Indonesia Economic Quarterly October 2016 Pressures easing Ndiam - - PowerPoint PPT Presentation

October 25, 2016

Indonesia Economic Quarterly October 2016 Pressures easing

Ndiamé Diop Practice Manager, Macroeconomis and Fiscal Management, South East Asia and the Pacific

Key takeaways

Macroeconomic pressures easing

• Thanks to good macro-fiscal management, short-

term macro pressures, in particular fiscal risks and inflation, have eased. This should support growth:

• Low inflation and stable Rupiah => monetary

policy easing

• Greater policy predictability
• Allows policymakers to focus more on

structural reforms Fiscal spending reforms key to inclusive growth

• Efficient and effective spending of public resources

critical to strengthening human capital and reducing poverty and inequality. It requires:

• Spending resources in the right areas & right
• Better fiscal allocation across programs within

sectors (social assistance, agriculture, education)

• Public spending in rural water and sanitation

provides an example: smart spending has borne results Recent fiscal reforms are lowering poverty and inequality

3

Macroeconomic pressures easing Fiscal spending reforms and inclusive growth Fiscal policy and welfare

External conditions remain unsupportive to growth

4

Source: World Bank Global Economic Prospects; WDI

World Bank projections for global growth by date of forecast

2 2.5 3 3.5 2013 2014 2015 2016 2017 2018 Jan-15 Jun-15 Jan-16 Jun-16 Average growth (2000-2008) Actual growth

But key domestic risks have eased, reducing macro- fiscal pressures

5

Fiscal risk Tax amnesty take up Private investor sentiment Credit growth Brexit Commodity prices US Fed rate hike Lower global growth China rebalancing and deleveraging

Risks

Eased Remain Domestic External

Prudent fiscal policy choices and high tax amnesty take-up reduced fiscal risks

6

Source: Ministry of Finance; World Bank staff calculations

• 3.0
• 2.5
• 2.0
• 1.5
• 1.0
• 0.5

0.0 0.5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2015 2016

• Expenditure cuts and

expanded fiscal deficit for 2016 announced in July

• The draft 2017 Budget

contains more realistic revenue targets

• Successful

implementation of Phase I Tax Amnesty program

Monthly fiscal deficit (% GDP)

Sound macro management and record low global bond yields helped stabilize the Rupiah

Source: BI;JP Morgan; World Bank calculations

Index, January 4 2016 = 100 96 98 100 102 104 106 108 110 Jan-2016 Apr-2016 Jul-2016 Oct-2016 USD/IDR JP Morgan EMCI

Improved rice import management helped inflation moderate further

Source: BI; World Bank staff calculations

Year-on-year growth, percent

4 8 12 16 Sep-13 Sep-14 Sep-15 Sep-16 Headline Rice BI inflation target Core

Improved macro-fiscal environment should help near- term growth

9

• There are no signs in the data of a pickup in activity as yet

20 40 60 80 100 120 140 160

• 40
• 30
• 20
• 10

10 20 30 40 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Retail Sales Index Motorcycle Sales Consumer Confidence Index

3 mma, percent yoy (LHS); consumer confidence index (RHS)

• But improved macro-fiscal conditions may help going forward:
• Low inflation and stable Rupiah => monetary policy easing
• Low fiscal risk => using fiscal policy to stimulate the economy
• Greater policy predictability and improved investor sentiment

Source: BI; BPS; World Bank staff calculations

10

Macroeconomic pressures easing Fiscal spending reforms and inclusive growth Fiscal policy and welfare

Public spending reforms crucial to greater access to services and inclusive growth

Source: World Bank staff.

Funding, human capital, Other Assets Education services, health services, infrastructure Student performance, Maternal mortality rates Growth, poverty Inequality, jobs

Re-allocation within the budget can help make growth more inclusive

12

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 20 40 60 80 100 120 Direct Transfers Education Health Subsidies Effectiveness Index (LHS) Budget (RHS)

(all HH targeted SA) (energy only)

Effectiveness at reducing inequality relative to spending Index (LHS); percent of GDP (RHS), 2012

• Direct social assistance

transfers are the most effective at reducing poverty and inequality, followed by education and health spending

• In 2012, total spending on SA and

health sectors was small relative to energy subsidies

• Subsidy reform and expansions of

SA programs since 2012 have helped, however more can be done

• In addition to increased SA

spending, re-allocation with the SA budget is needed:

• One rupiah spent on PKH

reduces inequality by 2.5 times more than a rupiah spent on Rastra, yet Rastra’s budget is more than 10 times higher.

Source: Susenas 2012, World Bank calculations. Note: Effectiveness Index is Change in Market Income Gini to Final Income Gini / Budget as % of GDP

In agriculture, much of the rising spending goes to private input subsidies rather than public goods

13

• In 2015, 47% of CG

public spending was used to subsidize private inputs rather than provide public

• goods. Only 3%

was spent on R&D and extension services

• Increased central

spending on agriculture has not led to similar increases in agriculture output

• Reallocation =>

higher productivity

Note: Spending figures refer to realized spending up until 2015 and the revised Budget for

• 2016. MoA reclassified the majority of its social aid spending to goods and services in 2016.

Source: World Bank COFIS database using MoF data

Central government spending on agriculture and irrigation IDR trillion (LHS); Year-on-year growth, percent (RHS)

1 2 3 4 5 6 10 20 30 40 50 60 70 80 90 100 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Extension services Irrigation Other agriculture subsidies Fertilizer subsidies R&D MoA non-social aid MoA social aid Growth in agriculture value added

In education, better spending is required to achieve

• utcomes

14

• Increasing enrollment
• Improving learning outcomes

Challenge

• Teacher certification program
• Large fiscal investment: doubling of teacher pay

following certification

Policy response

• Certification required a university degree, other

training, and experience

• Requirement to demonstrate competency was

dropped

Design

• Many teachers were incentivized to upgrade their

qualifications

• But no impact on student learning (test scores)

Evaluation

• Teaching has become a popular profession
• Prioritize demonstrated professional

competencies over education level and seniority

New opportunity

Example of the teacher certification program

In sanitation, targeted public investments triggered much larger investment by rural communities

15

Government spending directed to:

• creating demand for safe

sanitation and hygiene through community empowerment and behavior change

• increasing the supply of

affordable and aspirational sanitation facilities by the private sector

• enhancing the enabling

policy environment Households purchase latrines

Investment in rural sanitation, 2 data samples USD million, LHS; ratio, RHS

Source: World Bank, STBM

2 4 6 8 10 12 14 10 20 30 40 50 60 70 28 district in East Java 277 districts Community Contribution Local Government Spending Ratio of community to government contribution (RHS)

0% 20% 40% 60% 80% 100% 2000 2002 2004 2006 2008 2010 2012 2014 Rural Water Rural Sanitation

…leading to good outcomes: rapid rise in access to sanitation in rural areas

16

Government is achieving its goals in WASH (urban + rural)

• MDG for water supply

achieved (87% in 2015)

• MDG for sanitation

narrowly missed (61% in 2015; the target was 62.4%) Government now targeting universal access to improved water supply and sanitation services by 2019, in line with the SDGs

Access to improved water and sanitation, percent

Source: SUSENAS, BPS

17

Macroeconomic pressures easing Fiscal spending reforms and inclusive growth Fiscal policy and welfare

Fiscal policy (2012-14) did relatively little to reduce poverty and inequality…

Baseline Fiscal Policy Impact on Poverty and Inequality 2012-14

• 3.5
• 3
• 2.5
• 2
• 1.5
• 1
• 0.5

Poverty (percentage points) Inequality (points of Gini) 2012 2013 2014 Average

• Indonesian taxes and government

spending reduced poverty by 1.1-1.4 percentage points and the Gini coefficient by 2.6-3.3 points (over 2012-14)

• Relatively small reductions by international

standards, partly due to:

• personal income tax collection is low

with poor compliance

• social assistance spending is low
• health spending is low and much of it

is not on the primary care which most benefits poorer households

• education spending is high and has

some impact on inequality, but not to the degree seen in other countries

• Also partly due to high spending on

energy subsidies which predominantly benefit richer households.

Source : The 2012 result is from a fiscal incidence paper (World Bank and Ministry of Finance 2015), and the 2013 and 2014 results are from a coming update to that paper. The analysis is based on the Commitment to Equity framework (commitmentoequity.org), and applies standard fiscal incidence analysis to the majority of GoI taxes and spending

…but recent choices are delivering more positive results: poverty and inequality fell in 2016… thanks to

efforts to stabilize rice prices and social assistance expansion (PKH)

Source: Susenas

Poverty rate, percent (LHS); change in poverty, percentage points (RHS)

• 1.5
• 1
• 0.5

0.5 1 1.5 2 2.5 2 4 6 8 10 12 14 16 18 20 2003 2005 2007 2009 2011 2013 2015 Poverty Rate (LHS) Change in Poverty, yoy (RHS)

• 1.5
• 1
• 0.5

0.5 1 1.5 2 2.5 3 3.5 20 25 30 35 40 45 2003 2005 2007 2009 2011 2013 2015 Gini (LHS) yoy change (RHS)

Gini coefficient, points (LHS); change in Gini coefficient, points (RHS)