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THE recent presidential election gives Indonesia's new administration an opportunity to ready the country for a strong economic take-off. To do so, it has to steer the country into the next generation of economic reforms. The question is how to make that happen.
First some background: The International Monetary Fund (IMF) recently concluded its annual consultation with Indonesia on the country's economic policies and outlook, part of the IMF's so-called the Article IV process. The consultation showed that Indonesia's recent economic performance has been one of the few bright spots in the mostly cloudy global economic outlook. It has emerged relatively well from the global financial turmoil, as evidenced by its economic performance so far this year. Indonesia's performance is behind only two other economic giants - China and India - among the G-20 countries.
How did this come about? Indonesia entered the global financial crisis from a strong position. Its economic fundamentals were bolstered by the sound implementation of macroeconomic policies, and strengthened by positive corporate and banking sector balance sheets. As a result, economic growth averaged 6 per cent from 2005 to last year; fiscal performance was strong; the current account was in surplus; both public and external debt were halved in the last five years to about 30 per cent of GDP; and the country's international reserves were increased.
To be sure, Indonesia's financial markets were adversely impacted by the recent global financial crisis. Recovery, however, was quick. Domestic and foreign investor confidence has been restored, thanks to the strength of Indonesia's corporations and banks, as well as the quick policy actions taken by the government and central bank Bank Indonesia to mitigate the economic fallout. The faster-than-expected economic growth in the first quarter also helped.
What explains Indonesia's recent resilience in growth? Unlike some of its export-dependent Asean peers, the underlying source of its growth has been the strength of domestic consumption, which is about two-thirds of the economy.
This is not to say that Indonesia is immune to developments in external markets. Indeed, Indonesia's exports have been falling along with the rest of the region's. However, like the case in India, Indonesia's domestic demand growth has provided a buffer and kept growth positive. Most observers project that Indonesia's GDP will grow in the 3-4 per cent range this year.
Does the recent success provide reason for complacency? Hardly. Several challenges remain. The near-term macroeconomic policy mix will be especially critical in supporting continued growth in a volatile global economic environment, protecting macroeconomic and financial sector stability and safeguarding the gains made so far. In particular:
In the medium to long term, there is tremendous scope for Indonesia to build on its existing reform programmes and sustain high growth. Investing in better infrastructure will improve efficiency, promote rural development and result in faster growth. On the fiscal side, continued reforms to reduce energy subsidies and bolster the non-commodity tax base will enable the government to expand transfer programmes and social services to the poor while keeping debt low. Enhancing monetary policy credibility will narrow bond spreads and reduce market volatility, and thereby promote private investment. Lastly, developing financial sector regulation and supervision capacity will result in a sound financial system able to support growth.
The dividends from Indonesia's reforms to date are clear in terms of its macroeconomic and financial stability as well as the solid economic growth it has achieved. Now is the time to advance the reform momentum and continue Indonesia's development as one of the leading economies in Asia.
Thomas Rumbaugh is division chief in the Asia Pacific Department and mission chief for Indonesia at the IMF. Uma Ramakrishnan is the senior desk economist for Indonesia at the IMF.
Indonesia has emerged relatively well from the global financial turmoil...The near-term macroeconomic policy mix will be especially critical in supporting continued growth in a volatile global economic environment, protecting macroeconomic and financial sector stability and safeguarding the gains made so far.
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