Stronger Investment and Export Growth Continue to Strengthen Indonesia’s Economy

JAKARTA, December 14, 2017 — The Indonesian economy continued to expand at a solid pace during the third quarter of 2017 helped by commodity tailwinds and stronger domestic and external demand, according to the World Bank’s December 2017 Indonesia Economic Quarterly.

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Real GDP growth increased from 5.0 percent in the second quarter to 5.1 percent in the third quarter of 2017. Investment growth rose to its highest level in more than four years and foreign direct investment recorded the largest net inflow in more than seven years. Export and import volumes registered double-digit growth for the first time since 2012.

“In addition to external factors such as higher commodity prices and stronger global growth, the solid performance of the Indonesian economy was also supported by a better business environment that is attracting more foreign direct investment, as well as more public capital investments, which is the direct positive impact of fuel subsidies reduction two years ago,” said Rodrigo A. Chaves, World Bank Country Director in Indonesia. “This reflects the importance for the Government to persevere in implementing further ambitious reforms such as increasing tax collections and continuing to rationalize subsidies to accelerate infrastructure and human capital development .”

There are also signs that private consumption has started to recover. Sales of consumer durables such as car and motorcycles rebounded, with the latter jumping double-digits in the third quarter after three years of consecutive contractions.

Real GDP growth is projected at 5.1 percent for 2017, accelerating to 5.3 percent in 2018 driven by continued strong investment growth, further recovery in consumption, and an increase in government spending.

Effective government spending is also crucial to economic development. More than half of total government spending across all levels of government in Indonesia is conducted by sub-national governments, with 38 percent managed by district governments and 15 percent by provinces. This substantial allocation of resources to local governments, a product of Indonesia’s decentralization policy since the early 2000s, reflects the primary responsibilities of local governments to deliver basic services, notably health, education and local infrastructure.

Decentralization has increased opportunities for local solutions to local problems. Access to services has improved over the past 15 years of greater decentralization, but service delivery outcomes vary widely among local governments. The report, titled Decentralization that delivers, examines the wide-ranging performance of local governments and identifies mechanisms to help local governments perform better.

“Improving service delivery by local governments requires working on three i’s: more incentives for better performance in spending the resources the central government transfers to districts; more information for citizens and the central government to better monitor local government performance, and more interaction between citizens and businesses and their local governments and service providers to demand better quality,” said Frederico Gil Sander, Lead Economist for the World Bank in Indonesia.

The launch of the December 2017 Indonesia Economic Quarterly is part of Voyage to Indonesia, a series of events leading up to the 2018 IMF-World Bank Annual Meetings in Bali. The Australian Department of Foreign Affairs and Trade supports the publication of the report.

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