Indonesia will grow faster in 2018 – Finance Minister

Indonesia expects a faster economic growth next year, as Finance Minister exerts efforts to boost tax revenues.

Asia’s biggest economy, Indonesia, could expand at a faster speed next year than previously predicted, according to Indonesia’s finance minister.

Sri Mulyani Indrawati, who has been the country’s finance minister since 2016, said that economic growth will be pushed by a pickup in investment in 2018. Economy is expected to grow by 5.4 percent next year, the fastest expansion in half a decade.

The parliament passed a budget last week, anticipating a narrower deficit and higher tax revenue.

“The growth rate of 5.4 percent is based on a combination of on the one hand of a pickup in exports, but with investment that is still a bit conservative. If we assume that investment will pickup, then I think we will have much more upside,” said Indrawati, who sounded more update few days after the budget plan’s approval.

However, the minister’s optimism did not come without some cautions.

The Indonesian economy is set to face some headwinds rooting from rising interest rates in the United States, while the currency is currently under pressure in recent weeks.

The rupiah has plummeted over 3 percent against the dollar after reaching a 10-month high in September.

The currency has further slipped after the US president Donald Trump’s tax reform plan strengthened the dollar.

“Of the course the announcement by President Trump on tax reform, lowering the rate, is creating again pressure for Indonesia. A race to the bottom is worrying for all because it’s not a win-win game,” said Indrawati.

Benchmark Held

Under the shadow of the Federal Reserve’s tightening monetary policy via rate increases and unwinding of balance sheets, Indonesia’s central bank this month did not touch its interest rate as expected, following two consecutive cuts.

Policy makers are turning heads to the risks of weakening currency.

Indrawati said that the full of effect of the easing is yet to penetrate the broader economy, adding that the transmission of the rate cut to bank lenders “could be much more efficient.”

“But I think it will come, maybe with a lag of between 12-18 months, meaning the results can only be enjoyed early next year of the middle of next year,” said Indrawati.

On the other hand, credit growth has remained dull in spite of the country’s central bank’s monetary easing.

Bank lending swelled only 7.86 percent in September from a year ago, comparatively lower than the higher than 10-percent average growth a couple of years ago, according to the country’s financial services authority.

The country’s economy has been swelling around 5 percent, although it stays short of the 7-percent target, which was set by President Joko Widodo when he took wore the helm three years ago.

Boosting the Economy

The 55-year-old Indrawati attempts to push tax revenue upward, aiming to raise the country’s tax-to-GDP ratio from around 11 percent to 16 percent by 2019.

She also warned that Indonesia must be watchful of the impact that the tax cuts would have on revenue.

“The rates will depend on our ability to expand the base because if you lower the rate with the same very narrow and limited tax base, then it would be self-defeating for Indonesia. We have to look at it comprehensively,” she said.

The country’s economy has been swelling around 5 percent, although it stays short of the 7-percent target, which was set by President Joko Widodo when he took wore the helm three years ago.

A bugging fiscal loss has caused the 2017 budget deficit forecast to be reduced to roughly 2.7 percent of GDP, compared with the 2.9 percent that was estimated in July. Indonesia sports a legal limit of 3 percent.

For 2018, the country targets a budget deficit of 2.2 percent of GDP. The minister said that the government scores a contingency plan in the event of a revenue shortfall this year.

Indrawati said that although the expanding of debt limit has been regarded as options since its introduction in 2003, tinkering with it “would create less incentive to do the right thing in the real sector.”

“The issue is not about the cap on the deficit. The issue is about whether we have the capacity to design the right program in order for us to create higher growth. We believe that we should achieve higher growth that will create more jobs and reduce inequality and poverty,” said Indrawati.

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