Fiscal and monetary policies are focussed on stability. The smaller-than-expected fiscal deficit in 2018 contained the widening of the current account deficit and provided an important signal to investors. During 2019-20, fiscal policy is expected to be broadly neutral. There is ample scope to make the composition of spending more effective and inclusive. Shifting from fuel subsidies, which have increased, to targeted social assistance would benefit poor households. Raising more tax revenue remains a priority to enable higher spending on education, health and social assistance, which would reduce inequality and raise medium-term growth. Higher revenues would also allow a renewed infrastructure drive. Improvements in tax administration are ongoing and are part of the necessary efforts to raise compliance.
Bank Indonesia raised interest rates during 2018 to maintain macroeconomic stability amid escalating risks in global financial markets. It sought to offset the drag on growth through accommodative macroprudential policies, such as relaxing macroprudential liquidity buffers and lifting loan-to-valuation ratios. Non‑performing loans are low but credit quality should be monitored carefully for signs that standards have deteriorated. Monetary policy is likely to remain on hold, which is prudent given current exposures to renewed financial market turmoil. Interest rates could be lowered if vulnerabilities ease significantly.
The authorities have been taking measures to bolster financial system resilience and continue to co‑ordinate policy amongst the responsible authorities. Bank Indonesia is working towards local currency settlement systems with regional trading partners, which will reduce the need for US dollars. It also issued regulations to help enforce hedging requirements for foreign currency exposures. The authorities could encourage borrowers to reduce foreign currency exposures, for instance by borrowing in rupiah. Bank supervisors should remain vigilant against risks in the banking sector. Foreign exchange reserves have risen anew but should be used sparingly to ensure that they are available when needed.
A bold structural reform agenda would raise medium-term growth prospects, improving incomes, and provide a strong signal to financial markets. The government’s recently published “Low Carbon Development Path” highlights the risk to economic and social prospects without action to reduce environmental degradation and pollution. This agenda needs private investment, which in turn requires greater regulatory certainty and lower costs of doing business. Ongoing improvements to the online single submission system are needed, including by incorporating sub-national governments. Administrative price controls are used extensively to contain inflation but have knock-on effects. Low inflation rates offer an opportunity to relax these. The launch of the “One Map Policy”, which created a unified map of land use, was an important step towards improving legal certainty, including for rural households. It should be further developed to improve its accuracy. Easing the process for hiring foreign skilled workers and relaxing the negative investment list would boost foreign investment.
