ADB Predicts Growth to Continue in Line with Structural Reforms

TEMPO.CO, Jakarta - Indonesia's economic growth is expected to improve over the next two years if the new government can keep up its momentum on structural reforms by applying policies such as reducing fuel subsidies, according to a report released by the Asian Development Bank (ADB) on Tuesday, March 24, 2015.

"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 logistics 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," Edimon added.

The ADB, through its Asian Development Outlook 2015 (ADO) report, projected that Indonesia's gross domestic product (GDP) growth could reach 5.5 percent in 2015 and 6.0 percent in 2016. Previously in 2014, the Indonesian economy managed to grew by 5 percent.

The most recent ADO stated that one of the main drivers of expected growth is the fuel subsidies reduction policy implemented on November 2014, which has greatly improved the country's fiscal outlook and freed up significant resources for more productive purposes, including physical and social infrastructure.

With the subsidy reduction the government is now capable of doubling its capital spending for 2015, increase outlays on targeted education and health programs, and lower the fiscal deficit target to 1.9 percent of the GDP. Other factors cited by the ADB report are higher than expected tax revenues, improved budget implementation, policy reforms to promote private investment, robust private consumption, and a sharp decline in inflation rate.

The ADO report however, also pointed out that revitalizing the manufacturing sector is one of Indonesia's main challenges now that the commodity boom has faded, and that the country needs a new source of export growth to help restore GDP growth of above six percent.

ARK