The Indonesian economy continued to recover in 2021 despite moderating due to the COVID-19 Delta variant wave mid-year. The economy is estimated to have expanded 3.7 percent this year and is forecast to accelerate to 5.2 percent in 2022, according to the World Bank’s latest Indonesia Economic Prospects report.
The projection assumes that Indonesia will avoid another severe COVID-19 spike, achieve 70 percent vaccine coverage in 2022 in most provinces, and maintain accommodative monetary and fiscal policies. It also assumes that global trade growth and commodity prices will moderate.
“The Delta wave has taught us that continuing to improve vaccine rollout, testing, and tracing, as well as ensuring adequate critical care capacity are among the best ways to prepare for the Omicron variant and any other COVID-19 variants,” said World Bank Director for Indonesia and Timor-Leste Satu Kahkonen.
“Beyond a strong public health response, it is also important for Indonesia to sustain recent structural reform efforts. This should accelerate growth even as the authorities start to gradually reduce macroeconomic support.”
Downside risks to the outlook remain high amid uncertainty about the pandemic, global financial conditions, and scarring effects of the crisis, the report says.
To sustain economic momentum and prevent the effects of the pandemic from leaving lasting economic and social scars, the authorities will need to focus on a policy response that strengthens investment, accelerates human capital accumulation, and boosts productivity, the report recommends.
Challenges to this include containing the pandemic by accelerating the vaccine rollout in lagging areas and accelerating testing, tracing, and treatment; and maintaining an accommodative monetary and financial policy stance while preparing to calibrate policies as global and domestic financial pressures evolve.
It will also be important to enhance fiscal space to for the pandemic response and for medium-term fiscal sustainability, the report recommends. The recently adopted Tax Harmonization Law is a critical step to address low tax collection rates. Indonesia’s structural reforms will be important to building a more competitive, resilient, and greener economy.
The power sector will have a central role in contributing to Indonesia’s target of cutting greenhouse gas emissions by at least 26 percent with business-as-usual approach and by as much as 41 percent with enhanced international support by 2030, and of reaching carbon neutrality by 2060. Phasing down coal and scaling up renewable energy will be central to meeting Indonesia’s low carbon transition targets.
“Indonesia’s climate ambitions in the power sector need a comprehensive package of reforms and investments,” said World Bank Indonesia and Timor-Leste Lead Economist Habib Rab. “This could include four elements: strengthening power sector institutions, enabling private investments in renewable energies, ensuring the financial sustainability of the sector, and promoting a just transition for all.”
Strengthening public institutions in the power sector, and aligning the government’s and the power utility’s (PLN) net-zero carbon strategies will provide clear signals about the transition pathway.
Reforming renewable energy price controls, reducing or eliminating local content requirements for renewable energy equipment, and phasing out coal and fuel subsidies will help attract the private sector. Improving PLN’s revenue adequacy will be essential to financing its investment needs. Finally, a comprehensive plan needs to be developed to ensure that people and communities will benefit from the transition to a greener economy.