JAKARTA, INDONESIA – Indonesia’s economic growth is expected to accelerate again over the next 2 years if the new government can keep up its momentum on structural reforms such as sharply reducing fuel subsidies, says a new report by the Asian Development Bank (ADB) released today.

“President Joko Widodo’s administration has started policy reforms to improve the investment climate. We expect the government will follow through on policies to accelerate infrastructure development, reduce logistical costs, and enhance budget implementation,” said Edimon Ginting, ADB Deputy Country Director for Indonesia. “There are downside risks, both internal such as lower revenues, and external like the unexpected weakness of major trading partners, as well as an eventual rise in US interest rates, but the government is well prepared to manage those risks.”

In its flagship annual economic publication, Asian Development Outlook 2015 (ADO), ADB projects Indonesia’s gross domestic product (GDP) growth to reach 5.5% this year, and 6.0% in 2016. In 2014, the economy expanded 5.0%.

One of the main drivers of expected growth, according to the latest ADO, will be last November’s cut in fuel subsidies, which has greatly improved the fiscal outlook and freed up significant resources for more productive purposes, including physical and social infrastructure.

Those savings have allowed the government to more than double its capital spending allocation in 2015, increase outlays on targeted education and health programs, and lower the fiscal deficit target to 1.9% of GDP. Other factors cited by the ADB report are higher than expected tax revenues, better budget execution, policy reforms to encourage private investment, robust private consumption, and a sharp decline in inflation.

After 4 years of deceleration, 2014 marked the year when policy reforms to spur economic recovery were pushed by the new government that took office in October. What remains to be seen is if the administration will keep the momentum on those reforms, and develop an export-oriented manufacturing sector.

Reviving manufacturing is one of Indonesia’s main policy challenges now that the commodity boom has faded, and the country needs a new source of export growth to help restore GDP growth above 6%. Manufacturing has been constrained by factors such as strained infrastructure, rupiah appreciation, regulatory uncertainties, and logistics costs. The government plans to address the latter by investing significantly in ports and transportation infrastructure, and to improve the investment climate with a new one-stop investment licensing service.

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members – 48 from the region. 

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