IMF Concludes Article IV With Indonesia

by Ulrika Lomas, Tax-News.com, Brussels

31 July 2009

On July 28, 2009, the Executive Board of the International Monetary Fund (IMF) announced the conclusion of its Article IV consultation with Indonesia.

Indonesia entered the current global crisis with strong initial conditions. Aided by a generally favorable global economic climate that prevailed prior to the recent crisis, Indonesia’s fundamentals were strengthened through sound macroeconomic policy implementation, including prudent debt management and developing a sound financial sector, according to the IMF. Economic growth averaged about 6% since 2005, fiscal performance was strong, the current account was in surplus, both public and external debt dropped to about 30% of GDP, and international reserves rose to a relatively comfortable level.

Notwithstanding the initial impact of the global crisis, the economy has rebounded in 2009, says the IMF. During the last quarter of 2008, various factors – falling commodity prices, liquidity problems in some segments of the banking sector, default by a private sector conglomerate on its obligations, and general global risk aversion – led to a sharp deterioration in market conditions. However, with relatively strong corporate and banking sector balance sheet positions, high capitalization and profitability of the banking system, and a series of mitigating policy measures, the economy was able to absorb the impact of the crisis. These factors, combined with the stronger than expected recovery in Q1 of 2009, have boosted domestic and foreign investor confidence, notes the IMF.

The economy’s resilience to the weak global conditions was evident in the stronger than expected GDP growth in Q1 of 2009 that was supported by particularly strong consumption, as private consumption benefited from a large election-related spending stimulus. External accounts also improved in Q1 as the current account was positive from a non-oil trade surplus and the financial account registered a surplus due to demand for sovereign debt securities. CPI inflation has decelerated rapidly since October 2008 reflecting the weaker economic conditions as well as falling commodity prices.

Executive Board Assessment

In its recommendations, the IMF welcomed policy responses taken to cushion the country’s economy during the economic crisis, and urged the government to maintain some of its stimulus package in 2010. The IMF welcomed measures taken by the authorities in fiscal reforms toward a consolidated Treasury Single Account, simplified budget execution procedures, and strengthened cash management. The IMF recommended that the authorities build on the momentum of past reform efforts to enhance budget flexibility and improve public resource management. Further strengthening tax administration and lowering energy subsidies would help create fiscal space for priority infrastructure and social expenditures, concluded the IMF.

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