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GDP growth has been high and is set to edge up in 2017 and 2018. Government infrastructure spending continues to underpin economic activity, and both private consumption and private investment are showing signs of firming. The current account deficit is projected to be stable.
The central bank has eased rates six times since the beginning of the year. The government has released a string of reform packages over the past year to improve the business environment, streamline investment and liberalise inward investment. There should be scope for a few more interest rate cuts in the medium term, as inflation is projected to remain subdued. However, the fiscal balance is deteriorating owing to slower growth and low commodity prices. Public expenditure is being reined in to avoid breaching the legal deficit limit of 3% of GDP.
The government’s priority has been to lift spending on infrastructure and social services, notably health and education. This policy is welcome as it will raise growth and make it more inclusive. However, the deficit's proximity to its legal ceiling has led to cuts in planned expenditure. While an ongoing tax amnesty may help ease this constraint in the short term, in the longer term tax revenues, which are very low, will have to be boosted. Policies are needed to address the narrow tax base, the low number of taxpayers and weak compliance.
Economic Survey of Indonesia (survey page)