Key reforms are underway in Indonesia, however rapid economic growth is unlikely before 2016 without strengthening investment growth, according to a recent World Bank report.
A fall in global commodity prices amid a slowdown in China has impacted Indonesia’s growth outlook, according to the March 2015 edition of the Indonesia Economic Quarterly (IEQ), titled ‘High Expectations’.
According to the report, doubling government spending on infrastructure can help boost demand and accelerate fixed investment spending, however much more is needed, and effective implementation is crucial.
“The Government of Indonesia deserves praise for the fuel subsidy reforms and subsequent budget reallocations to infrastructure spending. But lower oil prices and weak tax compliance have eroded the savings from subsidy reform, requiring sustained public policy action at this time of high expectations. In the long term, Indonesia would benefit from improving revenue collection, including from the non-oil sector,” says Rodrigo Chaves, World Bank Country Director for Indonesia.
In Indonesia, domestic consumption continues to be the main driver of economic growth. However risks that are posed by relatively tight credit, higher import costs, and profit margin pressures could dampen its domestic spending and investment, the report said.
Further improving the investment climate and Indonesia’s competitiveness could help boost market sentiment, the report said.
“Accelerating fixed investment spending will strengthen Indonesia’s economy, and private sector involvement in this endeavor is key. The establishment of the ‘One Stop Shop’ for business licensing at the Investment Coordinating Board (BKPM) is a step in the right direction. But full implementation will not be require some time,” says Ndiame Diop, World Bank Lead Economist for Indonesia.
For Indonesia’s considerable natural wealth to play a stronger role in development, effective public management of these resources – and a sound policy framework for regulation – will be critical, the report concluded.
Read the full report from the World Bank, Indonesia Economic Quarterly: ‘High Expectations’
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