World Bank Revises Indonesia's Economic Growth Projection

KATADATA - The World Bank has revised the projection of Indonesia’s economic growth from 5.3 percent to 5.1 percent because of the government’s overdependence on fiscal expansion. According to World Bank Country Director for Indonesia Rodrigo Chaves, something more than fiscal expansion will be needed to boost economic growth amid the current global challenges. 

Rodrigo explained there are two reasons for making the revision. First, it turns out that the global economy condition is in even worse shape than initially predicted. Second, state revenue is lower than initially predicted, which will make it hard for the government to increase spending that could trigger better economic growth.

The World Bank recorded an increase in national government investment of 42 percent in the past year, yet growth in private sector investment remains low. Also, while people’s purchasing power has increased overall, it has not grown as fast as it did last year. (Read: IMF Welcomes Indonesia’s Move to Revise State Budget)

Meanwhile, export and imports are in decline, leading to 14.4 percent drop in revenue from these activities. Revenue from the oil and gas sector has plummeted 42 percent, and revenue from coal and palm oil has shrunk by 26.5 and 19.3 percent, respectively. 

These conditions are expected to persist for the rest of the year, adding to an ever-growing list of risks that, according to the World Bank, will affect the Indonesian economy. (Read: BI Expects Economic Growth Above 5.2% Amid Faster Capital Expenditure)

For these reasons, the World Bank predicts that actual state revenue will be lower than the target set in the 2016 state budget. To maintain the capital spending for keeping the economy vibrant, the government must expand the budget deficit to 2.8 percent of GDP. It will be equally important to cut allocated budgets for non-priority projects or events. 

In Rodrigo’s opinion, investment from the private sector is necessary to boost the state of Indonesia’s economy. “To achieve a strong improvement, investment from the private sector must be strong, and there must be a comprehensive policy reform, as well as continuous efforts to improve the business climate here,” Rodrigo explained. (Read: One Week, Two Rating Agencies Back Indonesia)

Ndiame Diop, the World Bank’s lead economist on Indonesia, said amid low commodity prices, it is crucial to diversify into the manufacturing and services sectors. “Indonesia has a lot of industries that could promote economic growth, and they include manufacturing,” Diop added. The challenge for these sectors, however, is complying with myriad complex regulations.