Indonesia’s Economy Struggles to find its Footing

May 6, 2015 Posted by ASEAN Briefing Reading Time: 4 minutes

For the second quarter in a row, Indonesia’s economy contracted as exports and government spending continued to decline – GDP was down 0.18 percent. The country’s currency, the rupiah, also fell.

Indonesia’s president, known colloquially as Jokowi, has set a target of seven percent GDP growth by 2017. He aims to achieve this through increased infrastructure spending and attracting more foreign investment. Although he has made some positive steps, this year’s first quarter GDP growth of 4.71 percent has raised worries that the government’s plans are not being implemented quickly enough. According to analysts at Bloomberg, the first quarter growth was the slowest year on year growth since the third quarter of 2009 and may cause analysts to downgrade their 2015 growth estimates for the country.

For 2015, the government has set a goal for economic growth of between 5.4 percent and 5.7 percent. In 2014, the country’s economy grew by 5.02 percent – the slowest rate in five years. So far this year, government spending has dropped 49 percent and exports have declined six percent.

Indonesia has also been battling against a weakening currency for some time now. The rupiah is now the worst performing currency in Asia for this year. In December of last year, the rupiah hit its lowest point since the 1997-98 Asian Financial Crisis. At that time, Indonesia’s central bank intervened by using its foreign reserves of US dollars and by buying government bonds on the secondary market to support the currency. Analysts were hopeful these actions could reinforce the currency, and there was some upward movement, but the recent fall shows that there is still much work to be done.

Tax amnesty program as revenue generator

In a bid to generate additional revenue for the government’s development plans, Indonesia’s Directorate General of Taxation is implementing a tax amnesty program, effective from April 29. It is hoped that the program will vastly broaden the country’s tax base.

The program will last one year and will allow individuals and corporations not currently registered to pay taxes to enroll and declare their past income, as well as paying their past due taxes. Taxpayers will be able to avoid any penalties and interest charges if they take advantage of the amnesty program.

Building the future

Despite experiencing two quarterly declines, Indonesia’s government has stated that it is confident that positive growth will be seen in the second and third quarters, since there will be increased infrastructure spending during this time. According to the country’s finance minister, in 2015, the government will spend 290 trillion rupiah (US$22 billion) on infrastructure. It has so far spent just seven trillion rupiah.

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