public consumption and exports. This came on the back of a counter-cyclical INDONESIA Key conditions and fiscal and monetary response to the pan- demic, higher commodity prices, and a challenges pick-up in external demand. On the sup- ply side, more than 60 percent of the Table 1 2021 Sound macro fundamentals prior to the contribution to growth in 2021 came Population, million 276.4 pandemic allowed Indonesia to build fi- from the manufacturing, wholesale & GDP, current US$ billion 1186.1 nancial and fiscal buffers to respond to the trade, construction, and telecom sectors GDP per capita, current US$ 4291.8 crisis. However, the country faces several reflecting growing demand especially in a 2.2 International poverty rate ($1.9) long-term structural challenges that can af- sectors less affected by COVID-19 restric- a 18.0 fect the recovery phase. Prudent macro tions. Leading indicators in February al- Lower middle-income poverty rate ($3.2) a 50.2 management has been constrained by low so pointed to sustained recovery in do- Upper middle-income poverty rate ($5.5) Gini index a 37.3 tax effort, shallow financial markets and mestic demand, with Purchasing Manag- School enrollment, primary (% gross) b 106.4 competitiveness challenges. Indonesia has er Index, consumer confidence and retail b 71.7 responded well to the crisis, including in sales improving. Life expectancy at birth, years terms of addressing these challenges Price pressures remained low despite in- Total GHG Emissions (mtCO2e) 1755.8 through structural reforms to boost taxa- flation reaching a 20-month high of 2.1 per- Source: WDI, Macro Poverty Outlook, and official data. tion and investment. cent (yoy) in February. This reflects rising a/ Most recent value (2021), 2011 PPPs. b/ WDI for School enrollment (2018); Life expectancy Indonesia faces short-term cyclical chal- food prices due to restrained supply, high- (2019). lenges that can weigh on the recovery. As er commodity prices, and in line with the COVID-19 may become endemic, a strat- narrowing output gap. Higher tobacco du- egy for accelerating the vaccination pro- ties and adjustment in non-subsidized Indonesia’s economy is recovering sup- gram over a protracted period is needed. LPG prices also raised administered ported by growing commodities exports Risks from US monetary tightening could prices. Nevertheless, the inflation rate re- also increase the cost of external financing, mains within Bank of Indonesia’s target and accommodative fiscal policy. This and rising tensions in Europe is worsening range (2-4 percent). helped reduce poverty closer to pre-pan- the external environment. Meanwhile, em- The external position remained sound demic levels. Medium term growth will ployment and incomes have not returned despite tightening global monetary be supported by rising private consump- to pre-pandemic levels, especially among conditions. Indonesia ended the year vulnerable households, and social assis- with a small current account surplus tion and investment as aggregate de- tance program coverage among targeted of 0.3 percent of GDP, the first since mand picks up and structural reforms groups remains low. 2011. This follows a solid performance start paying off. Downside risks remain by exports (up 46.1 percent) driven by elevated and could derail recovery, in- commodities and manufactured goods. cluding worsening global conditions and The position was supported by a sta- renewed COVID-19 outbreaks. Recent developments ble Real Effective Exchange Rate (REER) and capital flows as well as Growth rebounded from -2.1 percent in improvement in the secondary income 2020 to 3.7 percent in 2021, supported by balance due to government grants for FIGURE 1 Indonesia / Real GDP growth and contributions FIGURE 2 Indonesia / Poverty rate is declining albeit at a to real GDP growth slower pace than pre-pandemic years Percent, percentage points Percent 8 100 PPP USD $1.9 Poverty Rate 6 PPP USD $3.2 Poverty Rate 4 PPP USD $5.5 Poverty Rate 80 2 0 60 -2 -4 40 -6 -8 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 20 Private consumption Government consumption Investment Net exports Stat. discrepancy Change in inventories 0 GDP 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Sources: National Statistics Agency and World Bank. Sources: National Statistics Agency and World Bank. Note: Forecast is from 2021 onwards. MPO 1 Apr 22 COVID-19 support. Foreign reserves are 2022 in line with strengthening growth adequate covering 7.2 months of imports prospects. The recently approved Tax Har- by end 2021. Outlook monization Law will increase tax rates, Fiscal policy has been accommodative to broaden the tax base, facilitate tax compli- offset the pandemic’s fallout. The fiscal A recovery in private consumption and in- ance, and introduce a carbon tax. package has focused on health, social as- vestment supported by structural reforms Poverty is projected to continue falling as sistance, and firms support. This was are expected to boost growth to 5.3 percent the recovery fuels private consumption. made possible by commodity and oil in the medium-term. Net exports will par- However, the pace of decline, based on low- price windfalls that boosted fiscal rev- tially offset this as domestic demand boosts er-middle income countries poverty line of enues to 11.8 percent. The fiscal deficit imports, while exports ease following mod- $3.2 per day in PPP terms, will be halved narrowed from 6.1 to 4.6 percent of GDP eration in external demand. As the output from -3.0 pp/year in pre-pandemic years in 2020-2021. Monetary policy has also gap closes further, inflation is expected to 2014-2019 to -1.5 pp/year going forward been accommodative thus far but may increase over the medium term to 3.3 per- (2019-2024). Whether this progress is tighten going forward in line with tighter cent by 2024, slightly below the upper band achieved depends on the degree to which global financial conditions. The authori- target of the central bank. With improve- the recovery is inclusive of vulnerable ties announced a rise in the reserve re- ments in domestic demand, the outlook groups. Meanwhile, strengthened efforts quirements ratio starting in March 2022, projects a return to a current account deficit. are needed to mitigate the pandemic’s long- although the policy rate has remained However, external financing needs will re- term scarring impacts on productivity and unchanged since February 2021. Private main moderate at 2.2 percent of GDP (aver- inequality through the human capital chan- sector credit increased slightly in recent age 2022-2024) aligned with an increase in nel. Projections indicate large losses in life- months but has remained weak through- FDI. As such, foreign reserves are expected time earnings due to learning losses during out the pandemic. to exceed 7.8 months of imports. widespread school closures in 2020-2021. Poverty continued to decline, getting clos- The fiscal stance is expected to tighten with the Downside risks to the outlook remain ele- er to its pre-pandemic level. In September 2022 fiscal deficit projected at 3.7 percent of vated. Risks are stemming from faster-than- 2021, the poverty headcount rate, based GDP. Consistent with its previous announce- expected global financial tightening and on the national poverty line, fell to 9.7 ments, the government is committed to return contagion effects from EMs that can render percent after peaking at 10.2 percent in tothelegallymandated3percentofGDPdeficit external financing more expensive, pan- 2020. Progress was observed in both ur- by 2023. The consolidation path will be an- demic-related fiscal shocks that could derail ban and rural areas, stemming from em- chored on scaling back the economic recovery pro-growth programs, further scarring with ployment growth in manufacturing, program and on boosting domestic revenue implications on productivity and competi- wholesale & trade, as well as in the food mobilization. The recovery spending will ease tiveness, and changing global demand and and accommodation sectors. from4.0percentofGDPin2021to2.6percentin inflation related to the Russia-Ukraine war. TABLE 2 Indonesia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 5.0 -2.1 3.7 5.1 5.3 5.3 Private Consumption 5.2 -2.7 2.0 4.7 5.0 5.2 Government Consumption 3.3 2.0 4.2 1.4 1.5 4.4 Gross Fixed Capital Investment 4.5 -5.0 3.8 5.6 6.4 6.5 Exports, Goods and Services -0.5 -8.1 24.0 14.7 10.3 8.3 Imports, Goods and Services -7.1 -16.7 23.3 14.9 11.0 10.0 Real GDP growth, at constant factor prices 5.0 -1.6 3.3 5.2 5.3 5.3 Agriculture 3.6 1.8 1.8 3.8 3.9 3.9 Industry 3.8 -2.8 3.4 4.1 4.4 4.4 Services 6.4 -1.5 3.6 6.6 6.4 6.5 Inflation (Consumer Price Index) 2.8 2.0 1.6 2.7 3.1 3.3 Current Account Balance (% of GDP) -2.7 -0.4 0.3 -0.9 -1.4 -1.9 Net Foreign Direct Investment (% of GDP) 1.8 1.3 1.4 1.6 1.8 1.9 Fiscal Balance (% of GDP) -2.2 -6.1 -4.6 -3.7 -3.0 -3.0 Debt (% of GDP) 30.0 39.3 40.7 42.9 43.2 43.4 Primary Balance (% of GDP) -0.5 -4.1 -2.6 -1.5 -0.6 -0.5 a,b International poverty rate ($1.9 in 2011 PPP) 2.7 2.3 2.2 1.7 1.4 1.1 a,b Lower middle-income poverty rate ($3.2 in 2011 PPP) 19.9 18.8 18.0 16.0 14.2 12.6 a,b Upper middle-income poverty rate ($5.5 in 2011 PPP) 52.2 51.0 50.3 47.9 45.5 43.2 GHG emissions growth (mtCO2e) 2.4 -0.8 1.4 1.9 1.9 1.8 Energy related GHG emissions (% of total) 34.5 34.0 34.7 35.7 36.7 37.6 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on EAPPOV harmonization, using 2011-SUSENAS and 2021-SUSENAS.Actual data: 2021. Forecastss are from 2022 to 2024. b/ Projection using annualized elasticity (2011-2021) with pass-through = 1 based on GDP per capita in constant LCU. MPO 2 Apr 22