Indonesia Economic Prospects (IEP), June 2022: Financial Deepening for Stronger Growth and Sustainable Recovery

Full report in English (.pdf) | Summary in Bahasa Indonesia (.pdf) 
Presentation slides on: Indonesia's economy | Indonesia's financial sector  

10 Findings on Indonesia's Economy:

1. The Indonesian economy accelerated at 3.7 percent at the end of 2021 as the country stepped off from the COVID Delta wave. Momentum continued in early 2022 at 5 percent (Year on Year). However, due to the challenging global environment, the country is starting to feel the pressures of rising prices and tightening external finance.
2. Higher energy prices increased agricultural costs resulting in higher food prices. Cooking oil and other food prices have also shot up due to global supply shortages and rising demand. Most firms have resumed operations but operated below capacity. Large firms, export-oriented firms and businesses in high value-added services have recovered more quickly than MSMEs.
3. The budget deficit narrowed in 2021 (from 6.1 percent of GDP in 2020 to 4.6 percent in 2021) thanks to a recovery in revenue and slowing expenditure. Government debt levels rose slightly from 38.6 percent of GDP to 40.7 percent in 2020-2021. The 2022 budget saw a reduction in extraordinary COVID support as the authorities refocussed efforts on healthcare and dealing with the effects of the war in Ukraine.
4. The Indonesian economy is projected to accelerate at 5.1 percent in 2022 and 5.3 percent in 2023 due to the release of pent-up demand, improved consumer confidence, and improved terms of trade. Inflation is projected to rise to 3.6 percent (annual average) with the pick-up in domestic demand and higher commodity prices.
5. The report recommends sustaining structural policy reforms to support growth going forward and reduce reliance on near-term macroeconomic stimulus and energy subsidies to contain cost-push inflation in the short-term, which in turn could help avert sharp monetary tightening that would stifle the domestic recovery.
6. As such, four structural reforms areas could play a bigger role in stimulating the economy: tax reforms to enlarge quality public spending; prioritizing business enabling environment for micro, small and medium enterprises (MSMEs); rethinking trade policies to develop greener downstream industries; and deepening the financial sector.
7. The Indonesian financial sector is suffering from several shortcomings which hold back financial development, and, ultimately, inclusive and sustainable economic growth. As of today, the Indonesian financial sector is relatively small, costly and exposed to global risks, but policymakers have the opportunity to address key binding constraints.
8. Growing the institutional investor base and ensuring access to digital financial services (DFS) can expand the sources of funding. This in turn would enable expanding the lending/usage of financial services for individuals and MSMEs through transaction accounts and DFS. It would also facilitate the development of new sustainable finance market instruments for a transition towards a more sustainable economy.
9. Digital finance, competition, and a sound financial infrastructure play a key role in efficient resource allocation by channeling savings into the most productive investment opportunities in a less costly, faster, safer, and more transparent way. 
10. Financial stability is a crucial enabling factor for the financial sector to perform its key functions of efficiently allocating resources, assessing, and managing risks, and supporting the real economy.