe haven demand.
42 In early 2019, the Indonesian aviation industry was taken by surprise by the upward adjustment of the ceiling airfares move initiated by Garuda.
Kompas (January 16, 2020). The early 2019 adjustment followed what were already high airfares in end-2018, bringing an increase of 40 to 120
percent for many domestic routes. CNN Indonesia (January 15, 2020).
43 The aviation industry had offered airfares promos for 10 national destinations in February to maintain demand, although the stimulus was only
effective in March. CNN Indonesia (February 26,2020).
44 According to the IHS Markit Indonesia Manufacturing PMI April 2020 report, higher input prices due to input shortages were not paired with
higher output prices, partly due to lower output demand.
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4. Authorities responded to financial market volatility with easing measures
BI lowered the policy As global central banks aggressively eased monetary policy in response to the COVID-induced
rate and spike in financial volatility (Section A.2), BI also moved in tandem by lowering the policy rate
implemented twice in Q1, despite strong capital outflows. The 7-day Reverse Repo Rate was lowered in
liquidity easing February and March, and also in June by 25 bps each time, to reach 4.25 percent. Similarly, the
measures deposit and lending facility rates were also reduced in February, March, and June each time by
25 bps. Since March, BI has also taken several liquidity easing measures: the maximum duration
for repo and reverse repo operations have been extended to up to twelve months; repo auctions
have been conducted daily; the frequency of foreign exchange swap auctions has been increased;
and reserve requirement ratios for banks have been lowered. 45
Figure A.19: Despite currency depreciations, Bank Figure A.20: Credit growth saw an uptick in March, after
Indonesia eased the policy rate twice in Q1 OJK announced relaxation measures
(percent) (yoy growth, percent)
12.0 6.5 16
Consumption lending rate
Investment loans
14
11.5 6.0
12
11.0 5.5
10
Working capital
7-Day Reverse Repo Rate
lending rate
10.5 (RHS) 5.0 8 Credit growth
6 Consumption loans
10.0 4.5
Investment lending rate 4
9.5 4.0
2
Working capital loans
9.0 3.5 0
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20
Source: BI, CEIC, and World Bank staff calculations Source: BI, CEIC, and World Bank staff calculations
Credit growth picked In line with the decreasing policy rate, domestic lending rates have also been trending
up following the downwards, though not proportionately. The average lending rate 46 fell to 10.3 percent in Q1,
lowering of lending from 10.5 in Q4 2019 (Figure A.19). Lower borrowing costs, coupled with measures
rates and credit implemented by the Financial Services Authority (OJK) that temporarily allow special treatment
relaxation measures for loans to MSMEs and other COVID-affected debtors 47 partly contributed to credit growth
increasing to 7.1 percent yoy in Q1, from 5.9 percent yoy in Q4 2019 (Figure A.20). The uptick
in credit growth mostly came from stronger growth in working capital and investment loans.48
While the average lending rate continued to decline in May to 10.0 percent, credit growth fell to
5.1 percent in April from a six-month high of 7.2 percent in March.
45 See the press releases of BI’s Board of Governors Meeting in March and April 2020 for more information.
46 The average includes lending rates for consumption, working capital, and investment loans.
47 On March 16th, OJK introduced a loan relaxation package to help MSMEs and other COVID-affected debtors in addressing liquidity issues
arising from contraction in economic activities. The package includes a one-year postponement of credit or leasing payments for loans up to
IDR 10 billion for MSMEs and informal workers; and a postponement of credit or leasing payments without ceiling limits in accordance with
the debtors’ ability to pay the credit.
48 Investment loans are medium- to long-term credits to purchase capital goods, while working capital loans are short-term credits to finance the
working capital. During Q1, working capital loans went up 5.1 percent yoy (Q4: +2.3 percent), and investment loans went up 13.0 percent yoy
(Q4: 12.8 percent).
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The banking sector Banking stability indicators signal Figure A.21: Banking system remains sound
remained broadly that the banking system is (percent)
healthy, with currently still sound overall. 24.0 3.5
authorities preparing Although the capital adequacy
Capital adequacy ratio
measures in ratio (CAR) decreased to 21.7 23.5
anticipation of percent in Q1 from 23.4 percent
liquidity issues in Q4, it remains well above the 23.0 3.0
minimum regulatory CAR of 12
percent. Mirroring the stronger 22.5
growth in working capital credit,
non-performing loans (NPL) for 22.0 2.5
working capital credit also saw
the highest growth, 49 which Non-performing loan ratio (RHS)
21.5
brought the NPL ratio to 2.8
percent in Q1, higher than the 2.5 21.0 2.0
percent in Q4 2019 (Figure A.21). Apr-18 Oct-18 Apr-19 Oct-19 Apr-20
In the face of possible liquidity Source: BI and CEIC
pressures, where banks’ lending capacity and cash flows would be adversely impacted by the
pandemic, the Government has also introduced several measures to protect lending portfolio
and ensure credit availability. 50
5. Fiscal policy reacted quickly to the shock to boost spending on health and livelihoods
Successive fiscal As the understanding of the scope and impact of the pandemic evolved, the Government
packages were expanded its fiscal response accordingly. From a small package limited to mitigating the impact
announced to on tourism that was announced in February, the 2020 State Budget 51 was most recently revised
enhance healthcare to incorporate an expanded package of IDR 695.2 trillion, with an overall expected impact on
and to cushion the the budget of IDR 711 trillion or 4.3 percent of GDP above and below the line (World Bank
adverse economic estimate) 52, pushing the budget deficit to 6.3 percent of GDP. Key priorities include
impacts associated strengthening health care, expanding social protection, and helping prevent Indonesian
with the infection businesses from falling into bankruptcy and workers from layoffs. The rule stipulating that the
fiscal deficit is not to exceed 3 percent of GDP was relaxed through 2020-22 by the issuance of
a Government Regulation in-lieu of Law (Perppu No. 1/2020), 53 as issued by President Jokowi
on March 31 this year.
Expenditure The fiscal package will be implemented through a combination of revenue, expenditure and
measures include below-the-line financing measures, with expenditures taking the lion’s share, amounting to IDR
additional funding 506.1 trillion for improving health care, expanding social protection, and providing industry
for healthcare, social support. Total projected expenditures for 2020 were therefore raised to 16.7 percent of GDP
protection and from 14.6 percent in the initially approved 2020 budget (Table A.2). The additional expenditures
industry support will be funded in part by budget reallocations at the central government level and via the
49 NPL in working capital loans increased 24.0 percent yoy in Q1 (Q4: +17.4 percent), followed by the NPL increase in consumption loans of
14.5 percent yoy, and investment loans of 11.1 percent yoy. Historically, more than half of NPL came from working capital loans.
50 Detailed analysis of these measures is provided in Section B.4.
51 On March 31, the Government announced the first revision to the 2020 State Budget to accommodate the fiscal measures valued at IDR 434
trillion or 2.7 percent of GDP.
52 Compared to the announced package, the World Bank estimates the impact of the new fiscal measures in the revised budget compared to the
original budget, excluding the part of social assistance spending (PKH, Kartu Prakerja and Sembako) that was already in the original budget
(IDR 62.7 trillion) and including compensation payments to Pertamina and PLN and the B-30 renewable energy subsidy (total IDR 77.4 trillion)
as well as the net increase in DID transfers (IDR 3.5 trillion instead of the announced IDR 5 trillion).
53 The Government Regulation (Perppu No. 1/2020) was later approved by Parliament thereby becoming Law 2/2020.
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The Long Road to Recovery Indonesia Economic Prospects
composition of transfers to sub-national governments, predominantly at the expense of
infrastructure spending. 54
Table A.2: World Bank estimates of the fiscal impact of the announced fiscal measures in the revised 2020 budget
As percent
Fiscal Measure (1) Revenue Expenditure Financing (2) Total Cost
of GDP(3)
Health 84.6 84.6 0.5
Social protection 139.7 139.7 0.9
MSMEs 40.3 80.8 121.1 0.7
SOEs 76.1 60.2 136.2 0.8
o/w subsidy compensation 76.1 76.1
Tax incentives 55.0 68.1 123.0 0.8
Other 97.4 3.4 100.8 0.6
o/w labor intensive supports 18.4 3.4 21.8
o/w transfers to SNGs 12.2 12.2
o/w reserves 58.9 58.9
Sub-total 55.0 506.1 144.3 705.4 4.3
Unallocated below the line PEN Program 5.7 5.7 0.0
Total 55.0 506.1 150.0 711.1 4.3
Source: Ministry of Finance and World Bank staff estimates
The fiscal deficit is
Excluding tax subsidies that are included as expenditures, tax relief measures are expected to
expected to increase
reduce revenue by approximately IDR 55.0 trillion. The economic downturn itself is projected
predominantly due
to reduce the initial 2020 budget revenue by about IDR 479 trillion. Total Government revenue
to lower revenues
is therefore projected to fall to 10.4 percent of GDP from 12.8 percent in the initial approved
2020 budget. 55 Consequently, the fiscal deficit is expected to widen from 1.8 percent of GDP
in the initial approved 2020 budget to 6.3 percent of GDP. Also included in the COVID package
is the borrowing of IDR 150 trillion as below-the-line spending for the National Economic
Recovery program (PEN/Pemulihan Ekonomi Nasional). 56 Total debt financing is projected to
increase from IDR 351.8 trillion in the initial 2020 budget to IDR 1,220.5 trillion. 57
The details of the announced fiscal mitigation measures include:
• Health care: IDR 84.6 trillion (0.5 percent of GDP) 58 for the procurement of medical
equipment (rapid tests, disposable laboratory equipment, personal protective
equipment (Alat Pelindung Diri, APD)), preparation of health facilities, enhanced
benefits for health care workers, and tax measures such as temporary income tax relief
for COVID health care providers, and import duty and VAT waivers for goods
associated with the management of the infection. 59
54 The investment in infrastructure will be affected through the cuts in the central government budgets for MoPWH as well as transfers to SNGs
like DAK Fisik cuts and the subnational infrastructure spending relaxations of 25 percent of DBH and DAU to allow regions to utilize it, in part
or in full, for the handling of COVID. This may be for spending in the health sector and social safety net in the form of the procurement and
distribution of logistics and/or other urgent spending as determined by the Government.
55 The revised revenue target is 23.9 percent lower than the revenue target in the initial approved budget.
56 The PEN program as stipulated by Government Regulation 23/2020 has four policy components including capital injections, bailouts
(Government investment), provision of working capital loan guarantees and fund placements. Investor (May 12, 2020).
57 The total Government debt stock is projected to reach 36.4 percent of GDP, still below the 60 percent legal threshold. In accordance with
PERPPU 1/2020, the Government is allowed to finance the budget by using the surplus cash (Saldo Anggaran Lebih, SAL) from previous years;
the accumulation of endowment funds; other cash controlled by the government; and funds managed by BLUs. Further, the Government can
issue government’s bonds and/or Syariah (Islamic) bonds earmarked for COVID-19 that can be bought by Bank Indonesia (in the primary and
secondary markets), BUMN, Private Corporate Investors and/or retail investors.
58 Excludes additional subsidies for BPJS-Health premiums, which has been included in social assistance.
59 Kontan (April 22, 2020).
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• Social protection: IDR 139.7 trillion (0.9 percent of GDP) 60 to support the rollout of
new social assistance programs, expansion of existing social assistance programs,
including the pre-employment card program, and additional subsidies such as the BPJS-
health premiums and electricity bill waiver. 61
• Support to MSMEs: IDR 121.1 trillion (0.7 percent of GDP) 62 covers mainly interest
subsidies on MSME loans for 3 to 6 months, the placement of funds to provide liquidity
support to banks involved in MSME loan restructuring and a guarantee fund for new
working capital loans for MSMEs.
• Support to SOEs: IDR 136.2 trillion (0.8 percent of GDP), includes mainly additional
energy subsidy compensations to PLN and Pertamina (IDR 76 trillion), which is largely
due to uncompensated subsidies from earlier years, capital injections 63 and bailouts
(mainly from infrastructure, financing and transport SOEs).
• Tax relief: IDR 123 trillion (0.8 percent of GDP) 64 This is largely due to the temporary
waivers for personal income tax (including final income tax paid by MSMEs), corporate
income tax, import income tax, accelerated VAT refunds and the permanent reduction
of the corporate income tax rate from 25 to 22 percent.
• Other spending measures: IDR 100.8 trillion (0.6 percent of GDP) for the Cash for
Work Program under line ministries, support to labor-intensive industries in the form
of fund placements for loan restructuring, transfers (DAK Fisik and DID), grants to
SNGs for revenue declines associated with the slowdown in the tourism sector (to
compensate SNGs for lower hotel and restaurant tax revenue), B30 renewable energy
subsidies, housing incentives for low income households, and other potential fiscal
measures.
Government Largely due to implementation of COVID-19 fiscal measures and relaxation of the LSSR
expenditure (PSBB), government expenditure increased from IDR 220.0 trillion in May to IDR 225.0 trillion
increased in June in June. This was due to higher spending across all expenditure categories, except personnel
due to higher spending and interest payments. Social spending increased compared to May due to the
spending across realization of the new and expanded social assistance programs such as Kartu Sembako and
most spending types PKH (Program Keluarga Harapan; Figure A.22 and Figure A.23). 65 In contrast, personnel
spending was smaller than in May and similar to the amount last year due to the postponed
disbursement of the civil servants one month salary bonus (gaji ke-13). 66
The deficit narrowed The deficit in June at IDR 78.1 trillion was narrower than in May, but net financing 67 was lower
from May to June at IDR 60.1 trillion for the same period. Together, this resulted in a deficit financing of IDR 18
trillion indicating that the Government had used up some of the frontloaded financing made in
60 Includes the IDR 3 trillion earmarked for partial subsidies of BPJS-Health premiums for non-wage workers and the unemployed.
61 New programs include unconditional cash transfers (BLT) for households outside Greater Jakarta, direct in-kind food assistance (Sembako)
households in Greater Jakarta and BLT Desa funded by the Village Fund to cover the bottom 50 percent of population. Expansions of current
programs include a 3-month extension to the duration of benefits from the PKH program (Family Hope Program) which is targeted at the bottom
20 percent of the population, increases in the number of beneficiaries for Kartu Sembako (cash food vouchers) as well as higher benefit amounts,
catering to the bottom 30 percent of the population. In addition, the budget for the pre-employment card program, which provides incentives for
unemployed workers to join skilling and re-skilling programs, will be doubled to increase coverage, or equivalently, the number of eligible
participants.
62 Excludes subsidies to MSMEs for final tax payments, which is included under tax relief.
63 The capital injection to SOEs in some cases is to support the economic recovery. For instance, capital injection in PT SMI as a channel to
provide soft loans to Sub-National Governments, BPUI as an insurance holding SOE that would support MSME loan guarantees, ITDC to
support tourism in Mandalika (West Nusa Tenggara), HK to complete the Sumatra toll road project.
64 Excludes health care tax incentives which are included under health care
65 Implementation of the COVID fiscal package has been relatively slow, partly due to operational and administration issues. Liputan 6 (June 16,
2020).
66 Republika (July 2020).
67 Difference between total net government debt issued and total government investment.
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the previous months to finance the deficit. The year-to-June cumulative amount was IDR 416.2
trillion or 40 percent of the expected deficit this year. Net issuance 68 of Government IDR
securities (bonds and sukuk) and global bonds debt was IDR 430.4 trillion 69 for the year until
June. As of May, total outstanding debt was 32.1 percent of GDP. Despite an increase of
domestic and foreign holdings of bonds in May, the recent declines in bid-to-cover ratio and
increases in yields signal that local and global financing conditions have tightened. In response,
BI purchased a total of IDR 200.3 trillion in the year-to-May in both primary and secondary
markets, and relaxed reserve requirements to increase liquidity in the domestic financial sector. 70
Figure A.22: Spending increased in June following Figure A.23: Almost all expenditure types grew yoy in
increases across almost all spending types June except personnel and energy subsidy
(monthly realization, IDR trillion) (monthly realization, contribution to yoy growth, percent)
Personnel Material Personnel Material
Capital Interest payment Capital Interest payment
Energy subsidy Non-energy subsidy
Energy subsidy Non-energy subsidy
Social Others* 35
Transfers to SNGs Total expenditures Social Others*
300 Transfers to SNGs Total expenditures
25
250
200 15
150
5
100
-5
50
0 -15
Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20
Source: Ministry of Finance, World Bank staff calculations
Notes: *Other includes arrears payments from previous energy subsidies
Revenue collections Amid easing of the LSSR, fiscal revenue collection increased to IDR 146.9 trillion in June from
in June fell on IDR 114.8 trillion in May (Figure A.24), mainly due to higher non-tax revenue from SOEs’
reduced economic shared dividend and BI surplus as well as non-oil & gas income taxes and VAT. The cumulative
activity, slumping year-to-June collection reached IDR 811.2 trillion, equivalent to 47.7 percent of the revised
commodity prices, revenue target. 71 Compared to last year, revenues in June plunged 14.0 percent yoy as total
and declining income tax revenue and non-tax revenue from natural resources fell due to reduced economic
imports activity, lower prices of key commodity exports and tax relief measures (Figure A.25).
68 Net Issuance refers to the absolute amount of bond issuance less the absolute amount of bond redemptions for the same period.
69 Kontan (June 16, 2020).
70 The Board of Governors Regulation 22/2020 formally supports BI’s effort to help finance the Government during the COVID-19 pandemic
which allows BI to offer the initiative to purchase bonds through additional auction session (Green Shoe Option) and to some extent, private
placement if the Government fails to fulfill the auction target at the regular day
71 By the end of June 2020, total Government revenue reached 47.7 percent of revised revenue target (PERPRES 72/2020), higher than in the
same period in 2019 (41.5 percent) as the revised revenue target declined by about 21.5 percent compared to the 2019 target.
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Figure A.24: Revenue collection in June increased largely Figure A.25: Revenue collection plunged in June
due to non-tax revenue from SOEs’ shared dividend and compared to last year as the economic downturn took
BI surplus hold amid stricter containment measures
(monthly realization, IDR trillion) (monthly realization, contribution to yoy growth, percent)
Other International trade taxes Other International trade taxes
Excise VAT/LGST Excise VAT/LGST
Income taxes N-O&G O&G related revenues
Income taxes N-O&G O&G related revenues Total revenues
300 30
250
15
200
0
150
-15
100
50 -30
0 -45
Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20
Source: Ministry of Finance; World Bank staff calculations
Note: O&G related revenues refer to oil and gas income tax, dividends and royalties (non-tax revenues), N-O&G stands for non-oil and gas income
tax; VAT/LGST stands for value-added tax/luxury goods sales tax; “Other” includes: land/property taxes, other tax revenues; non-oil and gas non-
tax revenues; other non-tax revenues (profits of public enterprises, revenues from Public Service Agency [BLU], and other non-tax revenues [PNBP]);
and grants.
6. Labor market conditions deteriorated sharply
Until February 2020, Prior to the local spread of COVID-19, Indonesia’s employment rate 72 was stable at 65.7 percent
labor market in February 2020 (Figure A.26). Between February 2020 and the year prior, 1.6 million jobs were
indicators were created, the lowest annual increase since 2016. 73 The lack of employment growth is likely driven
stable… by a combination of slower growth in the working age population and stagnant wages 74,75 The
unemployment rate also remained stable at 4.9 percent. Underemployment declined slightly in
February 2020 from a year before (Figure A.27), with a decline in involuntary underemployment
slightly offsetting an increase in voluntary underemployment. 76
…but have The COVID-19 pandemic has thrown labor markets into disarray, both globally and in
deteriorated rapidly Indonesia. Q1 2020 statistics largely miss capturing these changes as mobility restrictions largely
since came into effect only in late March. However, more recent data from other sources, such as the
World Bank panel phone monitoring (HiFy) survey, is informative of the depth of the disruption
in the labor market (Box A.2).
72 The employment rate is the number of employed workers divided by the total working-age population. Its recorded value tends to be higher
in the February Sakernas than the August Sakernas.
73 Source: BPS February 2020 Labor Press release. Between February 2019 and 2020, the largest contributors to job creation were the education
and construction sectors which saw 400,000 and 345,000 new jobs, respectively.
74 Lack of higher wages to attract the inactive working age population into the labor force.
75 Indonesian labor market statistics are published twice a year in February and August. However, comparisons of February and August data
values are avoided as there are seasonal differences, such as differences in crop seasons, which would affect workforce employment and other
labor market statistics. This trend has been unfolding over the last 3 years and can be consistently observed in both August and February yoy
trends.
76 The growth in voluntary underemployment has been commensurate to the rise of a gig economy, where people are working on shorter term
contracts or in free-lance work. Over the last decade this trend has increased, though it has somewhat stabilized over the last two years, both for
women and men, with 34 and 17 percent respectively of those underemployed being voluntarily so. This modest shift that is taking place in the
labor market indicates that more workers, and particularly women, prefer shorter and more independent jobs associated with more flexible work
arrangements or may be resorting to taking up jobs that are available.
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Figure A.26: The employment and unemployment rates Figure A.27: Underemployment has fallen, driven by an
remained constant between February 2019 and 2020 increase in voluntary unemployment.
(percent, percent) (percent)
Employment growth (LHS) 35
Labor Force growth (LHS)
4 Working age population growth (LHS) 100 30
Underemployment
90
25
3 80
Employment Rate (RHS)
70 20
2 60 Voluntary underemployment
50 15
1 40
10
30
0 20 5 Involuntary underemployment
Unemployment Rate (RHS) 10
-1 0 0
February February February February February February February February February February February February
2015 2016 2017 2018 2019 2020 2010 2012 2014 2016 2018 2020
Source: BPS National Labor Force Survey (Survei Angkatan Kerja Nasional, Sakernas), WB staff calculations
Note: Includes February readings only. February 2020 data updated from the BPS February 2020 Labor Press release.
Nearly a quarter of The first round of the HiFy survey on the socio-economic impacts of COVID-19 on households
survey respondents has shown that many workers who were active before the pandemic, had to stop working. 77 By
had stopped working late May, 24 percent of survey respondents said they were not currently working. While cessation
of work happened in all sectors and seasonality may play a role, most of the respondents who
reported that they stopped working were in the hard-hit manufacturing, construction and
transport, storage and communication sectors (see Section A.1, Figure A.28). 78 While there was
no significant variation found between poor and non-poor respondents, 79 there were difference
between men and women in terms of likelihood to having to stopped working (Box A.3)
Around two-thirds of Among those that reported in the survey that they were still working, 64 percent experienced
the survey reduced income. 90 percent of workers in the transport, storage and communication sectors
respondents who and 84 percent of those in the trade, hotel and restaurant sectors reported lower incomes. Some
were still working workers were flexible enough to continue working albeit in different jobs in the same sector or
experienced reduced different jobs in another sector. Of those still working, 11 percent noted that they had switched
income jobs. For instance, of the 54 percent that were earlier in the service industry, 46 percent switched
to work in agriculture, 13 percent switched to the industry sector, while another 41 percent
switched jobs within the service sector. 80
The impact on As of February 2020 unemployment rates were highest for those with a vocational (SMK)
livelihoods has been degree, at 8.5 percent. However respondents to the HiFy survey who stopped working in late
greater on the less May came from all levels of education. About a quarter of those with junior secondary or lower
educated and those or senior secondary education have stopped working, compared to only 14 percent of those
living in urban areas with a tertiary education. Meanwhile, those with junior secondary education have a higher
chance of facing reduced income, than those with senior secondary and tertiary education.
Workers with lower education are more often employed in sectors such as manufacturing and
construction where many workers reported having stopped working in the HiFy survey.
77 Those who have stopped working can be defined as unemployed, therefore comparisons to unemployment are not made.
78 Though there was zero growth in agriculture partly due to a delayed harvest, employment in the agricultural sector is found to be the most
resilient, as expected.
79 This is in some contrast to broadly comparable household survey data that suggests that employment is slightly higher, at 64 percent, for the
poor than at 60 percent for the non-poor.
80 Ibid.
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While the COVID-19 pandemic is affecting workers in all areas, those in urban areas are
significantly more likely to have stopped working (26 percent) versus those in rural areas (19
percent). Respondents residing in Jakarta had the highest propensity to have stopped working
at 29 percent versus 26 percent outside Jakarta in Java and 19 percent for those outside of Java. 81
Nevertheless, the shift of workers to agriculture puts pressure on agricultural labor markets and
shows indicates how the shock can spill over to rural areas. No significant gender differences
were found among those who stopped working (Figure A.29).
Figure A.28: Significant increases in those not working Figure A.29: Those not working more often reside in DKI
versus employment shares in February 2020 is found in both Jakarta and, urban areas and hold lower education
industry and service sectors credentials
(percent) (percent)
Stopped working in May 2020 (Hify) Stopped working in May 2020 (Hify)
35
Employment Rate Pre COVID-19 (BPS) Employment Rate Pre COVID-19 (BPS)
30 90
25 80
20 70
60
15
50
10 40
5 30
0 20
10
0
Sources: For during-COVID-19 estimates for May: World Bank (2020) Indonesia High-frequency monitoring of COVID-19 Impacts. For pre-COVID-
19: Source: BPS National Labor Force Survey February 2020 (Survei Angkatan Kerja Nasional, Sakernas), WB staff calculations.
It is estimated that COVID-19 social distancing measures might have persistent effects on the labor market and
only 21 percent of the those who can work from home will be less affected. Because of the continuation of social
jobs in Indonesia distancing, many jobs will continue to be performed from home in the coming months or even
can be performed permanently. It is estimated that only 21 percent of the jobs in Indonesia can be performed
from home from home, with jobs in construction hotels and restaurants, or those that are informal or
conducted in rural areas being less amenable to be done from home (Box A.4). 82
7. Without emergency social assistance, COVID-19 could push millions into poverty
If not mitigated, In the absence of the Government’s social assistance measures for households (henceforth
losses in referred to as “relief measures for households”), model estimates suggest that the economic
employment and fallout of the pandemic could push 5.5 to 8 million Indonesians into poverty in 2020. 83 This
81 World Bank (2020) Indonesia High-frequency monitoring of COVID-19 Impacts.
82 Of course, there are jobs that cannot be done from home but will not be affected as much if these are in essential businesses. Likewise, there
are jobs that are amenable to be done at home though the workers might suffer (wage) losses or even lose their jobs if the demand for their firms’
goods and services diminishes.
83 Estimates as of 15 June 2020 based on the World Bank’s recent work “Poverty and distributional impact of Covid19 in Indonesia: A macro-
micro simulation approach”. The model for simulating the pandemic’s impact on poverty combines macroeconomic projections for GDP and
sectoral output growth with pre-crisis microdata from household and labor force surveys (SUSENAS and Sakernas 2019) to predict income and
consumption at the individual and household levels under three scenarios: (i) business-as-usual (growth estimate of 5.0 percent); (ii) a mild shock
(growth estimate of 0 percent estimated under assumptions of a deep global recession and moderate domestic restrictions); and (iii) a severe shock
(growth estimate of -2.0 percent estimated under assumptions of a deep global recession and severe domestic restrictions). Macroeconomic
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The Long Road to Recovery Indonesia Economic Prospects
household income would result from an aggregate decline in household incomes of between 5 and 7 percent –
can lead many mainly due to lower earnings – as well as employment losses among 2.6-3.6 million Indonesians
families to fall into who would either lose jobs or become inactive. The sharpest declines in earnings would occur
poverty in the traditional services and agriculture sectors, followed by manufacturing. As observed on
the ground through the HiFy survey, employment losses 84 are concentrated in the traditional
services sector, followed by manufacturing and other industries, while employment in
agriculture would register a net gain, serving as a buffer for some who lose jobs in other sectors.
Income and Households living in core and single Figure A.30: COVID-19 would cause income shocks,
employment impacts district metro (urban centers) would with the largest drop among urban households
vary by location experience the highest fall in overall (percent change)
income of between 5.5 to 7.5 percent, Mild - uncompensated Severe - uncompensated
depending on the duration of regional 0
mobility restrictions (Figure A.30).
Across island-regions in the country, -2
the impact on household income is
relatively homogenous, except Papua -4
with a relatively higher household
-6
income loss of 8.7 percent. 85 The
impact on employment would vary -8
across geographies, depending on
region-specific reliance on adversely
affected economic activities. Java and
Sumatera would account for half of
job losses expected across the
country. 86 This is due to the large Source: World Bank staff calculation.
share of workers in these regions Note: The percent change is relative to benchmark 2020.
‘Uncompensated’ scenario shows estimated income shocks
relying on traditional services. More without the government’s relief measures for households. ‘Mild’
than half of workers who become case assumes 0 percent GDP growth, whilst ‘Severe’ case assumes
inactive or lose their jobs reside in -2.0 percent GDP growth.
non-metro rural areas.
In response to the The Government’s social protection response to the crisis has been strong. Measures to mitigate
crisis, the GoI has adverse impacts among the poor and vulnerable include vertical and horizontal expansion and
instituted substantial repurposing of several existing social assistance programs, as well as addition of new ones (Table
increases in social A.3). Most of the measures target households in the bottom 40 percent of the income
assistance and distribution, for whom information was readily available in the existing social registry (DTKS),
economic support including those that were not covered by existing programs.87 Additional programs to capture
measures for those that might be affected but whose information was not already available were also put in
households… place, including those who reside in areas with high rates of infection and mobility restrictions
(Sembako for Jabodetabek), those who reside in rural areas (reallocation of the Dana Desa funds
for Unconditional Cash Transfers) and those who lost work and wished to undertake skills
training (Kartu Prakerja). Most of the programs were announced in April, and will in principle be
forecasts for growth in sectoral GDP are as follows, for the mild and severe impact scenarios respectively: Agriculture (-0.6% and -2.1%),
Manufacturing (-2.6% and -5.3 percent), other industry (-0.8 and -2.8), traditional services (-1.1% and -3.7%), and modern services (5.2% and
4.7%).
84 “Job losses” refer to both the unemployed and those who have become inactive due to the pandemic. The simulation model is based on the
March 2019 SUSENAS that does not distinguish between the two.
85 This is because nearly 65 percent of workers in Papua rely on agriculture, whereby the average earnings are expected to be the highest by 6
percent under severe and unmitigated cases.
86 Java would experience the highest job losses equivalent to 1.1 million under the severe impact scenario, followed by Sumatera with 0.7 million
jobs lost.
87 DTKS contains information on households in the bottom 40 percent of the population and – pre-COVID-19 – was used primarily to target
programs aimed at supporting consumption of the bottom 15 percent (PKH) and bottom 25 percent (Sembako).
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The Long Road to Recovery Indonesia Economic Prospects
implemented for a duration between 3 and 12 months. These generous measures effectively
double the Government’s spending on core social assistance relative to that in the 2019 budget
realization, and if they reach the target population, they would significantly offset much of the
aggregate income loss to households, lowering it to between 3.4 and 5.3 percent. Households in
non-metro-rural areas would benefit most from the mitigation efforts, with the fall in average
income half of what it would have been without the relief measures.
Table A.3: Government’s full response package to COVID-19
Program Benefit type, beneficiary Increased coverage Benefit incidence & Implementation Budget
name selection, and coverage above pre COVID-19 duration (IDR tn)
Sembako Existing food assistance Expansion from 15.2 Increased benefits of monthly, for 9 15.5
(Staple food) program, targeting the to 20 million IDR 200,000/month months (starting in
poorest 25 percent households, identified (for 12 months) March for existing
households included in the among those already households,
DTKS in the DTKS expansion started in
April)
PKH Existing family conditional Expansion from 9.2 to Increased benefits by monthly-for 9 8.3
cash transfer, targeting the 10 million households 25% for 12 months months (starting in
poorest 15 percent in the identified among April)
DTKS those already in
DTKS
Kartu Prakerja Pre-employment card Expansion from 2 to Training: IDR 1 Launched in April, 10
(Pre- targeting job seekers, aged 5.6 million individuals million/month, benefits rolling out
employment 18 or above who are not in in total of IDR 600,000/month progressively
card) formal education and not (4 months), IDR
receiving PKH or Sembako _ 50,000/month (3
months)
UCT (Non- Newly launched unconditional 9 million households IDR 600,000/month (3 April-December, 32.4
Jabodetabek) cash transfer, targeting months), then IDR 2020
households in DTKS and 300,000/month (6
outside Jabodetabek area, months)
who are not currently covered
in any of the existing
programs (Sembako, PKH,
and Prakerja)
Sembako New food transfer covering 1.2 million Food package April-December, 6.8
(Jabodetabek) COVID-19 affected households in equivalent to IDR 2020
vulnerable household Jakarta, 600,000 600,000/month (3
residents of Jakarta and households in months), then IDR
districts surrounding the peripheral districts 300,000/month (6
capital (Bodetabek) (Bodetabek) months)
Electricity Newly launched electricity fee All households HHs with 450 VA – fee April-September, 6.9
Subsidy waivers and partial discounts subscribing to 450VA waiver (6 months) 2020
and 900VA electricity HHs with 900 VA –
connection. 88 50% off bills (6
months)
BLT Dana Newly launched unconditional 11 million rural IDR 600,000/month (3 April-September, 31.8
Desa (Village cash transfers using 31 households, months), then IDR 2020
Fund) percent of Indonesia’s Village prioritizing those who 300,000/month (3
Fund (Dana Desa) program lost main source of months)
will be re-allocated to target income due to
rural households that are not COVID-19 89
covered by the Sembako,
PKH, and Prakerja programs
but affected by Covid-19
Source: World Bank staff compilation from various sources.
88 These add up to 50 million households in the 2019 SUSENAS.
89 The WB simulation model assumes 11 million households on basis of earlier data from MoF.
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The Long Road to Recovery Indonesia Economic Prospects
…that have the Absent the GoI’s relief measures for households, following the outbreak of the pandemic,
potential to Indonesia was projected to face a poverty headcount rate of anywhere between 10.7 and 11.6
significantly mitigate percent in 2020, translating into 5.5 to 8 million new poor relative to the year before, with the
the increase in the pandemic threatening to wipe out gains in poverty reduction over the last seven years (Figure
poverty headcount A.31). If the planned relief measures were fully executed as planned and delivered to the target
rate due to the population without overlaps between programs, and if people returned to work as mobility
pandemic restrictions are phased out in the third and fourth quarters of 2020, the estimated poverty rate,
instead of rising, could fall to between 8.2 and 9.0 percent, with the poverty rate in the mild
crisis scenario falling below even the benchmark rate of 8.6 percent in a 2020 without COVID-
19 (Figure A.32). This could translate into the equivalent of 1.3 million households either being
lifted out of poverty in the mild impact scenario, or at most 920,000 households entering poverty
in the severe impact scenario. The relief packages could also mitigate the adverse impact on
inequality, lowering the Gini coefficient from between 38.5 and 38.7 to 37.3 and 37.5 in the mild
and severe impact scenarios respectively, slightly lower than the 2020 benchmark of 38.2. 90
Figure A.31: Without Government social assistance Figure A.32: Full government responses could offset
measures, seven years of accumulated gain in poverty increase in poverty due to COVID-19
reduction would be erased (poverty rate in percent)
(poverty rate in percent)
15 14
11.6
12 10.7
10 8.7 9.0
13 8.2
8
6
11 4
2
0
9
Uncompensated Full SA package Uncompensated Full SA package
Severe COVID-19 - uncompensated
Mild COVID-19 - uncompensated
7 Severe COVID-19 - compensated
Pre-COVID-19
Mild COVID-19 - compensated
5 Benchmark Mild impact Severe impact
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: BPS, World Bank staff calculation
Note: Pre-COVID-19 level refers to year 2019, and adjusted with the actual coverage of social assistance (SA) measures; 2020 number refers to
simulated poverty rate. ‘Benchmark’ shows the forecasted poverty rate in 2020 without COVID-19 shock; ‘Uncompensated’ scenario shows the 2020
COVID-19 poverty shock when there is an absence of government compensation; ‘Compensated’ scenario shows 2020 poverty rate (simulated), after
taking into account the full SA package.
90 The relief packages would also mitigate the adverse impact on depth of poverty, lowering the poverty gap – a measure of how far the mean
income of the poor lies below the poverty line – from between 2.18 and 2.55 to 1.56 and 1.87 in the mild and severe impact scenarios
respectively, but would not completely offset it given the benchmark 2020 gap of 1.40.
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The Long Road to Recovery Indonesia Economic Prospects
GoI’s pandemic Poverty rates after taking into account Figure A.33: Government responses could mitigate
response could be the GoI’s pandemic response measures impact on the poor, mainly among rural
particularly effective for households vary across locations. If households
in preventing measures were fully implemented as (poverty rate, percent of population)
15 Benchmark
deepening of poverty planned and appropriately targeted, Mild crisis - compensated
in rural areas poverty in non-metro rural areas even Severe crisis - compensated
under the severe impact scenario could 10
be maintained at the benchmark level
projected for 2020 without the
pandemic, 91 but would be reduced to a 5
level slightly lower than the benchmark
in peripheral rural areas (Figure A.33).
0
Similarly, assuming flawless execution
of measures, poverty in Java and Papua
could be maintained at benchmark
levels even under the severe impact
scenario. But urban centers and areas
like Bali with relatively heavy reliance on
Source: World Bank staff calculation.
affected sectors (e.g. tourism) could Note: The percent change is relative to benchmark 2020.
face poverty rates higher than the 2020 ‘Uncompensated’ scenario shows estimated income shocks
without the government’s relief measures for households.
benchmark. ‘Mild’ case assumes 0 percent GDP growth, whilst ‘Severe’ case
assumes -2.0 percent GDP growth.
Figure A.34: The new poor would mainly engage in Figure A.35: More than half of the new poor also reside in
traditional services, one of the most affected sectors due rural parts of Indonesia
to COVID-19 (share of poor, percent)
(share of poor, percent)
50 Already poor New poor (compensated) 80 Already poor New poor (compensated)
40
60
30
40
20
20
10
0 0
Source: BPS, WB staff calculation.
Note: ‘Already poor’ (or structural poor) refers to individuals who would become poor in 2020 (both in benchmark and severe case). ‘New poor’ refers
to who would become poor under severe case. Traditional services include wholesale and retail, transport and warehousing, accommodation and
restaurants, and other services. Modern services include ICT, finance and insurance, real estate, company services, government administration,
defense and social security, education and health services.
The new poor would Under the severe shock scenario, even if all social support measures were fully implemented as
work mainly in planned and appropriately targeted, there could still be around 920,000 additional poor – as a
agriculture and
traditional services,
91 The benchmark level refers to what the poverty rates would be in year 2020, in the absence of the COVID-19 pandemic.
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The Long Road to Recovery Indonesia Economic Prospects
and reside in non- result of employment and income shocks.92 Among the new poor in 2020, after taking into
metro rural areas account the GoI’s COVID-19 response, 40 percent could be unemployed or become inactive,
followed by a quarter relying on agriculture and 21 percent on traditional services (Figure A.34).
Most of the structural poor (i.e. those who were already poor before the pandemic and would
remain so in 2020) would be in the agriculture sector, followed by traditional services. The
traditional services sector is forecasted to suffer the most due to the pandemic, with the highest
expected job losses. More than half of the new poor (those who become poor due to COVID-
19) also reside in non-metro rural areas (Figure A.35). Even if all support measures were fully
delivered a planned, many of the new poor would be in non-metro rural areas, indicating
deepening of poverty pockets in rural areas.
GoI’s pandemic The relief packages will help cushion the economic shock for the lowest deciles (Figure A.36),
response packages but will not fully offset welfare losses among the bottom 40 percent, especially in the third and
targeted to fourth deciles. The standard benefit programs are equivalent to IDR 600,000 (per month, per
households do not household) for the first three months, and then lowered to IDR 300,000 for the next months.
fully offset welfare These are far below the national poverty line of IDR 404,398 per person per month, and much
losses, particularly lower than the poverty line in some areas with high poverty incidence (e.g. Papua with an IDR
for the 5th to 8th 520,117 poverty line). Even after receiving the cash transfers, the poor or vulnerable who lose
deciles of the income jobs would not be receiving enough support to be lifted out of poverty in the case of a severe
distribution economic shock. Households between the fifth and eight deciles would experience higher
welfare losses of up to 5 percent in the severe impact scenario even after accounting for the
impact of the relief packages, the majority of which are by design targeted towards the most
vulnerable. 93
Figure A.36: Current social assistance package does little in protecting households above the bottom 40
(percent change in per capita consumption over the benchmark scenario)
Uncompensated Compensated (with Full SA package)
Poorest 10% 2 3 4 5 6 7 8 9 Richest 10%
2.0% 1.1%
0.0%
-2.0% -1.0%
-1.8%
-4.0% -2.6%
-4.2%
-6.0% -4.8% -4.9% -5.2%
-5.8%
-8.0% -6.7% -6.7% -6.6% -6.6% -6.3%
-7.6% -7.3% -7.2% -7.2% -7.1%
-7.8%
-10.0%
Source: World Bank staff calculation.
Note: The above figure presents employment impact of COVID-19, comparing benchmark (2020 as business as usual scenario, if there is no COVID-
19) and severe case of COVID-19. Percent change is relative to the benchmark (2020 without COVID-19 shock).
To ensure mitigation The Government’s social assistance and economic relief packages for households have the
of the adverse potential to mitigate the pandemic’s projected impact on the poverty headcount. However, for
impacts on poverty, this to be realized in practice, interventions must reach those who are targeted, with minimal
it is essential that leakage, and be implemented in a timely manner. Current progress shows high spending
GoI relief measures realization of many of the social assistance programs (see Part B). Nevertheless, findings from
92 The full SA package provides economic cushion mainly to compensate income losses due to COVID. However, government mitigation
against employment losses remain limited. If economic shock becomes more severe, the full SA package would not be able to fully compensate
welfare losses among the Bottom 40 (especially those in the third and fourth decile consumption distribution) and the limited mitigation
measures on employment provides no protection against job losses due to COVID.
93 Some programs are accessible also to those not previously identified as vulnerable in DTKS, and due to imperfect targeting some of the
benefits targeted to the poor are received by households above the poorest 40 percent but overall the SA packages aim to primarily protect the
poor and vulnerable.
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The Long Road to Recovery Indonesia Economic Prospects
for households be the HiFy survey suggest that there is still much more work to be done on both dimensions. In
rolled out faster in early May 2020, most households (54 percent) in the bottom 40 percent reported benefiting
the coming months from at least one GoI social assistance program since February 2020, and the share rose to 78
and reach those percent after accounting for loan deferment and electricity subsidy programs. Still, just over two
targeted in five households in the bottom 40 percent had not received any assistance under the PKH,
Sembako, BLT, Kartu Prakerja, or cash-for-work programs. The share stood at 51 percent of
households whose breadwinners had stopped working, and 56 percent among those
experiencing reduced incomes. 20 percent of households in the bottom 40 percent who reported
shortage of food had not received Sembako, while a recently launched Kartu Prakerja and BLT
programs have, within about a month, reached 13 percent and 14 percent of its target
respectively 94. To achieve the program targets the Government has committed to,
implementation efforts need to focus much more sharply on improving delivery of assistance
to the targeted poor and vulnerable households.
Millions of Just over half of households relying on income from vulnerable informal sector jobs, but who
households relying are not in the bottom 40 percent, are projected to receive some form of social assistance in 2020
on informal work (Figure A.37). This translates into about 4 million households who are in between the fifth and
remain unprotected eighth deciles and rely on informal work, but will not have access to assistance under any of the
GoI’s seven COVID-19 response measures except Kartu Prakerja. More than half of households
relying on the informal sector for income and who are not covered engage in the traditional
sector, where the sharpest declines in employment are expected. Nearly 60 percent of these are
self-employed, 45 percent have no access to any health insurance, over 70 percent have no
access to credit and over half do not own a bank account. Around half of them reside in rural
areas.
Figure A.37: Current SA package covers over half of households in the 5th-8th deciles that rely on informal sector jobs,
yet many of them remain with no access to any kind of government assistance
(percent to total SA package)
PKH only BPNT only Prakerja only
UCT non JABODETABEK only Sembako Jakarta only Sembako BODETABEK only
Dana Desa cash only Multi benefit Not receiving any
100%
80%
60%
40%
20%
0%
1 2 3 4 5 6 7 8 9 10
Source: World Bank staff calculation.
Note: Houseohlds here refers to households relying on informal jobs.
Social protection The Government’s pandemic response packages do little to protect most of Indonesia’s aspiring
architecture to reach middle class, that is, households in the fifth to eight deciles of the consumption distribution and
those above the among whom many engage in informal sector work, a group vital to expanding the middle class
bottom 40 percent is and crucial for unlocking Indonesia’s development potential as well as attaining high-income
urgently needed country status. 95 Measures to extend support them are discussed in Section B.5.
94 As of early May 2020, BLT and Kartu Prakerja have been received by 4 percent and 1 percent of about 71 million Indonesian households
respectively. Taking into account the Kartu Prakerja’s target of 5,6 million and BLT’s target of 20 million, the proportion of the programs’
recipient households could be translated into about 13 percent and 14 percent of the programs’ target respectively.
95 World Bank (2020). ‘Aspiring Indonesia: Expanding the Middle-Class’
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The Long Road to Recovery Indonesia Economic Prospects
8. Economic outlook and risks
Economic growth is With the onslaught of both domestic and external shocks, Indonesia’s economic outlook has
projected to weaken turned significantly weaker with the COVID-19 pandemic especially for 2020, but is projected
substantially this to recover over 2021-2022.
year but expected to
recover in 2021-2022
Table A.4: Key economic indicators
(growth yoy, percent, unless otherwise indicated)
Annual Revision from Dec 2019 IEQ
2019 2020e 2021f 2022f 2020
1. Main economic indicators
Gross Domestic Product (GDP) 5.0 0.0 4.8 6.0 -5.1
Private consumption 5.2 1.0 5.0 5.3 -4.1
Government consumption 3.2 5.0 2.0 4.5 1.3
Gross fixed capital formation 4.4 -3.5 4.5 6.5 -8.5
Export volumes of goods and services -0.9 -23.0 1.0 12.0 -24.5
Imports volumes of goods and services -7.7 -27.0 -1.5 10.3 -27.5
2. Other economic indicators
Consumer price index 2.8 2.6 2.8 3.0 ..
3. Economic Assumptions
Exchange rate (IDR/USD) 14237 .. .. .. ..
Indonesian crude price (USD/bbl) 67.5 24.4 26.4 28.0 -2.4
Source: BPS; BI; CEIC; World Bank staff projections
Note: 2019 figures are actual outcomes; f stands for forecast. Statistical discrepancies and changes in inventories are not presented in this table. All
GDP components are based on the latest GDP data. Exchange rate and crude oil price assumptions are average annual data. Revisions are relative
to projections in the December 2019 edition of the Indonesia Economic Quarterly.
Real GDP growth is Real GDP is expected to be flat in 2020, unchanged from 2019, despite expansionary monetary
forecast to plunge to and fiscal policy (Table A.4). 96 Private consumption is expected to slow sharply and investment
zero percent in 2020 to contract this year with social distancing and the imposition of travel restrictions and the large-
on account of scale social restriction (LSSR). With a substantial portion of the population undertaking home-
COVID-19 effects based-work and other personal preventive behaviors to avoid infection, growth of consumption
of services are all expected to weaken sharply. Job losses and the decline in consumer confidence
will exacerbate the slowdown in private consumption. Investment is also projected to shrink
due to the large uncertainty associated with the infection and its containment, weaker domestic
economic activity, lower commodity prices and the global recession. Even with the ease of
mobility restrictions, social distancing and personal avoidance behaviors are likely to persist until
a vaccine is discovered and widely administered. While Government consumption growth is
projected to accelerate with fiscal mitigation measures, it is unlikely to offset the weaker
components of domestic demand. Both export and import volumes are projected to slump on
adverse external conditions with the global economy expected to contract by 5.2 percent this
year. 97 However, imports are projected to shrink more rapidly on sharply weaker domestic
demand. 98 Net exports are therefore expected to make a positive contribution to overall headline
growth.
96 The baseline scenario assumes the current LSSR restrictions in place since March are phased out in stages as announced. In particular, it
assumes a transition to a full re-opening in June and July, with no further restrictions from August. It also assumes that the global economy will
contract by 5.2 percent this year. See World Bank (2020). Global Economic Prospects, June 2020. Econometric analysis suggests that each
percentage point decline in global growth leads the Indonesian economy to slow by 0.2 percentage point.
97 The global economy is projected to undergo a severe recession, contracting by 5.2 percent in 2020 (World Bank 2020. Global Economic Prospects.
June 2020. Washington, DC: World Bank). This is approximately 223 percent more severe than the global contraction during the Global Financial
Crisis. Correspondingly, Indonesia’s exports are assumed to contract 223 percent more than the observed decline in exports during the Global
Financial Crisis. Given that Indonesia’s real exports contracted around 10 percent in 2009, exports are therefore assumed to contract by around
23 percent in 2020.
98 Due to a number of factors, Indonesia’s imports have been trailing exports throughout 2019 and are expected to continue doing so this year,
especially given the observed slump in imports from China in Q1 this year. In addition, as observed in past crisis years, the sharp demand in
domestic demand is expected to lead to import compression, which further contributes to a weaker performance relative to exports.
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The Long Road to Recovery Indonesia Economic Prospects
An economic Despite the severity and the extent of the economic fallout associated with the pandemic, the
recovery is forecast downturn is expected to be temporary and a gradual economic recovery is projected once the
for 2021-2022 infection is contained locally and globally. Predicated on the flattening of infection rates curve
predicated on the sometime this year and the absence of infection flare ups or subsequent waves, economic growth
flattening of is expected to strengthen as social distancing measures and mobility restrictions are dialed back
infection rates domestically and abroad as infection rates ease, production activities gradually normalize, and
domestically and domestic and global demand slowly recover. An economic recovery that spans the next two
abroad years (2021-2022) is projected with private consumption gradually recovering first, followed by
private investment. The recovery in investment growth is projected to lag because firms’ balance
sheets are expected to be impacted with domestic containment measures and require time to be
repaired before further investment can be undertaken. In addition, with banks’ high exposure
to the corporate sector, the banking sector will also require some time to recapitalize and to
reduce the share of non-performing loans, weighing on financing for investment in the interim. 99
Uncertainty The precise magnitude and timing of the recovery, however, will largely depend on the extent
surrounding the of mobility measures domestically and aboard, which will in turn be contingent on the extent,
outlook is extremely severity and duration of the infection. Uncertainty surrounding the growth outlook is extremely
high given that the high, given that the infection is still evolving locally and globally and could still impact domestic
infection is still and external economic conditions. Risks to the outlook are still substantially tilted to the
evolving within and downside. Key risks include a longer-than-expected duration of the pandemic, a muted
outside Indonesia economic recovery, a prolonged period of heightened financial stress, and a sharper- and longer-
than-expected contraction in global trade compounded by re-escalating trade tensions.
Terms-of-trade is With the exception of base metals and Figure A.38: Indonesia’s term of trade is
expected to improve palm oil, prices of Indonesia’s key projected to strengthen in 2020
substantially as oil commodity exports are projected to (index 2019=100)
prices are projected decline in 2020. In particular, crude oil 130
to be significantly prices are forecast to average at only USD
lower than last year 25 per barrel in 2020, less than half of the 120
2018 2022
2021
2019 average of USD 61.4 per barrel. As
Indonesia is a net oil importer, the plunge 110 2020
in oil prices will more than offset the 2019
smaller price declines of the other key 100
commodity exports, thereby rendering a
substantial improvement in the terms-of- 90
trade (ToT) in 2020. The ToT as
measured by the net trade-commodity 80
price index (NTI) 100 is estimated to
increase by around 15 percent in 2020
compared to 2019 (Figure A.38) and is Source: BPS and World Bank Commodity Markets Outlook;
expected to provide a boost to the trade World Bank staff calculations.
and current account balance this year. In Note: Net trade-weighted price index is constructed over
Indonesia’s six major export commodities (rubber, base
2021, the ToT is expected to strengthen metals, coal, oil, gas, and palm oil).
further as most commodity prices are
forecast to improve.
99 While corporate foreign exchange regulations have helped nonfinancial corporates to increase their share of hedged foreign currency loans, their
elevated foreign-currency debt levels (close to 45 percent of total nonfinancial corporate debt) also leaves them exposed to foreign exchange
volatility. The refinancing risk of maturing corporate debt and higher cost of funding in the capital markets is likely to put further pressure on
Indonesian corporations and local banks.
𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊ℎ𝑡𝑡𝑖𝑖,𝑝𝑝 𝑥𝑥𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑖𝑖,𝑡𝑡 𝐸𝐸 −(𝐼𝐼𝑖𝑖,𝑡𝑡 )
100 The Net Trade-Commodity Price Index (NTI) is defined as follows: 𝑁𝑁𝑁𝑁𝑁𝑁
𝑡𝑡 = where 𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊ℎ𝑡𝑡𝑖𝑖,𝑝𝑝 = ∑(𝐸𝐸 𝑖𝑖,𝑡𝑡 and i=
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑖𝑖,𝑡𝑡 𝑁𝑁,𝑡𝑡 )− ∑ 𝐼𝐼𝑁𝑁,𝑡𝑡
commodity type; t= month; p=period (e.g. 5 year average); N = number of commodities; T= base year; E=value of export; I=value of import
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The Long Road to Recovery Indonesia Economic Prospects
The current account The CAD is projected to sharply narrow to 1.9 percent of GDP in 2020 from 2.7 percent of
deficit is projected to GDP in 2019, mainly due to a substantial improvement in the trade balance. In line with the
narrow substantially global economic contraction, supply chain disruptions, restrictions in global travel, soft
in 2020 as imports commodity prices, and the Phase One Trade Deal between the U.S. and China, export values
contract more than are expected to contract sharply in 2020. Meanwhile, import values are also expected to decline
exports, coupled significantly due to falling exports and substantially weaker domestic economic activity amid
with a sharp mobility restrictions, travel restrictions, and other domestic containment measures. Moreover,
improvement in the given that Indonesia is a net oil importer, a strengthening ToT, with lower projected prices of
terms-of-trade Indonesia’s key commodity exports being more than offset by lower expected oil prices, will
further support the goods trade balance. Beyond this year, the CAD is forecast to widen
modestly to an average 2.1 percent of GDP for 2021-2022 as domestic activity recovers
supporting import demand outpacing improvements in exports values.
Headline inflation is Despite a weaker Rupiah and supply shortages, consumer price inflation is expected to remain
expected to be lower muted in the near term. Economic growth has slowed sharply and a sizable negative output gap
as economic activity is expected to emerge this year, which coupled with record-low energy prices, would broadly
remains below weigh on prices across the economy. Headline inflation is expected to ease to an annual average
potential of 2.6 percent this year, lower than the 2.8 percent average of 2019. As domestic and global
economic activity gradually recover along with energy prices, inflation is expected to tick up to
2.8 percent in 2021 and to 3.0 in 2022.
Tax revenues are In line with the economic Figure A.39: The fiscal deficit is expected to widen to
projected fall to 8.6 slowdown, contracting imports, 6.3 percent of GDP in 2020 with higher expenditures
percent of GDP in softer commodity prices, tax relief and lower revenues
2020, the lowest in measures, and lower tax compliance (percent of GDP)
the last two decades due to cash constraints on the part Revenue Tax revenue
and will reach 2018 of both firms and individuals, total 20 16.7 16.7
levels only in 2024 revenue is expected to decline to 16 14.6 15.3 14.9
with some tax 10.5 percent of GDP this year, 12.4 11.8
10.4 10.5 11.2
12 9.8 9.3 9.8
reforms notably less than 12.4 percent in 8.6 8.6
2019 (Figure A.39). Tax revenues 8
will correspondingly decline to 8.6 4
percent of GDP, the lowest in two 0
decades. In addition, revenues are
projected to recover more slowly -4 -2.2
-4.1 -3.1
than the economy, as cash -8 -6.3 -6.3
Revised World Bank World Bank World Bank
constraints are assumed to be only
resolved after a period of time. The 2019 2020 2021 2022
recovery in tax revenues is Source: Ministry of Finance; World Bank staff calculations
therefore expected to be more Note: 2019 is preliminary actual figures
gradual, with the tax-to-GDP ratio reaching the 2018 levels of 10.2 percent only in 2024,
predicated on the implementation of some tax reforms such as broadening of the tax base,
increasing tax rates, introducing new taxes, and improving compliance. 101
Fiscal deficit will Meanwhile, total expenditures are forecast to increase to 16.7 percent of GDP in 2020,
remain above 3 significantly higher than the 14.6 percent in 2019, 102 primarily due to the fiscal mitigation
101 The corporate income tax rate is assumed to be 22 percent in 2020-2021 and 20 percent in 2022-2024. The other announced COVID-19 tax
relief measures are assumed to be timebound and in place only for 2020.
102 It is assumed that only half of the COVID-19 increase in social protection and the additional material spending will be continued post 2020.
Meanwhile, the additional subsidies for MSME interest payments is assumed to be only a temporary measure for 2020. With it being cut in 2020,
capital expenditure is projected to recover beginning in 2021. In addition, it is assumed that central government transfers to SNGs in the form of
DAK Fisik will be increased to make up for the current reduction in infrastructure spending.
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The Long Road to Recovery Indonesia Economic Prospects
percent of GDP until measures. Consequently, the fiscal deficit is expected to widen to 6.3 percent of GDP in 2020,
2023 and a 3.5 times the size of the initial approved 2020 deficit of 1.8 percent of GDP (Table A.5).
structurally higher Moreover, the deficit is expected to remain above 3 percent of GDP until 2023 but could widen
debt level is even further to 3.5 percent of GDP, if tax reforms are not implemented. The wider deficit over
projected over the the medium-term will be largely financed by borrowing, resulting in central government debt
medium term levels rising from 30.2 percent of GDP in 2019 to close to 40 percent in the medium term, again
predicated on the implementation of some tax reforms. 103 As a result of the larger debt
overhang, the ratio of interest to non-interest expenditures will increase from 13.5 percent in
2019 to 17.6 in 2021, and to 21.5 percent in 2024, highlighting that debt servicing will compete
with and crowd out more productive government expenditures in the medium term.
Table A.5: A wider deficit and a structurally higher debt ratio is projected over the medium term
(IDR trillion, unless otherwise indicated)
2020 Revised 2020 2021 2022
2019 2020 2020 MOF
(Perpres World World World
Actual Budget Outlook
72/2020) Bank Bank Bank
A. Revenues 1,961 2,233 1,700 1,700 1,681
1. Tax revenues 1,546 1,866 1,405 1,405 1,381
Oil & Gas Income taxes 59 57 32 32 20
Non-Oil & Gas Taxes, o/w: 1,274 1,585 1,167 1,167 1,136
Non-Oil & Gas Income taxes 713 872 639 639 604
VAT/LGST 532 686 508 508 503
Land and building tax 21 19 13 13 21
Other taxes 8 8 7 7 8
Excises 172 181 172 172 189
International trade taxes 41 43 33 33 37
2. Non-tax revenues 409 367 294 294 297
Natural resources revenues 155 160 79 79 71
Oil & Gas 121 127 53 53 37
Non-Oil & Gas 34 33 26 26 34
Other non-tax revenues 254 207 215 215 226
3. Grants 5 0 1 2 3
B. Expenditures 2,309 2,540 2,739 2,739 2,689
1. Central government 1,496 1,683 1,975 1,975 1,906
Personnel 376 416 404 404 384
Material 334 360 273 273 426
Capital 178 187 137 137 151
Interest payments 276 295 339 339 285
Subsidies 202 188 192 192 378
Energy 137 125 96 96 184
Fuel 84 71 41 41 86
Electricity 53 55 54 54 98
Non-energy 65 62 96 96 194
Grants 6 2 5 5 10
Social 112 108 175 175 251
Other 12 128 451 451 20
2. Transfers to regions 813 857 764 764 783
C. Overall Balance -349 -307 -1,039 -1,039 -1,008
D. Financing 402 307 1,039 1,039 1,008
1. Debt financing 438 352 1,220 1,219
2. Investment financing -44 -74 -257 -257
3. Lending -6 5 6 7
4. Guarantee obligation 0 -1 -1 -1
5. Other financing 15 25 71 71
Memo items (as % of GDP)
Total Revenues 12.4 12.8 10.4 10.4 10.5 11.2 11.8
Tax Revenues 9.8 10.7 8.6 8.6 8.6 9.3 9.8
Non-Tax Revenues 2.6 2.1 1.8 1.8 1.8 1.9 1.9
Total Expenditure 14.6 14.6 16.7 16.7 16.7 15.3 14.9
CG Expenditure 9.5 9.6 12.1 12.1 11.8 10.3 10.0
103 The baseline forecast for debt level also assumes that there will be a reduction in the capital injections to SOEs in future years.
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The Long Road to Recovery Indonesia Economic Prospects
Transfer to regions and Village Fund 5.1 4.9 4.7 4.7 4.9 4.9 4.9
Fiscal Balance -2.2 -1.8 -6.3 -6.3 -6.3 -4.1 -3.1
Primary Fiscal Balance -0.5 -0.1 -4.3 -4.3 -4.5 -1.8 -0.7
Central Government Debt 30.2 29.4-30.1* 36.67-37.97* NA 37.4 38.9 39.3
Assumptions:
Nominal GDP (IDR trillion) 15,834 17,452 16,391 16,384 16,088 17,166 18,340
Real GDP growth rate (%) 5.0 5.3 -0.4-2.3 -0.4-1.0 0.0 4.8 6.0
CPI/GDP deflator* 2.7 3.1 2.0-4.0 1.98-4.03 1.9 1.8 0.8
Exchange rate (IDR/USD) 14,146 14,400 14,900-15,500 14,500-14,800 15,000 14,500 14,000
Crude-oil price (USD/barrel) 62.4 63.0 30-35 29.9-35.3 25.0 27.0 28.6
Source: Ministry of Finance and World Bank staff calculations
Note: * KEM-PPKF in 2020 and 2021, MOF Outlook as in Semester I 2020 Budget Realization Report
Risks to the growth outlook are substantially tilted to the downside
Downside risks to Despite the significantly reduced growth forecast for 2020, risks to the outlook are still heavily
the outlook continue tilted to the downside, given the high uncertainty surrounding the continued local and global
to be severe spread of the virus and the associated adverse economic effects.
A resurgence of the Since early June, Jakarta and several other regions in Indonesia have begun to transition towards
infection a new normal by gradually easing mobility restrictions (Table A.6). With greater mobility and
domestically and reduced social distancing, a resurgence of the infection or subsequent waves of the infection
abroad could prompt could occur, potentially compelling the Government to introduce another bout of mobility
additional restrictions. Such containment measures will again curtail demand and supply and weigh on
lockdowns and domestic economic activity. Similarly, infection flare ups could also occur in China and the
further reduce advanced economies, prompting additional lockdowns in other countries that could further
economic activity disrupt trade and investment flows, and reduce commodity prices and global demand.
Table A.6: Indonesia’s gradual reopening plan
Period Key Modalities
Industries and services can operate with strict COVID-19 health protocol in place
Phase 1 (June 1)
Malls, shops and markets are still closed (cannot operate), except shops selling masks and health-related items
Malls, shops, and markets may operate with the COVID-19 health protocol in place.
Phase 2 (June 8)
Stores or businesses that have the potential for physical contact such as salons and spas may not operate yet
Malls continue to operate as in Phase 2, but there will be evaluation on possibility to open places of business such
Phase 3 (June 15) as salons and spas. COVID-19 health protocol remains in place.
Schools are opened with a rotation system
Gradual opening of places of business such as restaurants, cafes, and gyms with strict health protocols in place
Phase 4 (July 6) Outdoor activities with more than 10 people, out of region travel with limited air travel arrangements, and worship
activities with limited number of worshipers are permitted
Evaluation of opening social activities on a large scale
Phase 5 (July 20
It is expected that all economic activities have been opened by the end of July or early
and 27)
August 2020
Source: Announcement from the Coordinating Minister of Economic Affairs
Note: The Coordinating Minister continues to emphasize that the Government will evaluate the conditions of the next two weeks to determine the
actual course of action.
The economic Given the unprecedented severity and scope of the adverse economic effects associated with
recovery could take the pandemic, there is a risk that domestic output could take a longer-than-expected period to
longer-than-expected recover, weighing on the growth outlook in the medium-term. For instance, there is a risk that
given the severity of Indonesian firms’ balance sheets are severely impacted and will require an extended period of
the economic time to be repaired. Moreover, the banking sector, with its high exposure to the corporate sector,
downturn could also require a protracted period to recapitalize and to reduce the share of non-performing
loans, which disrupt financing for investment in the interim. Lastly, both domestic and foreign
investor confidence could be shaken due to the uncertainty surrounding the effectiveness of
Government measures to prevent further outbreaks and policies to kickstart the economic
recovery, therefore investment demand could be subdued in the medium-term.
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The Long Road to Recovery Indonesia Economic Prospects
Re-escalation of There is also a potential risk of the re-escalation U.S.-China trade tensions which would further
U.S.-China trade disrupt global value chains and trade flows, and further weigh on global economic activity (Box
tensions could delay A.5). Weaker-than-expected global demand or a more gradual-than-expected economic recovery
a recovery in global among the advanced economies and China would also pose risks to Indonesia’s external sector
economic activity and hence the growth outlook.
The Indonesian As discussed, uncertainty surrounding the growth outlook especially for 2020 is extremely high,
economy could enter given that the infection is still evolving locally and globally and could still impact domestic and
a recession if external economic conditions. The economic outlook is predicated on the global economy
containment contracting around 5 percent this year and the Government easing LSSR restrictions in five
measures are stages through June and July as announced, with the economy fully open in August.
extended into Q3
and Q4 and/or if the A scenario with the Indonesian economy facing a recession could materialize if infection flare
global recession is ups occur or new waves of infection emerge compelling the Government to impose additional
more severe than large-scale mobility restrictions in the third and fourth quarters, thus leading to slower growth
expected in domestically oriented sectors. The low-case scenario also assumes a deeper contraction of the
global economy, by 7.8 percent in 2020, and further dampening on investment and exports,
again weighing on Indonesia’s economic growth. In such a situation, the Indonesian economy
could contract, by as much as 2 percent in 2020. In addition, second round effects from lost
incomes to consumption and investment are more pronounced, and quarterly growth would
not recover to pre-crisis levels until well into 2021.
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The Long Road to Recovery Indonesia Economic Prospects
B. COVID-19 Impact and Responses
1. Introduction: Overcoming COVID-19
The COVID-19 The COVID-19 pandemic and the associated containment measures continue to cause
pandemic continues tremendous damage and disruption to the global economy. Now active in over 200 countries,
to spread across the the virus has been reported to be responsible for over 13 million cumulative confirmed cases
world and in and at least half a million deaths. In Indonesia, the epidemic has expanded rapidly since the first
Indonesia local cases were identified in early March (Figure B.1). At the time of writing, Indonesia had
80,094 cumulative confirmed cases, with about 39,000 of these having recovered and nearly
3,800 deaths. About 630,000 COVID tests 104 have now been carried out and the current daily
pace of around 10,000–12,000 people tested gives rise to about 1,500 new case confirmations
each day. The epidemic has spread across the country, with cases in all provinces, and the largest
cumulative caseloads being reported in East Java and Jakarta.
After a partial Strict social distancing and mobility restrictions, such as the Large-Scale Social Restrictions
lockdown, the (LSSR) imposed from April to June, combined with precautionary behavior by households to
Government is avoid infection, and the blowback from disrupted global demand, international trade and
reopening the tourism, and financial market volatility, have given rise to sharp domestic slowdowns in Q1 and
economy to prevent likely in Q2 (Section A.1). In an effort to restart economic activity to prevent further economic
further economic distress to the people and damage to the economy, the Government in June began a gradual,
distress to the people phased easing of mobility restrictions spanning two months to safely reopen the economy.
104 Cumulative total of the number of persons tested per day.
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The Long Road to Recovery Indonesia Economic Prospects
Figure B.1: The evolution of the outbreak in Indonesia and major policy responses
(daily confirmed new COVID-19 cases, thousands)
1.8 Milestones for cumulative cases: Jun-3
Mar-14 1st case: 2 March 100 cases: 15 March May-30 4th stimulus Jun-25
President declares COVID-19 as Provinces/cities in green package Second revision to
1.6 1,000 cases: 27 March 10,000 cases: 30 April the Budget 2020
a national disaster & establishes zones implement new
COVID-19 taskforce 50,000 cases: 25 June normal phase Jun-8
1.4 Flight restrictions
Apr-2 Apr-24 May-27 eased
Mar-17 Foreigners banned Banned Idul President announces
1.2 Mar-13 Emergency from entering Fitri Exodus 'new normal' phase
2nd stimulus Period Declared Indonesia May-7
package Domestic land transport for
1 Mar-31 essential purposes is permitted
3rd stimulus
0.8 Mar-11 package
WHO declares
COVID-19 as Mar-30
0.6 Large Social
Pandemic
Scale Restriction
0.4 (PSBB)
0.2
0
March-1 March-15 March-29 April-12 April-26 May-10 May-24 June-7 June-21 July-5
Source: Our World in Data
As the economy As the Government considers the path ahead, until a vaccine is developed and widely
continues to reopen, administered, it will need to balance the immediate urgency of caring for the sick and managing
a robust health the epidemic, while cushioning the effects of the economic downturn as well as repositioning
system is required the economy for a rapid and full recovery over the next few years, to become even stronger than
along with support to before. To support a safe and sustainable reopening of the economy, the priority remains to
firms and families to have in place a robust health system (Section B.2). Due to flare-ups and subsequent waves, a
help them weather safe and sustainable reopening requires continued improvements in health system capacity and
the downturn readiness, including continued expansion of testing and surveillance. Many businesses will
require continued support to ride out the economic downturn (Section B.3) and households will
need social assistance for subsistence (Section B.6). A sound financial system is also necessary
to extend liquidity to firms and help supplement their cash flows (Section B.4).
To build back better In the medium term, “building back better” will require rejuvenating the private sector to meet
over the medium post-COVID-19 demand, with conditions in place to facilitate the entry of new firms and
term, higher addressing long-standing constraints to investment (Section B.3). Moreover, there needs to be
spending on human higher public spending on health and social protection to help build, employ, and protect
and physical capital Indonesia’s human capital. Also, COVID-19-driven cuts to public capital spending and
are critical and postponements of infrastructure projects need to be reversed to avoid putting the
workers need Government’s growth-enabling infrastructure agenda at risk (Section B.7). Efforts to catalyze
support to retool and private sector participation in infrastructure are paramount, but additional spending will also be
upskill necessary. With millions of jobs destroyed during the crisis, and the possible acceleration of
trends in labor demand that favor the skilled, the unemployed need to be supported in their job
search and upskilling to meet employer needs in the post-COVID-19 labor market (Section B.5).
Flattening the debt Given these expenditure needs as well as the imperative of flattening the debt curve, temporary
curve is also fiscal measures need to be gradually unwound, and revenues increased (Section B.8). The
paramount economic downturn’s heavy fiscal burden has put public debt on an elevated trajectory, entailing
higher debt servicing costs that, if not reversed through revenue-enhancing reforms, will
eventually crowd out priority spending or risk jeopardizing Indonesia’s hard-earned investment-
grade credit rating.
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The Long Road to Recovery Indonesia Economic Prospects
2. Health: Safely adjusting to the New Normal
Public health policy Since the onset of the epidemic, public health policy has been focused on non-pharmaceutical
has focused on interventions aimed at managing the spread of the epidemic while enhancing health system
reducing infection capacity. This has entailed the implementation of behavior change measures, such as promoting
rates and boosting hand washing and mandating face masks in public, together with social restriction measures
health system such as mandating home-based work, coupled with temporary business closures and travel
capacity restrictions. Sub-national governments have also been permitted to impose varying degrees of
social restriction measures depending on local epidemic conditions, thereby increasing the
flexibility of localized responses to outbreaks. Moreover, spending reallocations within the
budget have made additional financial resources available to boost health care capacity.
There is a trade-off The most severe public health impacts Figure B.2: Flattening of the infection curve
between slowing the of a pandemic arise when caseloads
spread of COVID-19 rapidly increase and surpass the
Number of cases
Without public health measures
and maintaining treatment capacity of the health
economic activity system, leading to shortages of critical
health services along with higher
mortality rates. Given the significant
unknowns and limited ability to test
and isolate those who have COVID- Health system capacity
19, strict containment measures appear
to be the only option for most
countries to “flatten the infection
With public health measures
curve.” By reducing physical proximity
and human interactions, social
restrictions tend to slow the spread of
the infection, which reduces and delays Days since first case
its eventual peak, and provides the Source: Reproduced from World Bank (2020). East Asia and Pacific
Government with breathing space to Economic Update: East Asia and Pacific in the time of COVID-19.
expand the capacity of the health April. Washington D.C.: World Bank
system through policy interventions and additional resourcing before it is overwhelmed (Figure
B.2). Furthermore, by expanding health system capacity and other COVID-19 response
protocols when caseloads are still manageable, the Government can begin unwinding some of
these restrictions earlier while sustainably handling a larger burden of cases. Containment
measures, while necessary, carry high economic costs. The more extensive and severely
enforced, and the longer limitations on mobility are in place, the slower is the spread of the
virus, but at a higher economic cost. The appropriate balance depends on the severity of the
viral outbreak, the capacity of the health system, and the ability of the economy and the
population to weather the economic downturn. This tradeoff highlights the importance of
collecting timely and adequate data to calibrate policymaking.
The ability of With the right policies and settings in place, there is an opportunity to transition safely toward
Indonesia’s health a “New Normal,” that is, to ease social restrictions, thereby facilitating economic activity while
system to provide the keeping the infection in check. After implementing the Large-Scale Social Restrictions in Jakarta
infrastructure and surrounding satellite cities, the Government of Indonesia has begun implementing a gradual
necessary for a and phased reopening. The ability of Indonesia’s health system to provide the infrastructure
calibrated response necessary for a calibrated response to COVID-19 will be critical for a managed reopening of
to COVID-19 would the economy. These necessary public health measures include:
be critical for a
i. understanding the epidemic and monitoring the level of the disease transmission and
managed reopening
progression with scaled up capacity for confirmatory testing,
of the economy
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The Long Road to Recovery Indonesia Economic Prospects
ii. undertaking contact tracing and isolation of confirmed cases and their contacts to
contain spread, and
iii. increasing the availability and readiness of health services to cater to all the needs of
patients at any given point of time – especially the severe respiratory cases requiring
critical care.
Improved pandemic To provide the best chance of successfully navigating this reopening, focused efforts are needed
surveillance and in pandemic surveillance, health system information management, testing, and health system
health system preparedness for surges in infections. Due to an absence of reliable data on pandemic and health
information system indicators, such as the virus reproduction rate, it is difficult for policymakers to assess
management will be the costs and benefits of changes in the intensity of containment measures. Integrated
essential for information systems between laboratory, surveillance (to enable contact tracing), and health
managing the facilities can help overcome these challenges, as can expanded testing for more representative
reopening of the data, and further support for health system availability and readiness for potential new surges.
economy This calls for a number of measures that the Government could immediately consider:
Laboratory i. Expand laboratory capacity in Figure B.3: A low rate of testing can hinder the
confirmatory testing confirmatory testing across the country. calibration of the Government’s crisis response
capacity across the Despite significant recent (total people tested per thousand population; total confirmed cases,
country needs to be increases 105 in COVID-19 testing thousands)
improved with the capacity, Indonesia’s daily rate of 75 Total people tested (LHS)
200
accelerating spread testing remains low relative to the Total confirmed cases (RHS)
of the infection scale of the epidemic and also 60 160
outside Jakarta relative to its peers after accounting
for its large population (Figure 45 120
B.3). As infection rates have picked
up significantly outside Jakarta, 30 80
laboratory facilities outside the
Ministry of Health network have
15 40
been encouraged to increase their
involvement, though appropriate
0 0
quality assurance needs to be
enforced. Improvements in
regional supply chain management
and distribution of test supplies will Source: Our World In Data
be needed. Staff training at Note: Data based on latest reporting for all countries as at 4 July
laboratories will need to be scaled
up and quality assured, particularly in the use of technologies that were rolled out during the
pandemic. Improved information sharing from laboratories to health providers and decision
makers at the local level will support contact tracing and facility planning, and ultimately
ensure that expanded testing translates into better health and policy outcomes.
Information systems ii. Integrating information systems is central to strengthening the surveillance system. Better linkages
integration is a core between laboratories, disease surveillance, and health facility information systems would
activity in improve early detection of cases and support policy calibration. The integration would
strengthening the require uniform definitions of cases and indicators across reporting sites, as well as
surveillance system adequate supervisory mechanisms to ensure timeliness and quality of reporting.
105 The average daily number of people tested increased almost fourfold from around 2200 in April to around 8500 in June.
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The Long Road to Recovery Indonesia Economic Prospects
Strengthening sentinel surveillance 106 and community-based reporting would require
strong coordination with subnational governments.
Hospitalization data iii. Collect hospitalization data to better gauge the extent of the epidemic. Due to inadequate testing, as
can provide more well as the time lag in reporting, official COVID-19 case reporting may provide inaccurate
information on the information on disease transmission and progression. On the other hand, additional data
extent of the on hospital outpatients, inpatient admissions, and claims data on respiratory illnesses from
infection the National Social Health Insurance information system could be used to supplement
existing information. For instance, hospitalization rates for respiratory diseases, which is
not currently mined and analyzed, might characterize the past evolution of the epidemic,
and could be of use in the early warning system (EWARS 107) and to predict the epidemic’s
growth.
Health care system iv. Ensure health service availability and readiness for possible upcoming surges of new cases, and for
capacity needs to be functioning optimally in the “new normal”. Ongoing efforts are needed to ensure that health
expanded to meet services can cater to an increasing burden of, and occasional spikes in, COVID-19 cases.
possible surges in Strengthening and expanding the hospital and laboratory network remains critical and
COVID-19 cases should be informed by the integrated disease surveillance system. Stocks of personal
while continuing to protective equipment must remain adequate and surge-resilient for front line health
be able to deliver workers, and so too the required medical equipment and supplies for managing moderate-
basic health services to-severe respiratory illnesses. Innovative services such as telemedicine and e-learning that
have been successfully introduced during the pandemic need to be sustained and further
developed. At the same time, challenges in the delivery of key basic health services such
as immunization, nutrition, maternal health, and chronic diseases should continue to be
addressed.
New antibody-based v. Use antibody-based testing technology to assess the level of COVID-19 exposure among the general
testing technology is population. Assessing the extent to which the population has been exposed to, and has
crucial to inform developed, antibodies as a result of previously undetected infection, is crucial to inform
disease containment disease containment and suppression strategies. Mobility restrictions could be relaxed if
and suppression baseline measures (such as hand hygiene, face mask, face shield, and social/physical
strategies distancing) are properly implemented, and widespread testing is available to reliably
quarantine those with COVID-19 or those with an elevated risk of infection. 108 This
would require using newly developed antibody testing technologies to test representative
samples of the population, starting with areas that have confirmed outbreaks. 109,110
Risk communication vi. Improve risk communication to the public. Clearly communicating information about the
to the public is Government’s response to the epidemic aims to educate the public on the nature and level
essential for public of risks they are exposed to and to engage them in the response. Striking the right balance
cooperation with between improving transparency of information on the epidemic’s progression and
containment protecting the privacy of patients, and at the same time destigmatizing the affected
measures individuals, is a very demanding task but still something that can be achieved with a strong
public communication and education strategy.
106 Sentinel surveillance refers to “Monitoring of the rate of occurrence of specific conditions to assess the stability or change in health levels of
a population. It is also the study of disease rates in a specific cohort such as in a geographic area or population subgroup to estimate trends in a
larger population” (Last, J., 1988. Dictionary of Epidemiology, 2nd Ed).
107 The WHO’s Early Warning, Alert and Response System (EWARS) is designed to improve disease outbreak detection in emergency settings,
such as in countries in conflict or following a natural disaster
108 Those with an elevated risk of infection who may need to be quarantined include healthcare workers, caregivers and family members of those
under quarantine, and persons with a recent history of contact with those who have COVID-19.
109 See Laurenço et al. (2020) and Bendavid and Bhattacharya (2020) for arguments in favor of this approach.
110 However, note that some concerns have been expressed over the accuracy of antibody tests.
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The Long Road to Recovery Indonesia Economic Prospects
Preparations for the vii. Ensure the country’s preparedness for production and distribution of the COVID-19 vaccine. There is
production and a critical need to begin preparing for the vaccination roll-out even though a COVID-19
distribution of the vaccine may only be available after a considerable waiting period. When the vaccine is
vaccine across the available, the Government may need to ensure that the country has the capacity to rapidly
country should begin package and distribute it across the country, and also be ready to administer a national
now COVID-19 vaccination program. Lastly, the vaccination roll-out needs to identify a priori
priority groups to receive the vaccine as well as the operational definition of eligibility,
given that initial availability may only be for a very limited quantity.
3. Rejuvenating the private sector: Helping firms to stay afloat and facilitating the creation of new
enterprises
Figure B.4: The COVID crisis has hit Indonesian firms Figure B.5: …in almost every sector of the economy
hard … (average change in yoy monthly sale, May-June 2020, percent)
(share of firms that experienced difficulties in May or June 2020, percent)
90
Textile & apparel Hotel & restaurants Retail & wholesale Transport & storage
75
Other services Motor vehicles Rental business Science & tech. Food & bevages Info. & comms.
60
Real estate Electronics Other mfg. Construction Chemicals
45
Finance
30
15
0 0
-10
Large sales drop Reduced cashflow Difficulty paying Difficulty paying
Difficulty paying rent
YoY sales drop
Filed for bankruptcy
Reducing labor
Difficulty repaying
-20
-30
costs wages utilities
(>20%)
-40
availability loans
-50
Average across
-60
firms
-70
Source: World Bank COVID-19 Business Pulse Survey, World Bank Staff Source: World Bank COVID-19 Business Pulse Survey, World Bank Staff
calculations calculations
The economic fallout The COVID-19 epidemic has affected Figure B.6: Many Indonesian firms are struggling to
from the epidemic all sectors of the Indonesian economy. make ends meet, particularly micro firms
has reverberated With a few exceptions, such as those (share of firms by size that experienced difficulties in May or June
across the private related to the digital economy, firms in 2020, percent)
sector most economic sectors suffered a 30 Micro Small-medium Large
severe negative shock (Figure B.4 and 25
Figure B.5, Section A.1). While the 20
worst of the crisis may have occurred 15
in Q2, the recovery is expected to be
slow in some sectors, especially those 10
that involve face-to-face interaction 5
(such as retail or personal care), 0
gatherings (such as entertainment), Filed for Difficulty in Difficulty Difficulty in Difficulty in
and/or travel (such as transport and insolvency repaying paying paying rent paying
or loans wages utilities
hospitality). While firms of all sizes bankruptcy
have been impacted, micro firms tend Source: World Bank COVID-19 Business Pulse Survey, World
to have less capacity to weather the Bank Staff calculations
economic downturn due to lower access to finance and cash buffers (Figure B.6). Even with the
development of a vaccine that may normalize activity in portions of the economy, trends in
remote work and heightened salience of health concerns will mean that the private sector that
emerges from the pandemic will likely be structurally different. Building a better private sector
post pandemic requires a two-pronged strategy.
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There are two broad The government can follow two broad strategies to help businesses during the crisis:
strategies to help 1. Help firms “keep the lights on” by ensuring that they have enough cash to pay for their
firms bare minimum expenses even if they have limited or no sales activity.
2. Help existing firms re-start or expand production, and new firms to enter the market, to
take advantage of growing demand or changing demand patterns. 111
The first set of The first strategy includes short-term liquidity interventions that help healthy firms weather the
measures aims to storm while avoiding extending the life of unproductive zombie firms. 112 Despite the gradual
limit the destruction reopening, economic activity is unlikely to fully recover in the near term as personal behavior
of difficult-to-replace to avoid being infected will persist until a vaccine is available and widely administered, herd
value in healthy immunity is achieved through other means or a cure is found. Meanwhile, there is a role for the
firms Government to help soften the impact of the crisis on businesses. While the churn of firm
destruction and creation is characteristic of a healthy business environment, widespread firm
closures due to transitory external shocks can cause long-lasting damage to the productive
capacity of the economy. 113 This is especially the case when otherwise healthy firms are sent
into crisis-induced closures. Firms hold important intangible capital including knowledge,
experience, and relationships with stakeholders such as employees, clients, and supply networks,
which are costly and time consuming to build but can be quickly destroyed when firms
collapse. 114 While preserving this intangible capital is important for the recovery, it also presents
the Government with the difficult challenge of how to avoid keeping unviable firms alive
artificially.
These measures, which have begun to be implemented, would be needed as long as the
economy’s demand remains suppressed. The key elements of this first strategy are:
- targeted liquidity measures that help relieve pressure on firms’ cash flow, such as the
deferment of tax and social security obligations, expedited processing of government
payables to firms, interest subsidies and repayment holidays for debt service obligations,
and support for access to credit which can be repaid later;
- temporary amendments to insolvency and restructuring frameworks, including legal
frameworks for corporate debt restructuring and out-of-court conciliatory measures, to
avoid pushing firms into liquidation based on hard criteria better suited to ordinary
economic conditions;
- support for operating costs such as payments to cover wages, rental and utilities; and fee
waivers for government licenses, registrations, and permits.
Announced The Government’s current menu of assistance to firms is largely aligned with this first strategy
measures are largely that mostly entails temporary measures to reduce cash flow needs. It includes:
to provide liquidity 1. Reducing tax payments, which could reduce pressure on firms’ cash flows. The Government has
to the private sector provided accelerated value-added tax refunds to firms, exemptions from income tax
withholding arrangements when importing, though with no change to total annual tax
obligations, and a 30 percent cut in monthly income tax installments, again with no change
to the total annual obligations. Measures that reduce firms’ annual tax obligations have
111 The World Bank (2020). Assessing the impact and policy responses in support of private-sector firms in the context of the COVID-19
pandemic; and COVID-19 Notes, March 26, 2020, mimeo.
112 Zombie firms are firms that earn just enough money to continue operating and service debt but are unable to pay off their debts, and in turn,
unable to invest or grow, thus diverting resources away from healthy, viable firms.
113 Fernandes and Silva (2020), cited in World Bank (2020g) find that the Global Financial Crisis (GFC)’s negative effects on employment and
productivity in Brazil, Chile, Ecuador and Mexico persisted even after revenues and unemployment had recovered.
114 Didier Brandao, Tatiana; Huneeus, Federico; Larrain, Mauricio; Schmukler, Sergio L. (2020).
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included: a 6-month full exemption on MSMEs’ monthly final income taxes and payments
of employee personal income tax that would have been subject to withholding.
2. Reducing electricity expenses for small firms that rely on 450 VA and 900 VA connections by fully
exempting the former and providing a 50 percent discount on the latter, effective for 6
months.
3. Facilitating loan restructuring, especially to MSMEs. The Government is permitting banks and
NBFIs to take certain regulatory forbearance measures to relax credit requirements and
provide easier access to loan restructuring. 115
4. Providing interest rate subsidies and facilities for new working capital loans, especially for MSMEs and
labor-intensive industries. The Government has allocated IDR 34.2 trillion for interest rate
subsidies for 60.6 million MSME accounts with total outstanding loans of IDR 1,602
trillion. The scheme’s designated budget is distributed through a variety of MSME funding
channels, such as banks, financing companies, online platforms, and is applicable to loans
under the Government’s subsidized MSME loan program as well as under other non-
subsidized products. 116 The Government has also set aside IDR 6 trillion for state-owned
enterprises Indonesia Credit Guarantee Corporation (Jamkrindo) and Askrindo 117 to
provide credit guarantees on working capital loans to SMEs to sustain and support working
capital loan disbursements to the economy. In addition, support to labor-intensive
industries in the form of guarantee schemes and fund placements for loan restructuring has
been announced.
The second strategy The second set of measures entails facilitating the repurposing and production expansion of
helps firms to adjust existing firms and the entry of new firms in the market, to take advantage of growing demand
and expand during and changing demand patterns. 118 The strategy encompasses temporary stimulus measures but
the recovery also structural reforms, with the objective of facilitating the emergence of a more vibrant private
sector that will be more productive and create more middle-class jobs; it will also be a private
sector that increasingly leverages Indonesia’s environment rather than putting unsustainable
pressure on it. The measures facilitate firms to obtain the necessary resources (capital,
employees, and physical and service inputs) to meet rebounding demand and adapt to changes
in demand patterns. As the recovery gets underway, firms will then need to reactivate operations,
resolve recent supply-chain disruptions, and ramp up production. The recovery phase will also
likely see systematic changes in consumption preferences, such as more online shopping and
home delivery, more digital services, more home-based work, and more use of anti-COVID
products, such as protective gear and hand sanitizers. As a result, the key elements of the second
strategy could include:
- ensuring access to credit to expand production or start new or adjusted production or
services activities;
- offering loss carryback and accelerated depreciation facilities for businesses that invest in
plants and machinery, renovation, and refurbishment;
- exempting foreign skilled workers from permit requirements (except for COVID-19
testing);
- reducing input costs by eliminating non-essential checks and restrictions on imported inputs
(e.g. pre-shipment inspections, third-party verification of SNI compliance, port-of-entry
115 Financial sector measures to support loan restructuring are detailed in Section B.4.
116 The scheme funds the cost to lenders of providing eligible borrowers with options such as 6-month suspensions of principal repayments and
interest payments or 6-month suspension of principal repayments with interest rate reductions of 2 to 6 percentage points.
117 PT Askrindo (Persero) acts as a guarantor institution that assists MSMEs who are eligible and have sufficient collateral to obtain loans from
financial institutions, both bank and non-bank.
118 The World Bank (2020). Assessing the impact and policy responses in support of private-sector firms in the context of the COVID-19
pandemic; and COVID-19 Notes, March 26, 2020.
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restrictions, state import monopolies), fast-tracking other checks, and waiving import
duties.
The main measure While the implementation of government support has understandably focused on the first
announced for the strategy and, therein, especially on liquidity relief, the COVID-response packages envision
recovery phase has longer-term measures as well. The most prominent is a cut in the standard corporate income
been a cut in tax rates to 22 percent in 2020, with the rate declining to 20 percent in 2022. 119 While the
corporate income intention of equalizing tax rates with other jurisdictions in ASEAN is understandable, there is
taxes no evidence that corporate tax rates are a binding constraint to investment in Indonesia, while
the resulting structurally lower tax revenue poses challenges in addressing established
competitiveness bottlenecks related to infrastructure and human capital. Another plausible
channel to reduce the ongoing costs of firms are wage subsidies, which have been used
effectively in other countries to preserve valuable employer–worker relationships. However,
these may need to be carefully targeted, as widespread wage subsidies may be too onerous for
the fiscal budget. Moreover, it may be challenging to implement in Indonesia’s context of high
business and worker informality.
The National The National Economic Recovery program (PEN/Pemulihan Ekonomi Nasional) as stipulated
Recovery Program by Government Regulation 23/2020 sets out the latest stimulus policies to soften the economic
(PEN) is estimated impact of the pandemic. The program, estimated to cost IDR 150 trillion, comprises tax breaks,
to cost IDR 150 capital injections for state-owned enterprises (SOEs), interest subsidies for MSMEs, liquidity
trillion for recovery- support for the banking industry, as well as financial assistance for vulnerable households,
focused measures among others.
Figure B.7: Only 7 percent of firms have received Figure B.8: Firms are largely not aware that assistance
assistance from the government may be available
(share of firms that received assistance in May or June 2020, percent) (share of firms by reason for not yet receiving assistance, May-June 2020,
percent)
Applied but not received, 4% Too difficult to
apply, 2%
No need, 6%
Not eligible, 7%
No assistance, Credit Food
93%
Some
assistance Other
Fiscal Don't know why I Not aware,
haven't received 61%
any assitance,
20%
Fiscal assistance, 4% Credit assistance, 1%
Food assistance, 1% Other, 1%
Source: World Bank Business Pulse Survey, World Bank Staff Source: World Bank Business Pulse Survey, World Bank Staff
calculations calculations
Current measures While it is too early to gauge the adequacy of the measures as the economic downturn is still
may not be enough unfolding, a shortfall in assistance is likely, given the scale of the economic downturn. The
for firms to fully World Bank COVID-19 Business Pulse Survey 120 indicates that only 7 percent of firms have
cope with the received assistance while the large majority of firms are unaware of the existence of assistance
economic fallout and (Figure B.7 and Figure B.8). Moreover, despite a relative emphasis on assisting MSMEs – owing
prepare for the to their high vulnerability to sharp negative shocks and their large economic footprint – some
recovery of the above measures will have difficulty reaching micro firms. These account for about 89
119 Public companies with at least 40 percent of their shares listed on the Indonesia Stock Exchange and which meet certain other conditions will
continue to receive a 3 percentage point discount on the standard corporate income tax rate.
120 The World Bank COVID-19 Business Pulse Survey was conducted over May and June 2020. It asked a sample of 850 firms from across
Indonesia about COVID-19’s impacts on them through channels such as demand, supply, cash flows, and uncertainty.
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The Long Road to Recovery Indonesia Economic Prospects
percent of firms in the country, earn similar incomes to casual labor, and employ limited capital.
They are often highly informal, with few linkages to financial intermediaries and the tax system.
In many cases, these entities will receive indirect support through the Government’s expanded
social assistance, but many could also fall through the cracks. Finally, the Government’s limited
attention to aspects of the second strategy is notable, leaving much legwork to be done to ensure
a successful private sector rebound as the economy reopens. The good news is that various
measures that can help the rebound entail very little fiscal spending, such as import reforms and
revisions to the foreign skilled professional permits.
The Omnibus Bill The uncertain context that will dominate the outlook makes it critical to promote an
for Job Creation environment that is permanently conducive to investment, trade, and innovation. The Omnibus
offers an opportunity Bill for Job Creation is a potential step in the right direction. The Bill, which is currently being
for implementing a discussed in Parliament, aims to revise 79 individual laws with the view of attracting investments
deep structural and stimulating the competitiveness of firms in Indonesia. It has the potential to support the
reform post-COVID-19 recovery in the near term, while setting the foundations for faster long-run
growth. A number of measures are particularly welcome:
By removing i. The Bill will signal to the international community that Indonesia is open for business by
investment removing investment restrictions, including discriminatory practices against foreign
restrictions, the Bill investors in sectoral laws. The elimination of foreign equity limits could trigger an additional
will signal that USD 6.8 billion in investment. 121
Indonesia is open for
business
The Bill will improve ii. The Bill will improve the trading environment and increase local firms’ participation in
the trading global value chains that rely on importing-to-export. Introducing a risk-based approach to
environment and licensing for imports and exports could reduce the cost and uncertainties of trading. World
help local firms to Bank analysis suggests that recommendation letters to obtain each import license cost 6
participate in global cents for every dollar of imports. Moving the authority for trade-related licenses from
value chains sectoral ministries to the Central Government will reduce ministries’ discretion and
opportunities for corruption.
Reforming the SNI iii. Eliminating the Minister of Industry’s designation of accredited agencies to perform the
certification process Indonesian National Standard (SNI) conformity assessment may speed up and reduce the
will shorten and uncertainty of the SNI certification process. The SNI certification process is estimated to
reduce uncertainty increase the cost of inputs for businesses by 21 percent.
with the process
The Bill includes The Bill, however, also proposes reforms that could lead to adverse effects, especially in the
reforms that could current economic environment. For instance, the Bill’s proposed relaxation of requirements for
have adverse effects environmental protection will undermine natural assets that are crucial for the livelihoods of
on people’s health many and could negatively affect investments. The Government’s efforts in this area are targeted
and safety, natural at reducing delays. However, the causes of delays and uncertainty when obtaining an
assets, and labor environmental permit are cumbersome processing and arbitrary and corrupt implementation,
rights rather than the protections enshrined in the Environmental Law (2009). Moreover, the Bill
removes safety principles from several laws regulating licensing of high-risk activities and
products, such as drugs, hospitals, and construction of buildings, and no longer considers them
as high risk. Further, some of the Bill’s proposed revisions to the Manpower Law could reduce
workers’ protections. The proposed widespread exemptions from minimum wage compliance
and the reforms to phase out severance pay without a fully fleshed-out proposal for an effective
unemployment benefit and insurance scheme, could weaken the protection of workers and
121 World Bank staff estimates based on past investment flows and changes in foreign equity limits across sectors and over time in Indonesia.
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increase income inequality. This is particularly problematic at a time of heightened
unemployment due to the COVID-19 crisis. At the same time, reforms of labor laws are less
important than trade and investment reforms for the stimulation of new investments. 122
Other recent legislation and policies, from mining to agriculture, also risk generating negative
spillover effects for society (Box B.1)
4. Financial Sector: Increasing liquidity to the private sector and protecting lending portfolios to
preserve financial stability
Government As the downturn unfolds and more firms and households become severely impacted, there is
measures have potential for financial sector vulnerabilities to emerge across the economy as asset quality and
focused on ensuring balance sheets deteriorate. Mindful of the risks to financial system stability, the Government has
credit availability responded – thus far, successfully – with measures aimed at shoring up the supply of liquidity
and protecting and the quality of banks’ lending portfolios. BI’s interventions have included reductions in the
lending portfolios to policy rate and reserve requirements, expansion of the repo facility and of the macroprudential
support financial buffers, and purchases of government securities in the primary and secondary markets (Section
system stability A.4). In the short-term, these measures have had the desired effects of stemming the sizeable
capital outflows which took place from mid-February to mid-March, stabilizing the exchange
rate, stemming upwards pressure on the yield on Government securities, and preserving the
level of credit intermediated by banks. The initial rise in the yield on benchmark Government
bonds, of 200 bp between late February and mid-March for the benchmark 10-year tenor, has
been partially reversed. Similarly, the depreciation of the IDR/USD exchange rate during the
same period by about 15 percent has been almost completely reversed. As of June, the
Government’s other core financial sector policies for banks and non-bank financial institutions
(NBFIs) can be grouped under three categories:
i. Loan restructuring policies for banks Figure B.9: The loan-to-deposit ratio (LDR) has been
and NBFIs. 123 Banks and falling since December 2019
NBFIs are permitted to take (percent)
certain regulatory forbearance 98 LDR (LHS) 23
measures to relax credit Liquid Assets / Deposits & ST Funding (RHS)
requirements and provide 96 22
easier access to loan
restructuring. The measures 94 21
target debtors with credits
below IDR 10 billion that are 92 20
affected by COVID-19 and will
be available until March 31, 90 19
2021. The credit restructuring
method may include: reduction 88 18
in interest rates; extension of
the loan term; reduction of 86 17
principal arrears; reduction of Nov-18 Feb-19 May-19 Aug-19 Nov-19 Feb-20 May-20
interest arrears; addition of Source: Financial Services Authority (OJK); World Bank staff
credit facilities; and conversion calculations
of credit to equity. As of the end of June 2020, 100 out of 110 banks have started to
implement the restructuring program. As many as 6.4 million debtors, which is 13.5 percent
of total bank borrowers, have benefitted from restructurings, with total value of IDR 695.3
122 World Bank (2012).
123 OJK Regulations No. 11/POJK.03/2020 and 14/POJK.05/2020.
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trillion, equivalent to 12.5 percent of the total loan amount in the system. Of all restructured
debtors, 5.0 million are MSME debtors with total restructuring value of IDR 282.6 trillion.
ii. Liquidity relief policies for banks that are providing credit restructuring and additional financing. The
National Economic Recovery Program consists of several measures, including the Liquidity
Relief Policies for Banks. 124 Under this program, the Government may provide liquidity
support to banks which perform credit restructuring or give additional loans. 125 This policy
is timely considering that the banks’ liquidity as measured by the loan-to-deposit ratio has
been falling this year to reach a near two-year low in April (Figure B.9).
iii. Interest rate subsidies and credit guarantee policies. As mentioned in the previous section, the
Government allocated budget for interest rate subsidies for MSMEs. 126
While the adequacy Similar to the measures for the private sector, it is too early to assess the adequacy of the
of current measures government’s measures, as they are only now being rolled out and the impact of the crisis on
is not yet clear, it is the financial sector through the private sector is still materializing. While the loan forbearance
likely that further sanctioned by the OJK will allow businesses greater opportunity for loan restructuring, concerns
measures will be arise as to whether the restructuring of loans will of itself be sufficient, or just result in banks
required postponing action to address the funding constraints faced by their clients, hence pushing this
issue down the road. Moreover, liquidity relief measures for banks offer no assurance that the
benefits will be fully passed on to their business borrowers. Banks with squeezed earnings may
be tempted to deploy the government’s liquidity injection to strengthen their own balance sheets
rather than pass on the benefit to their riskier borrowers. Additional policies may be needed to
support growth-oriented enterprises, promote reallocation of resources to more efficient
companies, and avoid measures that risk propping up “zombie” firms.
Further deterioration Despite the broad-ranging assistance being provided to the private and financial sector, it is
in the private and unlikely to fully offset the impacts of a sharp downturn. Recent months have seen plummeting
financial sectors are sales, which is likely to have significantly deteriorated private sector balance sheets, constrained
likely... cash flows, and hiked bankruptcy risks. Non-performing loans are expected to rise and overall
asset quality to deteriorate, while client credit risks remain elevated and new lending subdued,
despite measures to improve credit availability. In addition, extraordinary policy measures that
temporarily ease prudential and lending standards to support the private sector will need to be
monitored and calibrated in order to manage risks and potentially a growing burden on the
financial system.
…but better Close monitoring of systemwide and systemic risks will therefore be crucial to identify emerging
monitoring and vulnerabilities, and the toolkit of resolution mechanisms should be bolstered. Banks should be
expanded resolution expected to produce and disclose reliable, frequent, and comparable information regarding loans
mechanisms will that have benefitted from borrower relief measures, to support assessment of asset quality,
help the authorities provisioning, and capital adequacy on a continuous basis. 127 Recovery and resolution planning
manage emerging for banks may need to be updated, and NPL management frameworks put in place together
risks with comprehensive insolvency and out-of-court processes. 128 Coordination arrangements
between the OJK, as the supervisory agency, and the Deposit Insurance Corporation (LPS), as
the resolution authority, should be further strengthened to ensure that LPS is informed of
124 Government Regulation No. 23/2020 issued on May 11, 2020 as one implementing regulation of Law 2/2020.
125 The scheme defines two types of banks: participating banks and implementing banks. Participating banks are large, local-majority-owned
commercial banks that are to receive government funds placements and provide liquidity buffer funds to implementing banks. Implementing
banks refer to any commercial bank that undertakes credit restructuring policies or provides additional financing, directly or indirectly through
rural banks or financing companies. Before submitting requests for liquidity assistance from the Government, implementing banks are required
to exhaust other means of satisfying their liquidity needs internally and by tapping the interbank money market, repos, or Bank Indonesia short-
term liquidity loans.
126 See discussion in Section B.3.
127 World Bank (2020f).
128 World Bank (2020g).
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emerging stress at an early stage and prepared for possible resolution measures if the situation
deteriorates. This can be facilitated, to a certain extent, through the establishment of effective
resolution functions, including the resolution planning and the crisis-situation bank
restructuring program. Development of an industry-funded resolution funding mechanism is
also desirable, though a public funding mechanism would still be needed, subject to robust
safeguards.
5. Skilling Indonesians to get them back into jobs
Labor market trends The pandemic not only led to substantial job losses, but also accelerated trends towards the
towards higher skills automation of low-skilled jobs that require physical presence, and the shift work that can be
requirements are done remotely, for which digital connectivity and skills are essential. Meanwhile, some hard-hit
likely to accelerate labor-intensive sectors, such as those related to tourism, may take long to fully recover. Sectors
post COVID-19 related to the digital economy, many of which are compatible with remote-working
arrangements, are likely to grow even faster. Overall, workers seeking jobs in the post-COVID-
19 economy likely require different and generally higher-order skills, suggesting an important
role for policies and programs that support education, training, retraining, reskilling, and
redeploying workers.
Closures of The Ministry of Education and Culture (MoEC) has advised local governments to close schools
education for the time being and cancelled national exams for about 8 million students. University and
institutions could post-secondary vocational education schools are closed nationally, affecting another 8 million
erode skills of many students. In secondary schools and tertiary institutions, protracted school closures increase the
young labor market dropout risk, particularly among lower-income students, who are more likely to enter the labor
entrants, with lower- force rather than return to the education system once the situation has normalized, mainly
income students because of the need to mitigate losses in household income and assets.
being the most
heavily affected Given the changing skills requirements of the post-COVID-19 labor markets, this risk of
dropouts and erosion of skills, concentrated among lower-income families, is especially
concerning. Secondary, tertiary, and vocational training institutions would benefit from guidance
on short and medium-term planning, where short-term focuses on supporting educators to
deliver distance learning and medium-long term helps build resilience and through EdTech.
Policies to support Kartu Prakerja, which has been repurposed to provide quick support to some of the newly
recent labor market unemployed through online training during COVID-19, is well placed to incentivize the
entrants – and to acquisition of skills through short-term training. More broadly, the Indonesian Technical and
retool those already Vocational Education and Training (TVET) systems can gear up to facilitate the development
in the labor market- of the skills needed for the adjustment to structural changes brought on by COVID-19 as well
will be essential to as the underlying mega-trends.
help workers adapt
to the post-COVID Other measures that can be considered include wage subsidies in select sectors that support new
labor markets hiring (to avoid financing industries populated by large healthy firms) and/or in conjunction
with conditionalities to provide on-the-job (OTJ) training, as well as efforts to strengthen job
matching assistance, and job-search counseling to facilitate transitions across jobs, economic
sectors, occupations, and regions.
Underpinning all of these efforts is the need to improve the quality of existing labor market
information and, importantly, to ensure that it can be used easily to inform education policy and
training programs, as well as to support labor market intermediation efforts. Critically, the
government will need to leverage big data from vacancy postings to take the pulse of the labor
market and the occupations and skills on demand, complemented by tailored surveys that gather
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The Long Road to Recovery Indonesia Economic Prospects
granular information to fill in data gaps. Other recently developed tools like the Critical
Occupations List, should be programmed on a yearly basis.
6. Strengthening the safety net and ensuring a healthy and productive labor force
Building a modern social protection system that leaves no one behind
The social protection The Government’s social protection response to the crisis has been strong. Measures to mitigate
expansion has adverse impacts among the poor and vulnerable include expansion and repurposing of several
highlighted gaps in existing social assistance programs, as well as the addition of new ones. Quick action translated
social protection into additional support for millions of households registered in social assistance programs, and
policy and delivery simulations show that the response is effective in protecting incomes of those that are the most
systems vulnerable, even though welfare losses will occur. However, the pandemic and its response also
exposed the existing weaknesses of the SP system. Three stand out. First, reaching poor and
vulnerable households that were not already captured in the system has been challenging. The
main instrument to identify households in need – the social registry (DTKS) – was not designed
to capture households that fall into poverty as a result of fast-onset shocks such as COVID-19,
or large-scale natural disasters. The absence of an on-demand window that can be easily – and,
in the case of COVID-19 – remotely accessed by those seeking assistance, prevents it from
being used as a tool to target and reach individuals and households facing sudden changes in
circumstances (the “newly poor”). Second, social assistance coverage has been concentrated
mostly among poor households with children, leaving other groups, such as the elderly and
disabled not adequately covered despite similar welfare conditions. 129 In addition, the so-called
middle-class and parts of the aspiring middle class are uncovered. High incidence of labor
informality has meant that social insurance coverage is low and stagnant.
Maintaining some of Going forward, there is a need to build, deploy and protect human capital in the longer term.
the recent A strong social protection system will help the Government to support longer-term planning
expansions and by households, reduce poverty and protect lives and livelihoods. Gaps in the social protection
introducing several system need to be addressed to build a more comprehensive and adaptive social protection
additional reforms system that can deliver a more inclusive and prosperous Indonesia as laid out in the
will lead to more Government’s Indonesian Vision 2045. The Indonesia Social Protection Flagship report 130 makes it
comprehensive clear that such a system will be increasingly needed to protect Indonesians from the disruptions
social protection expected to arise from population ageing, faster technological change, and the rapidly evolving
– and increasingly unfamiliar – world of work. Action in three areas should be prioritized:
Certain recent i. Locking-in key elements of the social assistance expansion that took place in response to
improvements to COVID-19 would help fill pre-existing gaps in coverage, while consideration should also be
social assistance given to further coverage of the elderly and people living with disabilities. Extending social
should be locked in, assistance with tapered benefits to the poorest 40 percent could define a “guaranteed minimum”
and coverage further level of support provided across the lifecycle through a comprehensive package of
expanded to the programs. Furthermore, Indonesia’s social protection programs should be made more
elderly and those responsive to shocks such as natural disasters and epidemics, such as COVID-19.
with disabilities
129 Notably, the differences in the welfare distribution are relatively small between the poor, vulnerable and aspiring middle class. The aspiring
middle class currently does not receive social assistance, by design, and is less likely to access contributory social security programs under SJSN.
Protecting this group more through social assistance and encouraging access to social security will be important to help foster a sustainable growth
of the middle class.
130 World Bank (2020a). The findings of the report and additional materials can be accessed from:
https://www.worldbank.org/en/country/indonesia/publication/investing-in-people-social-protection-for-indonesia-2045-vision
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The Long Road to Recovery Indonesia Economic Prospects
New and expanded ii. A set of mandated and individually financed social insurance programs for consumption
social insurance smoothing could complement the proposed expansions in social assistance and ensure more
schemes would comprehensive protection against risk events that may otherwise lead to significant
complement the hardship. Examples include Government contributions to help raise social insurance
country’s social coverage among informal workers; incorporation of the current severance pay system into
assistance programs a prefunded unemployment savings account that can be managed alongside the existing old-
age savings program; and support for expanding and improving of health insurance
coverage.
Investments should iii. Further investment should be made in a strong delivery system like a dynamic DTKS that
be made in a more covers a larger share of the population and can be used by an increasing number of programs
comprehensive and with a broader range of objectives than poverty-targeted social assistance. The new
regularly updated recipients identified through the on-demand approaches of Kartu Prakerja and the Dana
population database Desa BLT, as well as the in-kind Sembako for Jabodetabek, could potentially be prioritized
to support a more for full registration into the DTKS and, as a result, almost double the latter’s coverage. 131
adaptive social In the future, investments in a strong local government interface with adequate capacity to
protection system carry out regular and on-demand updating of such a database will be critical to ensuring its
ongoing reliability, and its suitability to support an adaptive, modern social protection
system. 132
Delivering universal health coverage 133
Universal health A health system that ensures affordable access to quality services would complement the
coverage would improvements in social protection and support a healthier and more productive labor force.
support healthier, Commendable progress has been made in universal health coverage (UHC), with public health
longer, and more expenditure increasing 22 percent annually between 2001 and 2018, supporting health service
productive lives, and provision expansions and improvements in population health. The Government’s national
help Indonesians health insurance scheme (JKN) 134 has played a key role and has quickly expanded to cover 83
achieve their full percent of the population (224 million Indonesians) 135. However, despite these positive
potential developments, Indonesia continues to compare poorly against its peers on some key population
health metrics. Overcoming these challenges is critical for sustained human capital accumulation
and being better prepared for future health challenges, including the next global pandemic.
Wide-ranging public Despite public health improvements in recent decades, 136 challenges remain especially in
health challenges maternal health and nutrition, as well as in communicable and non-communicable diseases
continue to erode (NCDs). The maternal mortality ratio today remains high relative to its income-level and
Indonesia’s human regional peers; its rates of under-5 child stunting are the fifth highest in the world, and it is the
capital third-highest global contributor to cases of tuberculosis (TB). The burden of NCDs has
increased rapidly, now accounting for 66 percent of the country’s disease burden. Moreover,
regional and income-related inequalities in health outcomes persist, with poor households
exhibiting infant and child mortality rates that are double those of richer households.
131 If all were included it could represent as many as 27 million additional households.
132 World Bank (2020a).
133 This subsection draws heavily from World Bank (2020). Indonesia Public Expenditure Review 2020 – Spending for Better Results.
Washington D.C.: World Bank.
134 JKN offers wide-ranging health insurance coverage for medically necessary treatment. The scheme charges premiums to users, but the
Government currently pays these fees for those least able to afford it.
135 Though active users account for approximately 75 percent of the population.
136 Between 1960 and 2016-2017, life expectancy increased from 45 to 69 years, under-5 mortality declined from 222 to 25 per 1,000 live births,
and infant mortality declined six-fold to 21 per 1,000 live births.
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The Long Road to Recovery Indonesia Economic Prospects
Challenges to health Underlying these poor health outcomes is a multifaceted set of challenges. Public resourcing for
service provision the sector (1.4 percent of GDP in 2018) is about half of that in countries with a similar income
include inadequate level. At around USD 55 per capita, it is well below the recommended USD 110 per capita
spending, poor needed to deliver an essential UHC package nationwide. 137 Frontline providers frequently lack
distribution of the drugs, equipment, and the training needed to deliver good quality services. 138 Overall health
services, inefficient financing is inefficiently allocated – skewed towards curative, rather than preventive, care. The
funding allocations, availability and geographic distribution of human resources for health, especially for primary
limited performance physicians and specialists, is a challenge. A lack of performance orientation in SNG health-care
orientation and weak financing has contributed to suboptimal service delivery. Within JKN, inefficient distribution of
governance scheme funds, 139 poorly designed compensation mechanisms for service providers, 140 and
generous benefits that are not matched by actuarially costed premiums, 141 hold back the
effectiveness of the scheme and jeopardize its the financial sustainability. 142 Finally, weak
governance and accountability, and fragmented information systems have more generally made
it difficult to link health sector spending with performance.
Action should be To meet the challenges of realizing Indonesia’s vision of universal health coverage, action should
taken in three areas be taken in three areas:
i. Increase resources for health services. There is a need to raise more revenue for the health sector
to enable spending levels on par with regional and lower middle-income averages. It could
begin by increasing taxation through excises on the consumption of unhealthy goods and
linking corresponding revenues to public health expenditure. Examples of excise reforms
include tier simplification and higher rates for tobacco excises as well as the introduction of
an excise on sugar-sweetened beverages (Section B.6). There is a need to consider extending
the JKN premium subsidies to the informal sector to achieve a significant expansion in
scheme coverage, while reducing the per-user cost of the scheme. 143 JKN premiums should
also be updated based on actuarial analysis and contributions compliance improved, to
ensure that those who can afford to pay for insurance are not being subsidized.
ii. Manage expenditure growth. There is a crucial need to ensure that rapidly rising costs of health
service provision, particularly of the JKN scheme, are effectively managed through better
system design and other efficiency improvements. Budget or volume ceilings can incentivize
hospitals to become more efficient and contain hospital expenditures. Cost-sharing for both
non-essential services and services prone to over-utilization should also be introduced, 144
which would encourage use of more cost-effective referral pathways, reducing overall health
system costs. In addition, the JKN benefit package could be made more explicit and better
137 Most recently, the third edition of the international Disease Control Priorities initiative (DCP3) estimated the total cost per person for sustaining
an essential universal health coverage package (EUHC) at 80 percent coverage would be US$110 in lower middle-income countries.
138 These conditions worsened during the COVID-19 crisis, with the system unable to meet the surge in demand for frontline equipment such as
protective gear and exposing health workers to higher risks of infection.
139 84 percent of JKN funds are being allocated to hospitals despite two thirds of health service utilization taking place outside the hospital system.
140 In JKN, primary health care services are paid for by capitation – a fixed amount per patient served – which incentivizes over-referrals and
under-delivery in weakly monitored and under-resourced systems. Alternatively, payment for hospital services is essentially open-ended,
incentivizing waste and unnecessary care.
141 Costs-to-contributions ratios on JKN insurance claims regularly exceed 100 percent.
142 JKN has exhibited large and increasing deficits since its inception.
143 For many in the informal sector, the cost of health insurance is prohibitive. Moreover, those with the lowest risks are will be the least likely to
pay to participate in the scheme – a case of adverse selection. If the subsidy is extended to the informal sector, these individuals would enter the
scheme and reduce average user risks and costs.
144 International evidence suggests that, while modest cost-sharing may be appropriate for high-cost/low-effectiveness services and to enforce the
gatekeeping system, it is likely to reduce both necessary and unnecessary utilization, particularly for the poor and vulnerable.
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The Long Road to Recovery Indonesia Economic Prospects
align benefits with available resources. 145 Finally, JKN claims data should be analyzed to
improve claims management, detect inappropriate or low-value care, and identify potential
cost efficiencies related to high-cost or high-frequency services.
iii. Improve governance and accountability across the health sector. Pathways to better governance and
accountability include annual budget performance assessments for the whole health sector,
investments in better-quality data and information systems, and ensuring that all agencies
(especially the MoH and BPJS Healthcare146) share performance, quality, and insurance
claims data, while also simultaneously pushing for greater inter-operability of systems to
reduce data redundancy and fragmentation.
7. Infrastructure: Closing the gap for higher potential growth 147
Figure B.10: Indonesia’s development prospects are Figure B.11: …while its existing infrastructure is
impeded by a USD 1.6 trillion public infrastructure gap… perceived to be of a lower quality than in ASEAN peers
(public capital stock per capita) (quality of infrastructure score, range: 1-7)
35,000 6
Indonesia ASEAN
30,000
30,634
25,000
5
20,000
15,000
4
10,000
10,247 USD 1.6 trillion to
close this gap
5,000
4,221
0 3
Advanced Emerging Indonesia Overall Roads Railroad Ports Air Electricity
economies economies average transport supply
Source: IMF data and World Bank staff calculations. Note: Estimates Source: WEF Global Competitiveness Report (2017–2018) and World
are for 2017, in 2011 constant price USD. Unweighted averages computed Bank staff calculations. Note: ASEAN is the unweighted average of
for 13 advanced economies and 21 emerging market economies Malaysia, Singapore, Thailand, and Philippines
A large infrastructure Indonesia needs more and better infrastructure to boost economic inclusion, sustain robust
gap constrains growth, and escape the middle-income trap. Infrastructure supports growth-enabling economic
Indonesia’s growth connectivity and the delivery of basic services such as water, sewage, and electricity. However,
prospects on a per capita basis, Indonesia faces a large and widening infrastructure gap relative to its
emerging market peers (Figure B.10), and perceptions of its infrastructure quality are lower in
almost all areas compared to ASEAN averages (Figure B.11). To deliver on the enormous
infrastructure needs of a rapidly urbanizing and increasingly modern economy, and match the
standards set by Indonesia’s peers, the Government will need to catalyze large, unprecedented
flows of private infrastructure investment as more public financing will not suffice, given the
sheer size of the gap. 148 Moreover, the pandemic has increased the enormity of the task by
triggering sharp cuts in public infrastructure spending and raising the likelihood of significant
145 Options include limiting the enrollment period to 2-3 months each year or lengthening the benefit activation period; limiting treatment
coverage to lowest class of hospital rooms (class 3) as per the original law; and costing the 144 services covered under JKN capitation to inform
future premium and reimbursement rates.
146 BPJS Healthcare is the entity responsible for managing the JKN scheme.
147 This section draws heavily on the World Bank’s Indonesia Systematic Country Diagnostic 2020, Indonesia Infrastructure Sector Assessment
Program Report 2019, and Indonesia Economic Quarterly October 2017.
148 World Bank (2017).
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The Long Road to Recovery Indonesia Economic Prospects
delays to infrastructure projects in the 2020–2024 RPJMN. 149 As the economy starts to emerge
from the downturn, a refocusing of government priorities toward infrastructure development
could support the recovery while boosting Indonesia’s long-term productivity and international
competitiveness.
Public investment Public investment into infrastructure has been insufficient, spending effectiveness has been low,
has often been low and capacity gaps have prevented adequate planning and execution. While the infrastructure
and of poor quality, needs far exceed the Government’s fiscal resources, historic budget allocations, while increasing,
while planning and nonetheless still remain low. At the central government level, spending on infrastructure has
coordination has long been constrained by a combination of tight budgets and low revenue collection. At the
been inadequate subnational level, limited own-source revenues and restrictions on subnational borrowing have
had the same effect. Local government development of medium- and large-scale infrastructure
has often been hindered by a fiscal transfer system with insufficient funding and predictability
for multi-year projects, which has increased the difficulty of partnering with the private sector.
Planning and implementation capacity are limited at all levels – especially when coordination is
required between different government entities, vertically or horizontally – detracting from the
efficiency and quality of infrastructure development.
Highly restrictive Private sector financing of Figure B.12: Indonesia imposes exceptionally tight
and complex infrastructure has been constrained by regulatory restrictions on foreign investment
regulatory settings restrictive regulations, shallow (FDI Regulatory Restrictiveness Index, 2018)
help to keep private domestic financial markets, and poor 0.4 Philippines
investors at bay support for public–private
partnerships (PPPs) amongst line Indonesia
ministries and SOEs. Given that 0.3 Malaysia
domestic financial markets are China
relatively shallow, significant India
mobilization of foreign private 0.2 Lao PDR
investment becomes necessary. Korea
However, Indonesia’s regulatory Vietnam
restrictions on foreign investment are 0.1 Brazil
some of the tightest among middle-
and high-income countries, which
would weigh on foreign investment 0.0
including the infrastructure sectors
(Figure B.12). 150 Source: OECD.Stat
SOEs have been Over the past decade, SOEs have been increasingly relied upon to deliver the government’s
critical to the delivery infrastructure investment program. They have been perceived as being able to deliver
of infrastructure but infrastructure faster, tolerate higher regulatory and financial risks, and overcome bureaucratic
have crowded out hurdles. Their ability to operate as monopolists or dominant players in key sectors, and the
opportunities for the regulatory support they receive, such as the right of first refusal over any activity in a sector,
private sector have significantly curtailed private sector prospects. 151 SOEs also benefit from public capital
injections, easier financing from state-owned banks, presumed protection from insolvency, and
explicit government guarantees that place them in advantageous positions compared to private
sector participants. This model of SOE-led infrastructure development is becoming
unsustainable as the Government’s fiscal limits have increasingly forced SOEs to turn to debt
149 The Jakarta Post (April 23, 2020)
150 World Bank and International Finance Corporation. Creating Markets in Indonesia: Unlocking the Dynamism of the Indonesian Private Sector.
Country Private Sector Diagnostic. World Bank Group, 2019.
151 Market-dominant infrastructure SOEs include Perusahaan Listrik Negara (electricity), Pelindo II (ports), and Angkasa Pura I and II (airports).
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The Long Road to Recovery Indonesia Economic Prospects
financing, resulting in some SOEs becoming highly leveraged and facing significant financial
stress.152 Amid the current downturn, the Government has significantly expanded support to
SOEs, allocating an additional IDR 112.2 trillion for purposes that include additional energy
subsidy compensations to PLN and Pertamina (IDR 76 trillion), 153 capital injections, and
bailouts (mainly for infrastructure, financing, and transport SOEs).
Cuts to public As the economic recovery gets underway, it will be essential that the Government recalibrate
investment should be from a focus on crisis management to one of regaining traction on its longer-term priorities
unwound as soon as such as infrastructure development. The large COVID-driven cuts to central government capital
is practicable spending and SNG transfers, which are heavily infrastructure-focused, should be unwound as
soon as is practicable. Beyond this, there is a need to double-down on efforts to attract private
capital into Indonesia’s infrastructure sectors, including through wide-ranging reform of SOEs,
while also ensuring more and better public investment. Specifically, the following could be
considered:
Improvement of i. Improve the regulatory, institutional, and financial environment for private sector participation in
regulatory, infrastructure. Easing of extensive investment restrictions, particularly the narrowing of the
institutional, and negative investment list that prescribes ownership limits, would open an important doorway
financial to global capital. A clear decision-making framework should be implemented to prioritize
environment for private financing of commercially viable opportunities and consider their open, competitive
infrastructure tendering. Regulations and institutional arrangements should be improved to promote
investment is critical better PPP project selection, preparation, procurement, and government support processes.
for enhanced private Making a broader array of infrastructure subject to user charges would reduce low-value use
sector participation and congestion, be favorable on the environment, and raise commercial viability. 154
Likewise, basing energy, port, and other tariffs on supply cost and demand considerations
would raise the viability of private sector participation. The introduction of new capital
market solutions, coupled with enabling regulatory reforms, would help to increase capital
mobilization from domestic and foreign sources, and expand the availability of long-term
infrastructure financing. 155
Reform of ii. Recalibrate the role and incentives of SOEs to catalyze private sector entry, increase competition, and boost
infrastructure SOEs infrastructure quality. The introduction of key performance indicators and efficiency
will be central to benchmarks can improve the efficacy of SOE-delivered infrastructure, further harden SOE
facilitating private budget constraints and, where appropriate, improve commercial orientation. Improved –
sector entry, and more restrictive – guidelines on SOE subsidies, financing, and guarantees should be
increasing issued to ensure alignment with a more sustainable role for SOEs in infrastructure and the
competition and introduction of competitive pressures and other efficiency-inducing mechanisms. SOEs
efficiency, and should be encouraged and better enabled to pursue asset recycling within a framework that
boosting maximizes public value and ensures fiscally prudent decision-making. 156 Asset recycling,
infrastructure quality such as through the Limited Concession Scheme157, can generate new efficiencies in
infrastructure while unlocking financing for new projects, but will require more
transparency in SOE data.
152 World Bank and International Finance Corporation. Creating Markets in Indonesia: Unlocking the Dynamism of the Indonesian Private Sector.
Country Private Sector Diagnostic. World Bank Group, 2019.
153 Largely due to uncompensated subsidies from earlier years.
154 The absence of user charges has usually not promoted access to services by the poor, but rather reduced availability and worsened inequalities
(Kessides, 1993).
155 World Bank (2017).
156 Asset recycling involves the sale or contracting-out of attractive, commercially viable SOE assets to the private sector to raise funds for new
infrastructure projects. Existing brownfield SOE assets are attractive to private investors as they tend to involve less risk and can quickly benefit
from private sector efficiency gains. Such efficiency gains can drive significant service quality improvements in the existing infrastructure stock.
157 The Limited Concession Scheme (LCS) was introduced through a recent Government decree, Perpres 32/2020. The LCS will enable private
firms to pay an upfront fee to receive the right to operate, and improve operations of, Government and SOE assets. Funds collected through the
scheme will be used by Government to finance new infrastructure.
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The Long Road to Recovery Indonesia Economic Prospects
Fiscal reforms at the iii. Increase public resources available for infrastructure investment across several sectors and at all levels of
central and sub- government. Additional spending is warranted in several infrastructure sectors such as roads,
national government urban infrastructure, water and sanitation, especially since these public investments would
levels are necessary have slowed due to the pandemic but remain critical to growth in the medium-to-long term.
to further increase Although some reallocation within the budget remains possible, sustainably increasing
infrastructure public infrastructure spending will require fiscal reforms to bring in more revenues (Section
spending B.7). Furthermore, at the sub-national level, enabling SNG borrowing, enhancing the
creditworthiness of SNGs, and using innovative instruments to leverage private funding for
SNGs can create space for more investment.
8. Fiscal: Reigning in debt through fiscal reform 158
Rising debt and The economic downturn and the corresponding measures aimed at mitigating its fallout have
interest payments translated into a rising public debt trajectory. Public revenues have collapsed, spending has risen
could hinder (Figure B.13), and the fiscal balance has deteriorated (Section A.5). With the outlook for revenue
spending on growth constrained (Figure B.14), central government debt could rise as high as 40 percent in
government the medium term. 159 Within a tight budget envelope, rising interest payments will begin to crowd
priorities and out spending on Government priorities, while capital markets may grow nervous about
jeopardize the financing public debt. Credit rating agencies have already been highlighting concerns about
country’s investment Indonesia’s fiscal position. 160 Failure to improve Indonesia’s fiscal fundamentals could
grade credit rating jeopardize the country’s highly coveted investment-grade credit rating, leading to higher costs
of public and private sector borrowing. 161,162 To reign in debt without jeopardizing economic
growth, Indonesia must shrink its deficits while allowing for much-needed increases in public
spending, which at 16.8 percent of GDP in 2018 is low relative to those of its international
peers. To begin with, unwinding crisis-time measures as they outlive their usefulness – especially
tax relief and capital injections – could deliver quick gains and resolve any unintended
consequences that may have arisen due to their rapid design and implementation. 163 More
substantive reforms should be focused on subsidy reform and exploiting opportunities for
higher tax collections.
158 This section borrows heavily from World Bank (2020d).
159 Although Indonesia’s debt-to-GDP ratio is comparatively low by international standards, the country’s capacity to repay debt (for instance,
assessed by its interest-payments-to-revenues ratio) is also comparatively low on account of low public revenues.
160 In April 2020, S&P Global downgraded its outlook for Indonesia’s sovereign credit rating to negative from stable. S&P Global (2020) stated
that “higher deficits over the next two to three years will lead to net general government indebtedness above 30% of GDP for a longer period”
and that the “narrow revenue base is an additional constraint on the ratings”. Furthermore, “a sustained rise in Indonesia's interest payments …
would indicate additional downward pressure on the sovereign rating.”
161 An ‘investment grade’ credit rating refers to a rating above BBB- from Fitch Ratings or S&P Global, or above Baa3 from Moody's. It is highly
vaunted as it facilitates lower-cost borrowing and opens up access to a much broader range of institutional investors.
162 There have already been over 50 sovereign credit rating downgrades this year for emerging economies, across the three main rating agencies.
163 Given the rapid pace at which Governments have had to respond to the unfolding crisis, there is the possibility that some policy measures will
have created perverse incentives that promote undesirable behavior by firms (e.g. using looser credit conditions to borrow for unproductive
purposes) or individuals (e.g. disincentivizing job search), or have a range of other design and implementation shortcomings.
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The Long Road to Recovery Indonesia Economic Prospects
Figure B.13: Fiscal measures have been implemented Figure B.14: Revenues have fallen during the downturn
across the globe in response to the downturn (central government revenues, percent of GDP)
(cost of fiscal response measures, percent of GDP)
12 15
9 12
6 9
3 6
0 3 Pre-COVID outlook
Current outlook without tax reform
0
2017 2018 2019 2020 2021 2022 2023
Source: IMF (2020) Database of Country Fiscal Measures in Response Source: MoF and World Bank staff calculations
to the COVID-19 Pandemic and World Bank staff calculations
Reforming subsidies
Energy and fertilizer Despite important reforms, energy and Figure B.15: Spending on subsidies is still high
subsidies are a large fertilizer subsidies still represent a relative to social assistance
share of the budget substantial share of Government (share of central government spending in 2018)
but are poorly outlays but are poorly targeted and
14
targeted at the poor represent a suboptimal allocation of
and vulnerable public funds. 164 In 2018, the Central 12
Government spent IDR 153.5 trillion
on fuel and electricity subsidies, and 10
IDR 33.6 trillion on fertilizer subsidies. 8
This was equivalent to 12.9 percent of
the total budget, triple the share spent 6
on social assistance programs (3.9
percent) (Figure B.15). These subsidies 4
are a source of financial stress at 2
energy SOEs – which cannot set prices
for full cost recovery and are often 0
repaid by Government in arrears. 165 Fertilizer Energy Social Health Capital
subsidies subsidies assistance
They are also badly targeted, with
estimates suggesting that the poor and Source: MoF and World Bank staff calculations
vulnerable only receive about 21 percent of kerosene and LPG subsidies, 3 percent of diesel
subsidies, and 15 percent of electricity subsidies. 166 Likewise, fertilizer subsidies are poorly
targeted, regressive, misused, and cost-ineffective at increasing production. 167
164 World Bank (2020c).
165 For instance, although global crude oil prices increased by 60 percent over 2016-18, domestic retail prices of RON 88 and diesel barely changed
since April 2016. When SOEs such as Pertamina and PLN do not link pricing to cost drivers, the financial burden ultimately falls upon the national
budget, whether through direct subsidy spending or through other financial transfers that become necessary to sustain these SOEs.
166 World Bank (2020c).
167 There is no evidence that fertilizer subsidies are targeted at all and 60 percent of the subsidies have been found to benefit the largest 40 percent
of farmers. Dozens of distributors have been charged by law enforcement for price collusion and selling subsidized fertilizers at higher prices.
Moreover, subsidy costs, both fiscal and economic, outweigh the benefits from higher rice yields. See World Bank (2020c) [PER Box 1.6]
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The Long Road to Recovery Indonesia Economic Prospects
Energy subsidies Reform of fuel and electricity subsidies could generate fiscal savings of 0.4 percent of GDP after
elimination could compensating the poor and vulnerable for impacts, while the elimination of fertilizer subsidies
yield 0.4 percent of could free-up a further 0.2 percent of GDP. 168 Eliminating poorly targeted subsidies for diesel
GDP in fiscal and premium fuels, LPG, kerosene and electricity would reduce budget outlays by 0.7 percent
savings after of GDP. 169 At the same time, the bottom 40 percent of households should be protected from
compensating the the corresponding direct impact of rising energy prices as well as the indirect impacts of price
poor and vulnerable rises in other goods and services that use energy as an input. Providing such compensation
through cash transfers would still allow for net fiscal savings of 0.4 percent of GDP. Careful
implementation is needed to avoid unnecessary hardship for the bottom 40 percent during the
transition. With the elimination of energy subsidies, corresponding improvements should also
be made to the governance and institutional frameworks of the key energy SOEs, Pertamina
and PLN, to ensure their long-run financial sustainability. The gross fiscal savings from the
removal of fertilizer subsidies could finance more effective policy interventions in agriculture. 170
Collecting more taxes
A long history of low The most promising opportunities for transforming Indonesia’s fiscal prospects can be found
tax revenue in reforms to taxation. Underlying the country’s low revenue collection is a Central Government
mobilization offers tax-to-GDP ratio of just 10.2 percent of GDP in 2018, one of the lowest among Indonesia’s
the promise of regional and emerging market peers. 171 Recent changes to tax policy, which have seen the
significant new fiscal standard corporate income tax rate permanently reduced to 22 percent, with a further cut to 20
space through percent scheduled for 2022, will push the ratio even lower.
reform
Government has The Government has taken steps to address the low revenue challenge, but it has not been
made some progress, sufficient. Major tax law changes have been in preparation for some time, and so too a medium-
but bolder reforms to long-term tax reform strategy to guide the reform process over the next few years. In a
are needed to commendable effort to improve tax administration and boost taxpayer compliance, the
accelerate the Government is modernizing the Directorate General of Taxation (DGT) through improved IT
needed boost in systems 172, organizational restructuring, and staff upskilling. These changes hold the potential
revenue for substantial revenue gains but international experience suggests that major tax administration
transformations of this sort can take over five years to be fully implemented. More recently, the
Government has also sought to boost revenues through changes in tax policy, by legislating to
introduce an excise tax on plastic bags and to bring sales on digital platforms under the scope
of the VAT. These efforts should be lauded, but only scratch the surface of the needed revenue
correction. 173
The groundwork for More substantive action should be taken today to lay the groundwork for a return to fiscal
a more ambitious tax sustainability once economic growth returns. Raising taxes in the middle of the crisis can be
reform agenda economically self-defeating and politically unviable. However, crises can also provide an
should be set today, amenable environment – with the required sense of urgency – to pass and secure major reforms,
168 Does not account for compensatory measures to farmers for loss of fertilizer subsides. Estimates are World Bank staff calculations based on
2017 fiscal data that, notably, precede the implementation of COVID-19 response measures.
169 World Bank (2020c).
170 With just a fraction of these savings, important programs could be funded to strengthen farm-, community-, and landscape-level soil, water,
and other natural resource management practices and improve investment in agricultural sector education and R&D.
171 As a comparison, with similar tax rates to Indonesia in 2018, the Philippines, Cambodia and Malaysia achieved tax-to-GDP ratios of 14.7
percent, 17.1 percent, and 12.0 percent, respectively.
172 Including mechanisms to make tax compliance easier, such as electronic VAT invoices, and electronic e-filing systems for corporate income
taxes and withholding taxes from employees’ payrolls.
173 The plastic bag excise revenues may gradually moderate as consumers substitute towards non-plastic alternatives, while digital sales are still
only a small share of the economy and will not generate major VAT income in the near term.
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The Long Road to Recovery Indonesia Economic Prospects
to deliver returns even if implementation must wait until the recovery is underway. Viable reforms for boosting
once the recovery is revenue mobilization have been identified under three key themes: lower thresholds;
underway progressivity through solidarity; and smart taxes. These are briefly outlined below 174:
More firms should Lower thresholds – to get more firms to Figure B.16: Indonesia’s VAT registration
be brought under the pay: threshold as a share of per capita GDP is the
scope of major taxes highest in the world
a) Lower the threshold that defines MSMEs (VAT threshold as a share of GDP per capita)
such as the VAT and
from IDR 4.8 billion to IDR 600 million in
CIT
business revenue 90
MSMEs have been classified as firms
earning less than IDR 4.8 billion.
Instead of the CIT, MSMEs must only 60
pay a low final tax on sales with limited
reporting requirements. As such, most
firms, including very profitable ones, 30
fall outside the CIT’s scope. The lower
tax and reporting burden can
discourage firms from growing larger
and encourage larger firms to split 0
themselves into smaller below-
threshold entities. Returning to the
pre-2014 threshold of IDR 600 million
would reduce these perverse incentives Source: Information on VAT thresholds from vatlive.com;
data on GDP from World Bank
and increase transparency. Notes: GDP per capita is current price LCU in 2018; Vietnam
b) Remove final tax treatment on construction has no minimum VAT threshold. This chart is reproduced
from World Bank (2018) and updated for the latest data.
and real estate
The construction and real estate sectors enjoy a special exemption from the CIT regime and
are subject to a low final tax on sales with limited reporting requirements. These sectors
also have among the lowest rates of tax compliance. Returning them to the CIT regime will
raise transparency and ensure improved horizontal equity across sectors.
c) Lower the registration threshold for the value-added tax (VAT) from IDR 4.8 billion to IDR 600 million
The registration threshold of IDR 4.8 billion results in a narrow tax base. As a ratio to GDP
per capita, it is the world’s highest (Figure B.16) and, combined with other exemptions,
results in Indonesia collecting only about 60 percent of its VAT revenue potential. 175 A
lower threshold will simplify the VAT system, improve compliance, and allow greater
reliance on indirect taxes for revenue mobilization, consistent with more advanced
economies.
Raise personal Raise personal income tax rates while also increasing their progressivity so that those who have
income taxes, more can carry a heavier share of the cost of addressing the pandemic:
including for the
Change marginal tax brackets and increase the rate on top income
middle class, while
The personal income tax (PIT) regime can be made fairer. The tax brackets could be
also ensuring that
adjusted so that the current top marginal rates apply to lower incomes, while a new top rate
those who have more
of 35 percent is applied to higher income. This would mirror top rates in peer countries and
contribute more
move Indonesia closer to the OECD 2018 average of 41.2 percent. Raising revenues in this
progressive manner contributes to lower inequality.
174 The following tax policy reform options draw heavily upon World Bank (2020h).
175 That is, 60 percent of total VAT revenue compared with a benchmark that taxes all consumption at Indonesia’s standard rate of 10 percent.
See Jin (2018) for further details.
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Expand the use of Smart taxes increase the use of excises to discourage the consumption of certain goods and
excise taxes with services that cause harm to consumers or third parties 176:
appropriate rates, to
a) Apply an excise on all single-use plastics
raise revenues while
This excise would tackle plastic waste that is damaging fisheries and marine tourism.
creating incentives
b) Apply an excise on sugar-sweetened beverages
for desired behaviors
This excise may reduce the consumption of sugar, which contributes to the incidence of
non-communicable diseases such as obesity and diabetes.
c) Introduce an adjustable fuel excise
An adjustable excise on petroleum products, which could be more easily implemented now
that petroleum prices have sharply declined, would raise revenues and reduce emissions.
d) Increase tobacco excises, via tier simplification
The numerous tobacco taxation tiers can be further simplified to a single tier with a higher
75 percent tariff/price ratio. This would help reduce Indonesia’s high smoking prevalence.
Successful tax reform Raising tax revenues over the short-to-medium term needs to be balanced against other
requires a well objectives, such as impacts on growth and equity, and will face stiff resistance from some
thought-out stakeholder groups. 177 In Indonesia, there is the potential for strong alignment between more
communications taxation, higher growth, and improved equity. The key challenge is therefore to build a stronger
strategy coalition of support around the taxation reforms that are needed, 178 to ensure that political
economy settings will allow for change. One approach is to package revenue increases with
important but popular spending initiatives, so that support for reform can be broadened. 179
Well-designed tax policy measures should also be implemented in a way that limits unnecessary
negative impacts on businesses, and limits compliance costs. 180 Finally, a communications
strategy aimed at wide socialization of the proposed reforms and their rationale is important for
success. 181
176 By incorporating an added cost into the price of a good or service, these excise taxes can help consumers internalize the negative impacts that
their consumption has on themselves, other parties and the environment.
177 World Bank (2018).
178 Breuer, et al. (2018).
179 For instance, revenues from excise taxes targeted at socially undesirable activities (e.g. tobacco) could be linked to necessary additional public
spending (e.g. financing deficits in the national health insurance scheme).
180 World Bank (2018).
181 Sarker (2011).
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BOXES
Box A.1: 2018 Rebasing of the Consumer Price Index
The Indonesian Statistics Bureau (Badan Pusat Statistik or BPS) introduced a revised Consumer Price Index (CPI) this year with new
household consumption categories and weights that reflect the results of the 2018 Cost of Living Survey (Survey Biaya Hidup or SBH
2018). The new methodology was implemented beginning with the January 2020 prices data and rebases the CPI to 2018 with a new
basket of goods, replacing the 2012-based CPI. Since 1988, BPS has released 6 cost-of-living surveys, serving as periodical five-year
updates to the mapping of Indonesian consumer expenditure patterns.
The 2018 SBH, compared to the 2012 SBH:
1. Reflects consumer expenditure patterns from a larger Table A.1.1: Weights of various CPI components
number of cities. The 2018 SBH covered 90 large cities and (percent)
sampled 141,600 households as opposed to only 82 cities Components 2012 2018
and 136,080 households in the earlier SBH; Headline 100 100
Core 65.4 65.5
2. Added 98 new commodities while dropping 101 Administered 18.0 18.1
commodities. New commodities were added to reflect Volatile 16.6 16.5
more recent consumer expenditure patterns which have Components 2012 2018
become more closely associated with technology, while the Food 35.0 33.7
101 commodities removed from the basket have become Raw food 18.9 18.0
relatively obsolete. For example, online ride-sharing
1 Processed food 16.2 7.0
Food provision/restaurant ** 8.7
transportation tariffs have been now added, while bus
Non-food 65.0 66.3
tariffs and post office fees were deleted as they have Note: **the sub-components were non-existent in 2012-base CPI.
become relatively uncommon expenditures; Source: BPS.
3. Recategorizes commodities from the former 7 household
expenditure groups into 11 groups.2 “Food, Beverage, and Tobacco,” a new group in the 2018 SBH, is made up of the
former “Raw Food” and portions of the former “Processed Food, Beverages, Cigarette, and Tobacco” categories.
Similarly, “Education” is now an independent category, separate from “Recreation and Sports”. Likewise, the former
“Clothing” category is now divided into “Clothing and Footwear” and “Personal Care and Other-Services” (Figure A.1.1);
4. Assigns higher weights for the core and administered price components, and a lower weight to volatile basket (especially
raw food), capturing more recent expenditure patterns where Indonesian urban residents spend more on non-food items
relative to food items.3 Hence, food components in total now have a weight of 33.7 percent, down from to 35.0 percent in
2012 (Table A.1.2).
The revised weights have implications for headline consumer price inflation going forward:
1. Lower weights for food components are expected to lead to softer impact of food inflation on headline inflation at times when
the food inflation is typically higher, such as during Ramadan and Eid festivities, and less-common instances when there are
shortages of essential food items;
2. Stronger impact of non-food prices on headline inflation as the 2018-base assigns higher weights for non-food components,
particularly housing and rents, electricity, fuels, higher education, and mobile phone data (Table A.1.2).
Table A.1.2: Weights of categories in consumer basket of goods and services
(percent)
Goods and services categories 2012 2018 Difference
1. Food, Beverage and Tobacco 27.23 25.01 -2.22
2. Clothing and Footwear 5.06 5.41 0.35
3. Housing, Water, Electricity, and Other Fuel 20.12 20.45 0.33
4. Household Equipment and Routine Maintenance 5.61 5.97 0.36
5. Health 2.80 2.62 -0.18
6. Transportation 12.36 12.38 0.02
7. Information, Communication, and Financial Service 5.81 5.83 0.02
8. Recreation, Sports, and Culture 2.04 2.15 0.11
9. Education 5.41 5.62 0.21
10. Food and Beverage Provision/Restaurant 7.81 8.67 0.86
11. Personal Care and Other Services 5.75 5.89 0.14
Source: BPS.
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Figure A.1.1: Reclassifications in the 2018 CPI
Source: Reproduced from BPS’s Cost of Living Survey 2018 socialization materials, BPS.
1 The BPS Chief mentioned that the 2018 CPI includes a number of new commodities in calculating inflation such as mobile accessories, power bank,
childcare services, and online ride-hailing transportation expenses, to find out the latest consumption patterns which is usually done every 5 years
https://finance.detik.com/berita-ekonomi-bisnis/d-4883368/baru-nih-gojek-grab-hingga-powerbank-masuk-hitungan-inflasi.
2 In the socialization of SBH 2018, BPS explained that the reclassifications was done to better align Indonesia with the 13 divisions of the United
Nations 2018 COICOP (Classification of Individual Consumption According to Purpose). In addition, BPS made further simplifications and remapped
the COICOP’s 13 divisions to only 11 divisions or groups.
3 In 2015, 50.0 percent of Indonesian cities’ population expenditure was used to consume non-food, a significant increase from only 30.7 percent in
1980. Spending on rice tends to decrease, while spending on processed food tends to go up
https://www.bappenas.go.id/files/data/Pengembangan_Regional_dan_Otonomi_Daerah/Statistik%2070%20Tahun%20Indonesia%20Merdeka.pdf.
Share of non-food expenditure in Indonesian cities in 2017 increased further to 53.3 percent (BPS, SUSENAS, March 2017).
Box A.2: Near-real-time insights on the socio-economic impact of COVID-19 on households in Indonesia (HiFy)
The COVID-19 pandemic is rapidly evolving. The welfare impacts of the pandemic and its containment measures are expected to be
severe. While the impacts are widespread, the effects are particularly deeper and longer-lasting among the poor and vulnerable. Policy
makers need timely and relevant information to monitor the impact of the COVID-19 crisis and the effectiveness of their policy
measures to mitigate the adverse impacts on livelihoods.
In response to this demand, the World Bank is administering a high-frequency monitoring of the socio-economic impacts of COVID-
19 on households (HiFy). The HiFy is designed as a 15–20 minute telephone interview survey of about 4,000 panel households across
40 districts and 35 cities in 27 provinces. The survey is implemented in five rounds over a six-month period. Households will be
tracked every 3–4 weeks for the first three months and every 6–8 weeks for the following three months. The survey provides near-
real-time insights on key socio-economic indicators, including social wellbeing, employment and income, food security, access to
healthcare, education, social assistance, and households’ coping mechanisms. The questionnaire is dynamic, with questions rotating
in and out to better capture the rapidly changing situation.
The HiFy sampled households drawn from the World Bank’s three recent data collection efforts, namely the Urban Perception Survey
(2018), Rural Poverty Survey (2019), and Digital Economy Survey (2020). To ensure the survey’s representativeness at the national
level, the coverage of households is well balanced across five major regions in Indonesia: DKI Jakarta, Java (outside Jakarta) Rural,
Java (outside Jakarta) Urban, Off-Java Rural, and Off-Java Urban. The sampled households were also selected with consideration to
the gender and education level of the head of the households. The second round of the data collection was recently completed in
early June 2020, and the analysis is currently on going.
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Box A.3: Economic effects of the COVID-19 pandemic through a Gender Lens
The COVID-19 crisis is unique, comprised of multiple crises interacting in complex ways, and creates substantial uncertainty about
people’s lives and livelihoods.1 Given the pre-existing gender differences in economic activities and social norms, amongst others,
the crisis may affect women and men in different ways. These differences need to be recognized and measured so that the policy
responses and interventions can respond to the various needs and priorities. A failure to do so will exacerbate the existing challenges,
with critical negative consequences for the economy. However, monitoring the size of gender-related impacts and the effectiveness
of the policy and implementation responses for men and women, and girls and boys, requires an on-going systematic effort to collect
and analyze sex-disaggregated data and information.
Women are disproportionately employed in sectors that are more affected by the crisis
Around the world, women are bearing the brunt of layoffs due to the economic downturn. In the United States, female workers
accounted for 55 percent of the job losses in April.2 The United Kingdom Quarterly Labor Survey showed that women are one third
more likely to lose their jobs or experience a reduction in their income in Q1 as they disproportionately work in retail and hospitality.3
Figure A.3.1: Agriculture and traditional services As of May 2020, 1.7 million employees4 had lost their jobs in
accounted for 66 percent of the female labor force, higher Indonesia due to the outbreak. However, it is estimated the net job
than that of males loss in total will be around 3.6 million5. A World Bank modelling
(percent to total labor force) of ex-ante poverty impact of COVID-19 crisis6 found that labor in
agriculture and traditional services, such as wholesale and retail,
Agriculture and Traditional sectors Other sectors transport and warehousing, accommodation and restaurants, and
100% other services are likely to be hardest hit by the crisis. These sectors
90% account for 66 percent of the total female labor force, compared to
80% 40% 34% 60 percent of total male labor force (Figure A.3.1). A recent World
70% Bank High-Frequency Monitoring of the COVID-19 Impacts
60%
(HiFy COVID – Box A.2) shows that 24 percent of breadwinners
who worked before the crisis had stopped working by May 2020.
50%
Service sector workers constituted the largest share (55 percent)
40% among them, followed by those in industry (33 percent). Even
30% 66%
60% among those who could still work during the crisis, 64 percent
20% received incomes lower than before the crisis. Again, those working
10% in the service sectors are most likely to experience reduced income.
0% Although male and female breadwinners have the same chance of
Male Female becoming unemployed or experiencing income reduction during
Source: BPS; World Bank staff calculation the pandemic, more than 80 percent of female breadwinners are in
the service sector, particularly in retail, leisure, and hospitality,
which are the hardest hit. This put the majority of the female workers at higher risk during the crisis time. However, in absolute terms,
many male workers are engaged in service sectors, in addition to male-dominated sectors such as construction and manufacturing
which are also severely impacted, making them not immune to the economic shock.
Meanwhile, the slump in economic activity as a result of mobility restrictions will tend to affect workers in informal sector more than
those in formal sectors7. In Indonesia, the share of women working in the informal sector (60 percent of total female employment)
is higher than that of men (53 percent of total male employment).
Micro, small, and medium enterprises (MSMEs) are also vulnerable to economic shocks, and women own around 60 percent of
Indonesia’s MSMEs, most of which are microenterprises and many of which are in the informal sector. The HiFy survey found that
those engaged in non-farm business, which are predominantly micro and small businesses, are the most negatively affected during
the pandemic. With more than 60 percent of female breadwinners working in non-farm business, compared to males at around 24
percent, a higher ratio of female breadwinners became vulnerable in this crisis than their male counterparts. Their vulnerability is
heightened since this type of work tends to fall outside the coverage of social protection measures. Adding to this vulnerable group
are domestic workers, who are over-represented by women.8
Overall, the gendered dimension of COVID-19 impacts on employment need to be assessed in the context of pre-existing state. With
the already relatively low female labor force participation (FLFP), the possible female job loss from this crisis will potentially reduce
the FLFP further, which would potentially weigh on long-term economic growth and competitiveness.9,10
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Female-headed households are more vulnerable to income shocks and food insecurity
While statistically the employment shocks are not different between female and male breadwinners, and the poverty incidence is
similar among female- and male-headed households, the COVID-19 impacts on female- vis-à-vis male-headed households can be
disproportionate. One of the mechanisms for differential impacts is households’ source of income, of which female-headed
households (FHH) are more vulnerable. For example, the HiFy data show that female-headed households relied more on remittances
(31 percent) than male-headed household (11 percent). Due to the more restricted conditions for work or other economic hardships,
80 percent of female-headed households received less or even no remittances after the pandemic.11 Similarly, as female-headed
households are more likely to have only one earner, they are more vulnerable economically once the only breadwinner experiences
employment shocks. This higher economic vulnerability among female-headed households seems to be transmitted into reducing
food consumption as a coping mechanism. Female-headed households are more likely to experience food insecurity, either due to
food shortages and/or eating less than they should. (Figure A.3.2).
As the majority of health workers and caregivers are female, women Figure A.3.2: The prevalence of food insecurity
have a higher risk of being exposed to the virus is higher among FHH
(share to total households by gender, percent)
In line with global trends, women make up the majority of health sector
staff in Indonesia. In total, 74 percent of health sector staff, and 63 percent
of frontline health sector staff are women. Having direct interaction with Male
infected patients as part of their main jobs, more female health staff will be
Ate less
at risk if they cannot comply with infection control protocols, such as due
to shortages of personal protective equipment (PPE) when doing their jobs.
Female
In addition, social norms dictate that women take more responsibility for
caring for the sick in the family thereby increasing their likelihood of
exposure to the virus. During the African Ebola outbreak, women were
Shortage of Food
more likely to be exposed to the virus, as they have roles as caregivers within Male
families.12
Social and gender norms prescribe the burden of responsibility for
Female
household and family care to women
Working from home or flexible working arrangements have been promoted 0 20 40 60
as a way to help both men and women to balance work and family needs
and keep married women with children in the workforce. Companies, Source: High-frequency monitoring of households, Summary
of Results from Survey Round 1.
including in Indonesia, that may have been slow to introduce formal Note: Shortage of food is defined when a family does not have
procedures for flexible work have had to make this change due to the enough food to feed for the whole household. Ate less is
COVID-19 outbreak. While this may herald a positive change for defined when a family eats less than before the pandemic but
promoting gender equality in the workforce in the longer term, it has come does not necessarily lack of food consumption.
at a time when schools are closed and women are picking up the burden of the additional domestic work, home school supervision,
and childcare responsibilities at home. From around the world, there is evidence of an unequal distribution of the additional work,
and the additional stress that women are bearing.13 The same pattern is observed in Indonesia. Although only 18 percent of
households in the HiFy survey who have school-aged children required adults to quit their jobs or work less in order to supervise
their children who are continuing their studies at home, in most of them (66 percent), this responsibility falls on the mother. This will
potentially reverse some of the progress made in narrowing the gender wage gap over recent decades and disrupt the career
progression and earnings prospects of mothers more than of fathers.14
1 There are substantial uncertainties in this crisis that depend a lot on the epidemiology of the virus. See IMF (2020). The Great Lockdown: Worst Economic
Downturn Since the Great Depression by Gita Gopinath, IMF Blogs, April 14 2020
2 Why the coronavirus crash is hurting women more than men, CBS News (May 28, 2020)
3 R. Joyce, X. Xu, 2020, ‘Sector shutdowns during the coronavirus crisis: which workers are most exposed’
4 Detik (May 12, 2020)
5 Net job loss is calculated as the difference between job losses and job gains as workers transitioned between sectors during the pandemic. Poverty and
Distributional Impact of COVID-19 Shock in Indonesia, an internal modelling exercise as of June 2020.
6 Ibid
7 Low-income, self-employed, and informal workers are less likely to be able to work from home and to have income protection schemes. Hayatama M., Mariana V.,
and Hernan W., Jobs’ Amenability to Working From Home: Evidence from Skills Surveys for 53 countries, World Bank Policy Research Working Paper 9241, May
2020.
8 There are many MSMEs unregistered in the banking system, tax system and social assistance system as these MSMEs have no National Identity Number (Nomer
Induk Kependudukan) and therefore will not be able to receive certain benefits from the Government.
9 Increasing the participation of Indonesian women in the labor market means that Indonesia will have more skills and more talent available to support economic
growth. Gender Equality and Development, World Development Report, 2012.
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The Long Road to Recovery Indonesia Economic Prospects
10 Higher earnings from working women also tends to lead to several channels of productivity growth. These include increased household savings and higher
expenditures on human capital investments through better education and health care. Agenor, Pierre-Richard, O. Canuto, Gender Equality and Economic Growth
in Brazil, World Bank Policy Research Working Paper 6348, 2013
11 The number of male-headed households that stop receiving remittances is marginally lower than that of female-headed households.
12 Fawole, Olufunmilayo & Nguku, PatrickM & Adewuyi, PeterA & Bamiselu, OlufunmiF. (2015). Gender dimensions to the Ebola outbreak in Nigeria. Annals of
African Medicine. 15. 10.4103/1596-3519.172554
13 See for example evidence from the UK in : A. Andrew, S. Cattan, M. Costa Dias, C. Frarquharson, L. Kraftman, S. Krutikova, A. Phimister, and A. Sevilla, 2020,
‘How are mothers and fathers balancing work and family under lockdown’, The Institute for Fiscal Studies
14 A. Andrew, S. Cattan, M. Costa Dias, C. Frarquharson, L. Kraftman, S. Krutikova, A. Phimister, and A. Sevilla, 2020, ‘How are mothers and fathers balancing work
and family under lockdown’, The Institute for Fiscal Studies.
Box A.4: The dynamics of working from home
Academics are developing classifications to evaluate which jobs can be done at home based on the skills needed to successfully
complete the tasks.1 According to this classification, close to half of the jobs in high-income countries can be done at home, but this
is true for less than a quarter of jobs in low- and middle-income countries. Using a common methodology, 37 percent of jobs can be
done at home in the United States, but only 21 percent in Indonesia.2 How amenable jobs are to be done from home varies enormously
across economic sectors and based on what are considered essential services. In Indonesia, while 88 percent of government jobs are
estimated to be amenable to be done at home, this is true for only about 40 percent of key manufacturing jobs (textile, leather products
and footwear; wood and wood products), and for only 10 percent or less of jobs in hotels and restaurants, construction, wholesale,
or agriculture (Figure A.4.1).
Figure A.4.1: Percentage of jobs that are estimated to be amenable to be done at home (percent)
A. By economic activity B. By type of employment contract
Fisheries Employee
Agriculture and hunting
Construction 42%
Wholesale and retail trade Employer w/perm worker(s) 17%
Quarrying
Hotels and restaurants Casual worker (non-ag) 12%
Food, beverage, and tobacco
Cement and non-metallic mineral
Own account 11%
Mining exclude petroleum and gas
Transport: ground transport
Iron and basic steel Employer w/temp worker(s) 6%
Other manufacturing products
Forestry Unpaid family worker 4%
Transport: water transport
Fertilizers, chemicals, and rubber
Electricity and city gas Casual worker (ag) 2%
Crude petroleum and natural gas
Transport, equipment, machinery, and… C. By wage quintile
Petroleum and gas refinery
Textile, leather products, and footwear 100%
Water supply
Building rental
Wood and wood products 80% 45%
Transport: services allied to transport
Business services 60% 74% 75%
81% 83%
Amusement and recreation
Transport: air transport
Social and community 40%
Paper and printing
55%
Communication
Personal and household
20%
26% 25%
Services allied to financial 19% 17%
Banks 0%
Non-bank financial institution 1 2 3 4 5
General government
Income quintile
0% 50% 100%
Can be done from home Can't be done from home
Note: Estimates based on Sakernas and Dingel and Neiman’s (2020) methodology
Not surprisingly, workers in jobs that can be done at home are also more likely to be wage workers. Overall, 42 percent of wage jobs
are estimated to be possible to complete from home, 17 percent of employers with permanent workers will be able to do so, and only
11 percent of own-account workers will be able to do so (Figure A.4.1B). Half of the workforce with high wages is estimated to be
able to work from home; while, interestingly, a higher share of those with the lowest wages are able work from home (26 percent)
than those with wages placing them in 2nd, 3rd, and 4th income quintiles (Figure A.4.1C).
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Men, low-skilled workers, and workers living in rural areas are more likely to have jobs that cannot be done at home (see Figure
A.4.2). The difference is most striking for low-skilled workers, for whom 85 percent of the jobs require physical presence. Higher
education is also highly correlated with a higher proportion of jobs that can be done at home, as almost 80 percent of people with
university education have jobs that can be done remotely at home.
Figure A.4.2: Share of tele-workable jobs by…
A. Gender B. Age category
76% 81% 79% 79%
24% 19% 21% 21%
Female Male Adult Youth
Can be done from home Can't be done from home Can be done from home Can't be done from home
C. Skill level D. Urban/rural
16%
87% 85% 71%
88%
84%
13% 15% 29%
12%
High-skilled Semi-skilled Low-skilled
Rural Urban
Can be done from home Can't be done from home
Can be done from home Can't be done from home
Note: Estimates based on Sakernas and Dingel and Neiman’s (2020) methodology
While the exercise is interesting, it should be noted that more in-depth analysis should account for which services are considered
essential (even if not amenable to be done from home, these occupations will not stop), that the same occupations might differ in their
skills content in high and middle-income countries,3 and that workers may be able to adjust their services and production functions to
the new constraints.
1 Dingel and Neiman (2020). “How many jobs can be done at home?” April 16, 2020. Mimeo.
2 The estimation methodology for jobs that can be done at home is based on Dingel and Neiman (2020), which classifies the feasibility of working at home based on
responses to two Occupational Information Network (O*NET) surveys covering “work context” and “generalized work activities” for each standard occupational
classification (SOC) code. Given the many-to-many mapping from SOC code to KBJI (Indonesia Standard Job Title Classification, Klasifikasi Baku Jenis Pekerjaan
Indonesia), when an SOC maps to multiple KBJIs, we allocate weights for each SOC code using the proportion of KBJI in The Intercensal Population Surveys
(SUPAS).
3 The World Bank is piloting an adjusted version of the US O*NET in Indonesia that will shed light on this question.
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Box A.5: Indonesia, Trade Tensions, and the Phase One Trade Deal
Despite the endorsement of the Phase One Trade Deal in January this year, U.S.–China trade tensions and the threat of tariffs,
while certainly pausing during the first few months of 2020, have not completely disappeared and have in fact seen some re-
escalation in recent weeks.1 In addition, given the continued move away from China as a production hub due to the aging of its
labor force, higher wage bills, and recent major supply chain disruptions, it has become more important to understand the
consequent trade and investment effects and their possible longer-term implications for Indonesia.
Prior to the Deal, trade tensions had been escalating for a period of two years. These tensions, along with the increases in tariffs
and the ensuing increase in global policy uncertainty, have all weighed on world trade and investment. Global trade growth slowed
to 0.8 percent in 2019, the weakest pace by far since the Global Financial Crisis2. At the same time, global investment growth also
declined to 2.3 percent in 2019, the lowest since 2016.3
According to the Phase One agreement, China will increase its imports from the United States by an additional USD 77 billion in
2020 and USD 123 billion in 2021, totaling to USD 200 billion, compared to 2017 levels. China imported over USD 185 billion
in total U.S. goods and services that year. The deal covers additional imports in agriculture (USD 32 billion), manufacturing (USD
77.7 billion), services (USD 37.9 billion), and energy (USD 52.4 billion) over the period February 14, 2020 to December 31, 2021.4
Trade and FDI Diversion Effects due to Heightened Trade Tensions
Slower global trade and the protracted heightened policy Table A.5.1: Companies in China preferred relocation
uncertainty have impacted the East Asia and Pacific (EAP) destination
region. Regional exports growth is estimated to have slowed to Locations Responses Percentage
1.9 percent in 2019, after reaching 9.4 and 4.9 percent in 2017 Southeast Asia 59 24.7
and 2018, respectively. Regional fixed investment was also Mexico 25 10.5
subdued, growing by 4.3 percent in 2019, lower than the 4.7 Indian Subcontinent
(India, Bangladesh, 20 8.4
percent and 5.1 percent increase in 2017 and 2018, respectively.5
Pakistan, Sri Lanka)
Elsewhere 15 6.3
In the face of higher tariffs and increased uncertainty, the U.S.– United States 14 5.9
China trade tensions are likely to have contributed to trade and East Asia 10 4.2
Foreign Direct Investment (FDI) diversion effects, where Europe 9 3.8
companies operating in China relocated operations away from No plans to relocate
144 60.3
China, especially to neighboring countries in Southeast Asia.6 A manufacturing facilities
joint survey conducted by AmCham Shanghai and AmCham Source: American Chamber of Shanghai and China Joint Survey on
China in May 2019 showed that 40.7 percent of respondents Tariffs
were considering relocating manufacturing facilities outside China and that Southeast Asia was the preferred destination (24.7
percent), followed by Mexico (10.5 percent) (Table A.5.1).7 Accordingly, USD 31 billion of U.S. manufacturing imports were
diverted from China to other Asian countries in 2019, of which 46 percent were absorbed by Vietnam.8 This diversion
contributed to Vietnam exporting an additional USD 14 billion worth of manufactured goods to the United States in 2019
compared to 2018.9
Apart from Vietnam, there was also some evidence of trade diversion effects from China to Thailand and Indonesia. The specific
goods categories for which U.S imports from China decreased but U.S. imports from Indonesia, Thailand, and Vietnam increased
include inedible crude materials (excluding fuels), machinery and transport equipment, and miscellaneous manufactured articles
(Figure A.5.1). At the same time, Vietnam saw a large increase in direct investment from China, growing by 64.8 percent to USD
4.1 billion of FDI inflows in 2019, up from USD 2.4 billion in 2018. Vietnam received large investments from China partly due
to its trade liberalization efforts and favorable investment climate, which has supported Vietnam’s relatively high integration into
global value chains (GVCs).10 Vietnam’s GVC integration is found to be diversified across manufacturing sectors, including basic
and fabricated metals, chemicals and chemical products, electrical and optical equipment, transport equipment, machinery, and
rubber and plastics.11
Aside from GVC integration, Vietnam also offers competitive costs and close geographical proximity to China, which helps the
country to be a prominent option for companies in China to relocate their production bases to.12 These factors have all contributed
support for increased direct investment from China to Vietnam (Figure A.5.2). Likewise, Thailand experienced a similar FDI surge
from China in 2019 with, in particular, the Thailand Plus relocation policy package contributing to luring firms from China to
relocate their production to Thailand.13 Similarly, China’s FDI realization into Indonesia in 2019 almost doubled to USD 4.7
billion or 16.8 percent of total realized investment, from 2018.14
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The Long Road to Recovery Indonesia Economic Prospects
Figure A.5.1: Select categories of U.S. good imports from Figure A.5.2: Direct investment from China surged in
Vietnam, Thailand, and Indonesia increased in 2019 2019
(U.S. goods import growth by source country and goods category, 2019, (Realized direct investment from China into destination country, USD
percent, yoy) billion)
90% China Indonesia
6 Thailand Indonesia Vietnam
75% Thailand Vietnam
60%
5 4.7
45%
30% 4.1
15% 4
0%
-15% 3
2.4 2.5 2.4
-30%
Chemicals and Related Crude Materials,
Manufactured Goods
Machinery and Miscellaneous
2
1.0
1
Transport Equipment Manufactured Articles Inedible, Except Fuels
Products
0
2018 2019
Source: CEIC, WB staff calculation Source: CEIC, WB staff calculation
Trade and Investment Diversion Effects due to the Phase One Deal
The Phase One Deal requires China to import more manufacturing, agriculture, services, and energy products from the United
States. As a commodity-exporting country, and with China being a major importer, Indonesia's exports to China are likely to be
affected by this agreement. Coal and LNG are major commodity exports, which reached 53.7 percent and 15 percent of total
mining exports, respectively, for the years 2014-2018. Over the same period, China imported 15.3 percent of its total coal imports
from Indonesia, while coal imports from the United States constituted only 1.6 percent of total Chinese coal imports. Similarly,
China imported 9.2 percent of its total liquefied natural gas (LNG) imports from Indonesia, while LNG imports from the United
States only amounted to 2.6 percent. It is therefore plausible, if not likely, that China will divert a portion of its energy imports
from Indonesia to the United States, particularly coal and natural gas, to meet the commitments of the trade deal, especially in the
face of the COVID-related reduction in coal and natural gas domestic demand in China.15
Figure A.5.3: China is a major importer of Indonesian Figure A.5.4: Indonesia faces increasing export losses
coal from the trade deal
(Indonesia coal exports by destination country, 2015–2019, percent) (estimated drop in Indonesian exports to China from the trade deal,
USD million)
30% 2020 2021
-
25%
-100
20% -200
15.6%
15% -300
10% -400
-500
5%
-600
0% Agriculture
-700
Energy
-800
Manufacturing
-900
Source: CEIC, World Bank staff calculation Source: Reproduced from Cali and Nabil (2020).
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The Long Road to Recovery Indonesia Economic Prospects
China is the second-largest destination for Indonesia’s coal exports after India, and account for 15.6 percent of Indonesia’s total
coal exports during 2015–2019 (Figure A.5.3). Similarly, China is the third most major destination country for Indonesia’s natural
gas exports, after Singapore and Japan. With the Phase One trade
deal, recent estimates indicate that Indonesia’s exports to China are Figure A.5.5: Mining sector investment realization
expected to drop by USD 1.4 billion in 2020–21 as a direct result of in Indonesia, 2015–2019
the agreement and that gas and coal account for almost half of the (percent)
expected export drop (Figure A.5.4).16
Mining and other
Oil, Natural Gas, excavations
Apart from the trade diversion effects from Indonesia to the United and Geothermal 5%
States, the trade deal could also spark investment diversion effects. Mining
If China adheres to the imports from the United States stipulated 9%
in the trade deal for an extended basis beyond 2021, direct
investment in Indonesia could be disrupted, especially for coal and
Mining support
LNG industries. Investment into the coal industry constitutes 26 services
percent of mining sector investment realization from 2015 to 2019 activities Metal Ore
(Figure A.5.5).17 Similarly, investment into the coal industry 10% Mining
accounts for a quarter of Chinese investment in Indonesia over the Coal and 49%
Lignite
same period.18 In the face of potential lower Chinese demand for mining
Indonesian coal and LNG products in the medium term, investors 26%
could decide to scale back investments in coal and LNG industries
on profitability concerns, leading to dimmer prospects for
Indonesia’s coal and LNG industries, pending new substitute Source: CEIC, World Bank staff calculation
export destinations.
1 Aljazeera (June 29, 2020).
2 World Bank (2020a).
3 See World Bank (2020b) and Wall Street Journal (2020).
4 In exchange, the United States agreed to reduce tariffs on Chinese products worth USD 120 billion from 15 percent to 7.5 percent, including flat-panel televisions, Bluetooth headphones,
and footwear. However, the 25 percent U.S. tariffs put in place earlier on Chinese goods worth USD 250 billion will remain immediately unchanged and could be rolled back as part of
a Phase 2 trade negotiation.
5 World Bank (2020a).
6 Nikkei Asian Review (2019), South China Morning Post (2020a).
7 The survey received nearly 250 responses, with industry composition as follows: 61.6 percent from manufacturing-related industries, 25.5 percent from services, 3.8 percent from retail
and distribution, and 9.6 percent from other industries. See Amcham Shanghai (2019).
8 Amcham Shanghai (2020).
9 Forbes (2020).
10 Asian Development Bank (2017), World Bank (2020c).
11 Anukoonwattaka, W and Lobo, R.S. (2019).
12 See ASEAN Briefing (2019).
13 The policy package includes a 50 percent corporate income tax reduction for an additional five years for firms with an investment of at least THB 500 million by 2020 or not less
than THB 1 billion by 2021. See South China Morning Post (2020b) and Thailand Board of Investment (2019).
14 According to the Indonesia Investment Coordination Board (BKPM) data. Badan Koordinasi Penanaman Modal (2020).
15 With the slowdown in its economy this year, China would struggle to fulfill the deal on energy without displacing the energy imports from other exporters outside U.S. See Amcham
Shanghai (2020), International Energy Agency (2020), Straits Times (2020), United States Trade Representative (2020).
16 Indonesia’s LNG exports to China could potentially be lowered by USD 434.8 million (about 12.3 percent of Indonesia’s 2019 natural gas export to China), while coal exports could
fall by USD 233.2 million (about 7.4 percent of Indonesia’s 2019 coal export to China) in 2020–2021. WB staff calculation based on USTR, WITS, and IMF WEO. See Cali and
Ryandiansyah (2020, forthcoming).
17 Using KBLI (Klasifikasi Baku Lapangan Indonesia) 2015 data
18 According to the American Enterprise Institute’s China Global Investment Tracker data, about a quarter of China investment into Indonesia is allocated to the coal industry, totaling
to USD 3.7 billion from 2015 to 2019.
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The Long Road to Recovery Indonesia Economic Prospects
Box B.1: Minimizing externalities from post-crisis economic recovery policies
While far-reaching support is crucial for the economic recovery, it Figure B.1.1: Indonesia has high potential-to-actual
will be important to ensure that such support does not come at the yield ratios, underscoring the opportunity for
expense of Indonesia’s already over-stretched natural assets and local expanding production in the current land base
livelihoods. Instead, green industrial policy offers opportunities to (Indonesia crop potential vs actual yield, (ton/ha))
leverage changing consumer demand that focuses on sustainability
and places greater weight on health-consciousness.
Oil palm (large plantations)
The recently approved revisions to the 2009 Minerals and Coal
Mining Law also illustrate this risk. The revisions introduce an Oil palm (smallholder)
obligation for mining companies to carry out more exploration
activities and removes limitations to such activities aimed at Maize (rainfed)
protecting the natural environment.1 While this strategy may
generate short-term gains in economic activity nationally, it risks
Maize (irrigated)
exacerbating pollution of land and water resources, massive
deforestation and forest degradation2, as well as conflict over access
to land with local communities.3 In addition, the expansion of coal Rice (rainfed)
production – the main mining product in Indonesia – would not Potential yield
bode well with the trends in global demand for clean energy and, if Rice (irrigated) Current yield
continued to be used for domestic energy production, will further
contribute to the pollution problem in Indonesia.4 0 20 40 60
Source: Yield Gap Atlas; World Bank staff calculations
Pressure on land is also building. This is due to the need to
accommodate the increasing shift of workers towards agriculture in response to the COVID-19 shock, and to the objective of
achieving food self-sufficiency, particularly in rice, in response to possible global food shortages. This target is driving plans to
convert additional land for agriculture, such as the Ex-Mega Rice Project (EMRP) area in Central Kalimantan, which includes
between 250,000 and 300,000 hectares of peatland. Because peat areas are unsuitable for rice cultivation, the benefits are likely to
be limited. On the other hand, deep peat areas are important carbon sinks and the conversion of peatland for agriculture generates
large negative spillovers in Indonesia through forest and land fires, pollution, peatland degradation, and destruction of biodiversity.5
Preliminary World Bank estimates suggest that restoring peatland would have large multiplier effects associated with increased
agricultural production and would also greatly reduce the risk of fires and related costs to the economy. The analysis estimates
large economy-wide returns from such investments: an initial investment of USD 1 in restoration may yield a combined return of:
a USD 1.61 increase in value added, a USD 2 sustained increase in value added resulting from the extra production in the restored
peatlands, and a USD 0.85 reduction in the social cost of peat degradation, as lower fire risks would result in lower carbon
emissions, lower loss of natural assets, and reduced impacts on health.
A more effective strategy to increase agricultural production both for commercial and food security purposes would be to increase
the productivity of existing agricultural land. There is great potential to increase agricultural yields across both cash and food crops
(Figure B.1.1). To that end, reallocation of wasteful fertilizer subsidies toward investments in extension services could ensure a
better match of crop choice with land suitability, enhance seed quality, and reduce post-harvest loss. It would also build human
capital in agriculture, helping to modernize this key sector.
Similarly, the increasing demand for clean energy sources along with the large untapped potential of the renewables make the
sector another ideal target for the expansion of investments in Indonesia even in the short run. The Ministry of Energy and Mineral
Resources estimates 168.6 GW of renewable energy potential in Indonesia (from solar, geothermal, wind, hydro and others), of
which roughly 6.4 percent has been installed so far. Solar energy is a case in point. Technology advances in photovoltaic cells
(PVC) have made solar power more competitive vis-à-vis fossil-fuel-derived energy globally6 and new generations of batteries are
making solar an increasingly more stable source of energy supply. Estimates suggest Indonesia may have close to 50 GW of
potential solar capacity, the vast majority of which is untapped, with a potential to generate 325,000–515,000 jobs.7 Considering
the potentially healthy returns on investments, there is much appetite for private investments in the sector, which could help the
economy in the near term. For that to happen, the Government needs to address a number of bottlenecks, including a revision of
feed-in tariffs, which currently make investments in renewables including solar unviable. Local content requirements for PVC, as
well as regulations dictate that private solar plants are to be transferred to PLN at the end of the power purchase agreements. In
this context, the development of biomass energy, which the Government is pursuing through subsidies for B30 biodiesel, may not
be an equally appealing solution given the possible environmental damage associated with forest conversion to increase palm oil
production.
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The Long Road to Recovery Indonesia Economic Prospects
1 These include the removal of the limit on offshore mineral explorations and the removal of the area limitations for special mining business license areas
(“WIUPKs”) for metal mineral production operation activities and coal production operations.
2 One of the key drivers of deforestation/forest degradation in East Kalimantan was mining, which is highlighted in the Government’s Emission Reductions Program
Document (https://www.forestcarbonpartnership.org/system/files/documents/Revised%20ERPD.pdf).
3 There is increasing evidence of the detrimental effects of mining activities in developing countries, including in Indonesia. On the health effect of mining in
Indonesia, see Bose-O’Reilly et al. (2010). Health assessment of artisanal gold miners in Indonesia. Science of the Total Environment, 408:713-725. On land conflict
generated by mining activities in Indonesia, see World Bank (2014). Towards Indonesian Land Reforms: Challenges and Opportunities. A Review of the Land Sector (Forest
and Non-forest) in Indonesia. DOI: 10.13140/RG.2.2.16062.02883. On the negative pollution and economic impact of mining activities on local communities
globally, see Aragon, F. and J.-P. Rud (2016). Polluting Industries and Agricultural Productivity: Evidence from Mining in Ghana, The Economic Journal, 126 (597):
1980 – 2011; and von der Goltz, Jan & Barnwal, Prabhat, 2019. Mines: The local wealth and health effects of mineral mining in developing countries, Journal of
Development Economics, 139(C): 1-16.
4 The heavy exploitation of coal for energy and exports has contributed to air pollution and respiratory diseases due to pollution, which could cause 238 premature
deaths/million people per year and cost up to USD 805 billion between 2012 and 2030 (Bloom et al. (2015). The economics of non-communicable diseases in Indonesia.
Geneva: World Economic Forum (WEF).
5 Preliminary World Bank analysis suggests that the value added from the conversion of an additional hectare of peatland to agriculture could be 50 percent lower
than the social costs in terms of loss of natural assets (forest, agricultural areas), carbon emission, and health impact.
6 Various bottlenecks make solar production relatively costlier than global standards, but still cost-effective once positive spillovers such as reduced carbon
emissions and lower health impacts from air pollution are accounted for (IISD, 2019).
7 World Bank (2018). Indonesia: Creating Climate Markets, Nurturing Green Industries. Mimeo.
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The Long Road to Recovery Indonesia Economic Prospects
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APPENDIX: A SNAPSHOT OF INDONESIAN ECONOMIC INDICATORS
Appendix Table 1: Budget outcomes
(IDR trillion)
2012 2013 2014 2015 2016 2017 2018 2019
Actual Actual Actual Actual Actual Actual Actual Actual
A. State revenue and grants 1,338 1,439 1,550 1,508 1,556 1,666 1,944 1,961
1. Tax revenue 981 1,077 1,147 1,240 1,285 1,344 1,519 1,546
2. Non-tax revenue 352 355 399 256 262 311 409 409
B. Expenditure 1,491 1,651 1,777 1,807 1,864 2,007 2,213 2,309
1. Central government 1,011 1,137 1,204 1,183 1,154 1,265 1,455 1,496
2. Transfers to the regions 481 513 574 623 710 742 758 813
C. Primary balance -53 -99 -93 -142 -126 -124 -11 -72
D. SURPLUS / DEFICIT -153 -212 -227 -298 -308 -341 -269 -349
(percent of GDP) -1.9 -2.3 -2.1 -2.6 -2.5 -2.5 0.0 -2.2
Source: MoF; World Bank staff calculations
Note: Budget balance as percentage of GDP uses the revised and rebased GDP
Appendix Table 2: Balance of payments
(USD billion)
2018 2019 2020
2017 2018
Q3 Q4 Q1 Q2 Q3 Q4 Q1
Balance of payments 11.6 -7.1 -4.4 5.4 2.4 -2.0 0.0 4.3 -8.5
Percent of GDP 1.1 -0.7 -1.7 2.1 0.9 -0.7 0.0 1.5 -3.1
Current account -16.2 -30.6 -8.4 -9.5 -6.6 -8.2 -7.5 -8.1 -3.9
Percent of GDP -1.6 -2.9 -3.2 -3.7 -2.5 -2.9 -2.6 -2.8 -1.4
Trade balance 11.4 -6.7 -2.2 -4.1 -0.3 -1.3 -0.9 -1.7 2.5
Net income & current transfers -27.6 -23.9 -6.2 -5.4 -6.3 -6.9 -6.6 -6.4 -6.4
Capital & Financial Account 28.7 25.2 4.0 15.9 9.9 6.8 7.5 12.6 -2.9
Percent of GDP 2.8 2.4 1.5 6.2 3.7 2.4 2.6 4.4 -1.1
Direct investment 18.5 12.5 4.5 0.9 6.0 5.8 5.2 3.2 3.5
Portfolio investment 21.1 9.3 -0.1 10.5 5.2 4.6 4.9 7.1 -5.8
Other investment -10.7 3.3 -0.5 4.7 -1.4 -3.6 -2.7 2.4 -0.5
Errors & omissions -0.9 -1.7 0.0 -1.0 -0.8 -0.5 0.0 -0.3 -1.7
Foreign reserves* 130.2 120.7 114.8 120.7 124.5 123.8 124.3 129.2 121.0
Source: Ministry of Finance, Republic of Indonesia; World Bank staff calculations
Note: *Reserve at end-period
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Appendix Table 3: Indonesia’s historical macroeconomic indicators at a glance
2000 2011 2012 2013 2014 2015 2016 2017 2018 2019
National Accounts (% change)1
Real GDP 4.9 6.2 6.0 5.6 5.0 4.9 5.0 5.1 5.2 5.0
Real investment 11.4 8.9 9.1 5.0 4.4 5.0 4.5 6.2 6.6 4.4
Real consumption 4.6 5.1 5.4 5.7 4.7 4.9 4.3 4.6 5.1 4.9
Private 3.7 5.1 5.5 5.5 5.3 4.8 5.0 5.0 5.1 5.2
Government 14.2 5.5 4.5 6.7 1.2 5.3 -0.1 2.1 4.8 3.2
Real exports, GNFS 30.6 14.8 1.6 4.2 1.1 -2.1 -1.7 8.9 6.5 -0.9
Real imports, GNFS 26.6 15.0 8.0 1.9 2.1 -6.2 -2.4 8.1 11.9 -7.7
Investment (% GDP) 19.9 31.3 32.7 32.5 32.4 32.4 32.2 32.6 33.0 32.8
Nominal GDP (USD billion) 165 893 918 915 891 861 932 1,016 1,042 1,119
3,68
GDP per capita (USD) 857 3,741 3,668 3,532 3,368 3,605 3,886 3,945 4,193
8
Central Government Budget (% GDP)2
Revenue and grants 13.9 15.5 15.5 15.1 14.7 13.1 12.5 12.3 13.1 12.4
Tax revenue 7.8 11.2 11.4 11.3 10.9 10.8 10.4 9.9 10.2 9.8
Non-tax revenue 6.0 4.2 4.1 3.7 3.8 2.2 2.1 2.3 2.8 2.6
Expenditure 15.0 16.5 17.3 17.3 16.8 15.7 15.0 14.8 14.9 14.6
Consumption 2.7 3.8 3.9 4.1 4.0 4.5 4.6 4.4 4.7 4.5
Capital 1.7 1.5 1.7 1.9 1.4 1.9 1.4 1.5 1.2 1.1
Interest 3.4 1.2 1.2 1.2 1.3 1.4 1.5 1.6 1.7 1.7
Subsidies 4.2 3.8 4.0 3.7 3.7 1.6 1.4 1.2 1.5 1.3
Budget balance -1.1 -1.1 -1.8 -2.2 -2.1 -2.6 -2.5 -2.5 -1.8 -2.2
Government debt 97.9 23.1 23.0 24.9 24.7 27.5 28.3 29.4 29.8 30.2
o/w external government debt 51.4 11.7 11.9 11.8 13.3 16.0 16.6 17.5 17.6 17.9
Total external debt (including private
87.1 25.2 27.5 29.2 32.9 36.1 34.3 34.7 36.0 35.9
sector)
Balance of Payments (% GDP)3
Overall balance of payments .. 1.3 0.0 -0.8 1.7 -0.1 1.3 1.1 -0.7 0.4
Current account balance 4.8 0.2 -2.7 -3.2 -3.1 -2.0 -1.8 -1.6 -2.9 -2.7
Exports GNFS 42.8 23.8 23.0 22.5 22.3 19.9 18.0 19.1 20.3 17.9
Imports GNFS 33.9 21.2 23.2 23.2 22.7 19.3 17.1 18.0 21.0 18.3
Trade balance 8.9 2.7 -0.2 -0.7 -0.3 0.6 0.9 1.1 -0.6 -0.4
Financial account balance .. 1.5 2.7 2.4 5.0 2.0 3.1 2.8 2.4 3.3
Direct investment -2.8 1.3 1.5 1.3 1.7 1.2 1.7 1.8 1.2 1.8
Gross official reserves (USD billion) 29.4 110 113 99 112 106 116 130 121 129
Monetary (% change)3
GDP deflator1 20.4 7.5 3.8 5.0 5.4 4.0 2.4 4.3 3.8 1.6
Bank Indonesia benchmark policy rate
.. .. .. .. .. 6.3 4.8 4.3 6.0 5.0
(%)
Domestic credit (eop) .. 24.6 23.1 21.6 11.6 10.4 7.9 8.2 11.8 6.1
Nominal exchange rate (average, 8,77 10,46 11,86 13,38 13,30 13,38 14,23 13,40
8,392 9,384
IDR/USD) 6 0 9 9 9 1 8 3
Prices (% change)1
Consumer price Index (eop) 9.4 3.8 3.7 8.1 8.4 3.4 3.0 3.6 3.1 2.6
Consumer price Index (average) 3.7 5.3 4.0 6.4 6.4 6.4 3.5 3.8 3.2 4.8
Indonesia crude oil price (USD per barrel,
28 112 113 107 60 36 51 61 55 67
eop)4
Source: 1 BPS and World Bank staff calculations, using revised and 2010 rebased figures. 2 MoF and World Bank staff calculations, 3 BI, 4 CEIC
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Appendix Table 4: Indonesia’s development indicators at a glance
2000 2011 2012 2013 2014 2015 2016 2017 2018 2019
Demographics 1
Population (million) 212 245 248 252 255 258 262 265 268
Population growth rate (%) 1.4 1.3 1.4 1.3 1.3 1.3 1.2 1.2 1.1 ..
Urban population (% of total) 42 51 51 52 53 53 54 55 55 ..
Dependency ratio (% of working-age population) 55 51 50 50 49 49 49 48 48 ..
Labor Force2
Labor force, total (million) 98 117 120 120 122 122 125 128 131 134
Male 60 73 75 75 76 77 77 79 80 82
Female 38 44 46 45 46 46 48 49 51 51
Agriculture share of employment (%) 45 36 35 35 34 33 32 30 29 27
Industry share of employment (%) 17 21 22 20 21 22 21 22 23 23
Services share of employment (%) 37 43 43 45 45 45 47 48 48 49
Unemployment, total (% of labor force) 8.1 7.4 6.1 6.2 5.9 6.2 5.6 5.5 5.4 5.3
Poverty and Income Distribution3
Median household consumption (IDR 000 per month) 104 421 446 487 548 623 697 765 835 ..
National poverty line (IDR 000 per month) 73 234 249 272 303 331 354 375 402 441
Population below national poverty line (million) 38 30 29 28 28 29 28 28 26 25
Poverty (% of population below national poverty line) 19.1 12.5 12.0 11.4 11.3 11.2 10.9 10.6 9.8 9.2
Urban (% of population below urban poverty line) 14.6 9.2 8.8 8.4 8.3 8.3 7.8 7.7 7.0 6.6
Rural (% of population below rural poverty line) 22.4 15.7 15.1 14.3 14.2 14.2 14.1 13.9 13.2 12.6
Male-headed households 15.5 10.2 9.5 9.2 9.0 9.3 9.0 8.7 6.4 ..
Female-headed households 12.6 9.7 8.8 8.6 8.6 11.1 9.8 9.3 6.6 ..
Gini index 0.30 0.41 0.41 0.41 0.41 0.41 0.40 0.39 0.39 0.38
Percentage share of consumption: lowest 20% 9.6 7.4 7.5 7.4 7.5 7.2 7.1 7.0 7.0 ..
Percentage share of consumption: highest 20% 38.6 46.5 46.7 47.3 46.8 47.3 46.2 45.7 45.4 ..
Public expenditure on social assistance (% of GDP)4 .. 0.5 0.5 0.7 0.6 0.8 0.7 0.7 0.7 0.7
Health and Nutrition1
Physicians (per 1,000 people) 0.2 .. 0.3 0.3 .. 0.3 .. 0.4 0.4 ..
Under five mortality rate (per 1000 children under 5 years) 52 33 32 30 29 28 27 26 25 ..
Neonatal mortality rates (per 1000 live births) 23 17 16 16 15 14 14 13 13 ..
Infant mortality (per 1000 live births) 41 27 26 25 24 24 23 22 21 ..
Maternal mortality ratio (modeled est., per 100,000 live
272 221 214 207 199 192 184 177 .. ..
births)
Measles vaccination (% of children under 2 years) 76 80 82 81 75 75 76 75 75 ..
Public health expenditure (% of GDP) 0.7 0.9 1.0 1.0 1.1 1.2 1.4 1.4 1.4 ..
Education3
Primary net enrollment rate (%) .. 92 93 92 93 97 97 97 98 98
Female (% of total net enrollment) .. 49 49 50 48 49 49 49 49 49
Secondary net enrollment rate (%) .. 60 60 61 65 66 66 79 79 79
Female (% of total net enrollment) .. 50 49 50 50 51 51 49 49 50
Tertiary net enrollment rate (%) .. 14 15 16 18 20 21 19 19 19
Female (% of total net enrollment) .. 50 54 54 55 56 55 53 53 52
Adult literacy rate (%) .. 91 92 93 93 95 95 96 96 96
Public spending on education (% of GDP)5 .. 3.3 3.3 3.3 3.3 3.5 3.4 3.1 3.0 ..
Public spending on education (% of spending)5 .. 18.9 17.9 17.3 17.4 19.3 20.0 20.0 20.0 ..
Water and Sanitation1
Access to at least basic drinking water services (% of
76 85 86 87 87 88 89 89 .. ..
population)
Urban (% of urban population) 90 93 94 94 94 95 95 95 .. ..
Rural (% of rural population) 66 76 77 78 79 80 81 82 .. ..
Access to at least basic sanitation facilities (% of
41 62 64 66 67 69 71 73 .. ..
population)
Urban (% of urban population) 63 74 75 76 77 78 79 80 .. ..
Rural (% of rural population) 25 50 52 54 57 59 62 65 .. ..
Others6
Proportion of seats held by women in national parliament
8 18 19 19 17 17 17 20 20 17
(%)
Source: World Development Indicators; BPS (Sakernas); BPS (Susenas) and World Bank; MoF and World Bank staff calculations. Social assistance
1 2 3 4
includes spending on Raskin, health insurance for the poor, scholarship for the poor, family hope program (PKH), cash for work (PKT, 2018), and
remaining MOSA and social protection function expenditures and actuals; 5 MoF; 6 Inter-Parliamentary Union.
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