World Bank: government spending drives Indonesia’s modest growth

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An industrial park

JAKARTA (TheInsiderStories) – The World Bank said  the government spending for infrastructure is driving a modest pick-up in growth in Indonesia, with projected growth to be 5.1 percent for 2016. In order to reach a sustained recovery, more private investment is essential, it said.

Weaker than expected revenue growth and the continued decline in commodity prices poses downside risks to sustained government investment. Robust investments by the private sector will be essential for sustained economic recovery, according to the March 2016 edition of the Indonesia Economic Quarterly.

“Indonesia enjoys a higher growth rate than most commodity exporters, which have been impacted by disappointing global growth. But growth below 6 percent is insufficient to create enough jobs for the 3 million Indonesians entering the work force each year,” says Rodrigo A. Chaves, World Bank Country Director for Indonesia.

“A more solid recovery depends on strong private sector investment, which requires sustained and comprehensive regulatory reforms to improve the business climate,” he noted.

Investments by the central government increased by 42 percent year-on-year in 2015. In contrast, growth in private sector investment remained subdued.

Growth in consumer spending also remained moderate, compared to years past, as high food price inflation curbed spending growth. Export and import volumes continued to decline, and export revenues fell by 14.4 percent relative to 2014. Oil and gas export revenues declined by 42 percent year-on-year, coal revenues by 26.5 percent, and palm oil revenues by 19.3 percent.

The persistent decline of commodities underlines the urgency to diversify the economy, to the manufacturing and services sector, particularly tourism, which can create higher-pay, higher-skilled jobs. But manufacturing has also been hard hit, with exports falling by 13.4 percent year-on-year, and infrastructure development for tourism has been insufficient.

“Indonesia has many industries that can significantly improve growth, including manufacturing,” said Ndiame Diop, World Bank Lead Economist for Indonesia. “But these sectors are still constrained by cumbersome and restrictive regulations. While the government has proposed bold reforms in the last 6 months, more action will hopefully tip investor confidence and boost investment.”

This edition of the IEQ, entitled Private Investment Is Essential, outlines several measures that the government can include in subsequent policy packages, in order to facilitate investment. For example, lowering capital requirements for logistics companies; a centralized review system of trade regulations; and better institutional coordination and public education to increase access to finance.

World Bank said more private sector investment is essential, given the limitations in revenue collection imposed by falling oil and gas revenues, which dipped to only 1.2 percent of GDP in 2015, compared to 3.4 percent in GDP in 2012. The revenue-to-GDP ratio slid to only 13.0 percent of GDP last year.

To increase revenue, the government is undertaking tax policy reforms, strengthening tax administration, and investing in IT and data management systems. But the impact of these reforms will not be overnight.

Meanwhile, Indonesia’s Coordinating Minister for the Economy Darmin Nasution said the government is optimistic that the economy can grow above 5 percent this year. “The answer is yes. That’s our hope. The drivers of the growth is infrastructure development and series of economic packages,” he said, when asked about this year’s economic growth target. (*)

 

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Source: The Insiderstories
World Bank: government spending drives Indonesia’s modest growth

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