Indonesia's minister of finance discusses the country's efforts to achieve a sustainable growth path. Budget reforms and fiscal stimulus have already been pushed through. But to tackle the question of poor infrastructure, the government needs more than increased investment.

During the 'taper tantrum' in mid-2013, the prolonged weak performance of the global economy and uncertainties in the global financial market created risks for many economies. Weak global demand together with the downward trend of the commodity market put pressure on some countries’ current account deficit, slowed growth projections, increased inflation pressure, or brought about a combination of these three. 

In Indonesia’s case, thanks to the concerted efforts of the Ministry of Finance, the central bank and the financial service authorities, the economy was able to survive the 2013 turbulence quite well. At that time, we worked very hard to manage external pressures so that they would not strain our economic potential further. Several key policies were introduced to achieve this, including a subsidised fuel price adjustment, a more accommodative policy by the central bank, and tax breaks to certain industries.

By the end of 2013, those policies had worked quite effectively, as indicated by an improvement in our trade balance followed by a lower current account deficit. Pressures on the financial markets had also softened. Foreign reserves that were once under pressure returned to positive growth. In the following year, Indonesia’s macroeconomic development was quite stable. Our current account profile continued to improve while substantial capital still flowed into the economy, creating some surplus in the balance of payments. 

Positive results

Coordinated efforts among government institutions also helped our macroeconomic performance throughout 2015. We were also lucky that our central bank adjusted its policy rate quite early. Some analysts argued that other emerging economies were a little behind the curve in responding to rapid development in the global financial sector. The result was positive. Our trade balance was in surplus in the final 10 months of 2015 and the current account deficit continues to improve. Inflation is very benign while foreign direct investment is still growing. The positive perception of Indonesia’s conditions was also reflected in global investors’ strong appetite for our global bond issuances. 

However, we face new challenges due to recent global economic events. Despite the positive growth in 2014, the International Monetary Fund World Economic Outlook projected extended moderate global growth in 2015 and 2016. The global economy has also been held hostage by uncertainty, reflected in the high volatility of exchange rates. 

To safely navigate our economy through these uncertainties, Indonesia’s government is not standing still. A series of short- to medium-term fiscal stimuli are ready and are being implemented. These policies cover budget optimisation, business incentives and spending on priority sectors such as infrastructure, among others. We also increased our non-taxable income level and provided higher budget transfers through village funds to create more stable consumption and to sustain people purchasing power. 

Future challenges

We are aware that global challenges require us to broaden our economy to achieve a more sustainable and resilient trajectory. In Indonesia, as in many other middle-income countries, creating more sustainable growth is a challenge. A set of factors – an infrastructure and technological backlog, market imperfections, inefficient use of natural resource income, labour market challenges and high income inequality – contribute to the uncertainty of our growth trajectory.

The issue of growth was extensively discussed last year in the Indonesian Ministry of Finance International Conference on Growth Strategy. In that conference, Professor Joseph E Stiglitz, one of the speakers, suggested that emerging economies do not necessarily need to follow advanced economies’ footsteps in attaining sustainable growth. What is needed for emerging economies is a new growth strategy, as well as a developmental model, that is best suited to their economic profile. 

With regards to Indonesia’s economic profile, we understand that the lack of infrastructure and productivity has been preventing the country from reaching its full potential. Additionally, our dependence on natural resource exports in the past few decades has also limited the development of our industrial sector. In many cases, structural factors are holding back our growth potential. Moving away from this condition requires us to make necessary and balanced investments in skills and human capital formation, infrastructure and institutional development.

Budget reforms

The first breakthrough in achieving more sustainable and resilient growth comes from our budget reform initiatives. The recent removal of fuel subsidies will generate increased fiscal space to put towards productivity-enhancing areas such as infrastructure, health, food security, poverty alleviation and education. For the first time in Indonesia's history, our budget allocations for infrastructure are larger than energy subsidies. We have redirected most savings towards infrastructure development so as to improve connectivity and achieve energy and food security. We have also injected more capital into some of our infrastructure-related state-owned enterprises and increased cash transfers to Indonesia’s regions through our village funds.  

In terms of infrastructure, however, we know that increased funding is only half the story. We still face some significant organisational and governance challenges to develop infrastructure that can underpin our future growth prospects. In this regard, we have made some progress by reforming regulatory arrangements and some of the institutions needed to select, build and operate large-scale, productivity-enhancing infrastructure efficiently.  

For instance, we have established an inter-departmental committee, the KPPIP (the Committee for Accelerated Infrastructure Delivery), to identify and prioritise infrastructure projects and decide on which agencies are best placed to implement them. The KPPIP consists of key government ministries related to infrastructure delivery, such as the Coordinating Ministry of Economic Affairs, the Ministry of Finance, Bappenas (the Ministry of National Development Planning) and the National Land Agency. An important aspect of the KPPIP’s work is to decide which projects can potentially benefit from involvement by private investors through financing mechanisms such as public-private partnerships (PPPs).  

Private sector investment

Supporting this KPPIP initiative are a range of institutions and law reforms that are all aimed at improving the investment environment for private sector investors and at leveraging the amount of government funds available for infrastructure investment. 

In terms of regulation development, we have implemented a new law that regulates the land acquisition process and has eased the auction process by encouraging officials to use an online procurement system. Land acquisition, for instance, has been a serious obstacle to the development of infrastructure projects and has made investors hesitant to invest. Due to land disputes, some infrastructure projects have been idle for years or have been cancelled altogether. The new arrangements will not only shorten the process of land acquisition but will also create a more clean, transparent and predictable process.  

I believe that both government and private sectors play an indispensable role in infrastructure development. We continue to explore ways to encourage increased private sector involvement in infrastructure development through innovative mechanisms. This is to ensure that we are able to direct our resources into the right area so that the private sector is confident to partner with the Indonesian government.   

We have been developing the PPP scheme for infrastructure development. To support this scheme, the Ministry of Finance has established three companies focusing on infrastructure development through PPPs. PT Sarana Multi Infrastruktur was established to increase private participation in infrastructure projects by providing services including targeted loan products, equity finance and advisory and project preparation services. PT Indonesia Infrastructure Finance was established to provide advisory services and financing assistance for commercially viable infrastructure projects. And PT Indonesia Infrastructure Guarantee Fund provides government guarantees for PPP infrastructure projects, improves creditworthiness of PPP projects, and assists with improving the governance and transparency of the guarantee provision process.

Future potential

Evidence shows that in some economies that have successfully reached high-income status, a supportive macroeconomic policy mix was truly mandatory. Nevertheless, this framework can only be reached if the structural constraints have been previously tackled. In Indonesia’s case, the infrastructure lag is regarded as the main structural constraint for growth. The Indonesian government has therefore demonstrated its commitment to continue reforming to address this challenge. 

To sum up, it is fair to say that Indonesia has been able to positively distinguish itself. Our macroeconomic fundamentals clearly stand out compared to other emerging economies. Many institutions, including international ratings agencies, have noted this positive performance. In the 2016 World Bank Doing Business ranking, Indonesia moved up by 11 positions, year on year, to 109th position. Additionally, following Standard & Poor’s revision of Indonesia’s credit outlook from 'stable' to 'positive' in May 2015, Fitch re-affirmed our investment-grade rating with a 'stable' outlook. Our prudent and supportive fiscal policy reform initiatives were mentioned as the main reason of this positive development. These are excellent achievements considering that in the past 12 months other major emerging markets have seen less encouraging development. 

We are not slowing our structural reform efforts. Following the budget reform initiatives, tax reform will be further explored, both in the areas of tax administration and policy. At the same time, business sector incentives will be provided to further increase our competitiveness. In focusing to improve our infrastructure condition, we acknowledge that governments are unable to carry the entire infrastructure financing load by themselves. We acknowledge that there is a range of issues we need to address before private sector investors are confident enough to do more business in Indonesia. We have started to resolve these issues with more supportive policies that are under development. With more attention paid to infrastructure development, accommodative business incentives and strong commitment from the government to generate a more sustainable growth trajectory, Indonesia’s future looks even more promising.

Bambang PS Brodjonegoro is the finance minister of Indonesia.

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