Indonesia Needs to Pursue Structural Reforms Amid Widening Current Account Deficit

JAKARTA, INDONESIA – Indonesia’s growth is expected to dip slightly in 2014 before recovering next year, says Asian Development Bank’s (ADB’s) flagship annual economic publication Asian Development Outlook 2014 (ADO), released today.

“ADB forecasts that Indonesia’s economic growth will soften slightly to 5.7% in 2014, before picking up to 6.0% in 2015,” said Adrian Ruthenberg, ADB’s Country Director for Indonesia. “The forecast assumes that parliamentary elections in April and presidential elections in July go smoothly, and steps will be taken to improve the investment environment.”

Private consumption is expected to remain strong throughout the forecast period assisted by easing inflation and election-related spending in the first half of 2014. Growth in fixed investment in 2014 is predicted to remain similar to last year. Meanwhile, investment is forecast to pick up in 2015 after the newly elected government clarifies its policies and likely accelerates investment in infrastructure. Investment prospects will improve on considerably lower inflation and current account deficits projected for 2015, as well as on strengthening world trade.

Reducing Indonesia’s current account deficit will remain a challenge in 2014 and beyond. To address this challenge, Indonesia’s government has taken steps to slow domestic demand, spur exports, and dampen imports, together with the rupiah’s depreciation. Nevertheless, the impact may be relatively short-lived. Longer-term strengthening of the current account requires structural reforms to achieve sustained gains in productivity and competitiveness.

ADO notes that one such reform is the phasing out of fuel subsidies. In this regard, the government took the right step in this direction in 2013 and should sustain its commitment towards market-based fuel pricing in the years ahead. Further reduction in subsidies would free up substantial budget funding for infrastructure, education, and social security which is needed to render the country’s growth more equitable.

To stimulate more private investment in infrastructure and complement the government’s limited budget should be another priority for the next government. To do this policy reforms to improve the investment climate will attract a steady inflow of foreign investment. This will help reduce the current account deficit over the longer term, and spur technological innovation to improve productivity and competitiveness.