(EnergyAsia, September 28 2012, Friday) — Indonesia’s economy will grow at a slower rate of 6% this year from 6.5% in 2011, but inflation will rise to 5% on account of stronger domestic demand and the effects of a moderate fiscal stimulus, said the International Monetary Fund (IMF).
The fund recently issued this report following a study visit to Southeast Asia’s largest economy by a team of senior officials led by Sanjaya Panth in June.
Its report said Indonesia faces growing risks from a possible larger-than envisaged slow down in external demand as well as global risk aversion spikes.
“Their combined impact could be amplified by policy missteps,” it said.
The government’s response through a moderate fiscal stimulus in the 2012 budget has been described as “appropriate given weaker external demand.”
“Reducing excess liquidity would improve the effectiveness and credibility of monetary policy. Increased flexibility of the exchange rate, combined with judicious use of reserves when warranted, would address market tensions during bouts of heightened risk aversion.”
The IMF has urged the government to replace costly and inefficient energy subsidies with targeted cash transfers so as to create room for critically needed increased infrastructure and social spending. Further steps to strengthen financial sector oversight and the systemic crisis response framework would help safeguard financial stability.
Noting Indonesia’s young population and rising inequality, the IMF said the government should focus efforts on achieving economic growth “whose fruits are shared more broadly.”
“This requires better investment and improvements to the business environment. Maintaining an open trade and investment regime would ensure that Indonesia remains an attractive destination for foreign investors,” it said.