OREANDA-NEWS. On March 9, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Indonesia.

Sound macroeconomic management and exchange rate flexibility have bolstered policy credibility and external resiliency in Indonesia over the past 18 months. In the face of Fed tapering and headwinds posed by slumping commodity prices, policy and reserve buffers have been strengthened through a clearer policy framework and better policy coordination. Markets have responded favorably, as evidenced by large portfolio inflows in 2014 and so far in 2015. Overall, the banking system remains sound and well capitalized, while the corporate sector has been affected by a cyclical slowdown. Key risks, which emanate mainly from external sources, are moderately to the downside, requiring continued vigilance by policymakers.

Notwithstanding commodity sector developments and global risk factors, the near-term outlook is broadly positive. Led by a pickup in public investment, growth should reach around 5? percent this year. Inflation is expected to return to within BI’s target band of 3 to 5 percent by year end, given the current monetary stance and fuel price outlook. The current account deficit should also narrow slightly, with a lower oil import bill offsetting pressures arising from non-oil commodity exports, while foreign reserves are expected to rise moderately.

Decisive fiscal policy actions taken since late 2014 on fuel subsidy reforms have opened space in the budget to support government plans to increase social and infrastructure spending, but lower oil and gas revenues may constrain available resources in the near term. Monetary policy continues to provide a strong anchor to inflation expectations and facilitate external adjustment, with the latter also aided by flexibility in the exchange rate and bond yields. Financial sector policies have been aimed at deepening market activity, enhancing macro and micro prudential oversight, and increasing corporate sector resilience.

Looking ahead, the main challenge for Indonesia is to chart a course to higher, more inclusive growth, while preserving macro-financial stability and further strengthening the external position. Moderate fiscal consolidation would help improve funding conditions and facilitate external adjustment. It should be underpinned by a broad tax revenue strategy and supported by prudent borrowing, with a view to generating ample resources for growth-critical spending and maintaining debt sustainability. The current monetary stance appears appropriate until inflation and external pressures firmly ease. Financial stability is expected to be preserved through prudential measures backed by strengthened frameworks for risk assessment and protocols on crisis management. Structural policies should address longstanding supply bottlenecks, deepen financial markets, and create a more supportive trade and investment climate in order to expand the export base, stimulate job creation, and raise potential growth.