Indonesia wants to fire up manufacturing and tourism as it attempts to diversify its economy away from commodities, Bambang PS Brodjonegoro, the Indonesian minister of finance said on Tuesday.
The minister also emphasised Indonesia’s need to learn from its past mistakes in order to develop a better growth model.
“We’re not new to the idea of structural reform,” he said at the Asia Development Bank annual meeting in Frankfurt on Tuesday. “We did it in the 1980s when oil prices were slow and the economy was suffering from similar symptoms then.”
“When we tried to shift the economy away from oil to manufacturing back then, we forgot to maintain the sustainability of the reform itself,” he said. “Then by the time the markets had recovered, we forgot about our manufacturing sector and we were back to our dependence on commodities.”
Indonesia’s economy grew rapidly between 2001 and 2012 as commodity prices soared and China rapidly expanded. But with prices for key exports like liquefied natural gas, rubber and palm oil falling to half their 2011 highs, export revenues have suffered.
During the past decade, the share of commodities in Indonesia’s exports has increased, making its external accounts more vulnerable to cyclical swings in commodity prices, according to an ADB study published in December 2015.
Indonesia’s export competitiveness was also hampered by the appreciation of the rupiah and low productivity in the manufacturing sector. Volatility in the real exchange rate was caused by dependence on commodity exports and openness to capital flows.
The ADB noted that longer term strengthening of the country’s external position would require reforms to achieve sustained gains in productivity, to diversify export, and to boost competitiveness. This is something that Indonesia is willing to address.
SUSTAINABLE REFORM
“We need to look back at our structural reforms and redefine them,” the finance minister said. “We need to diversify our economy and manufacturing is number one. We need to focus on increasing our capacity in this sector.”
And the minister is conscious that this time, the reforms must be sustainable.
“We need to promote budget reform in order to promote structural reform,” he said. “But we need to monitor the quality of spending, and to continue real sector reform. We need to make our business empire much friendlier to investors, foreign and domestic.”
Recently the Indonesian government took advantage of the low oil prices, eliminating fuel subsidies and reallocating the saving into infrastructure and social security.
The minster added that tourism was another key area that the government was preparing to revitalise.
The 2014 election of Joko Widodo as president was seen as a positive step for Indonesia by the international financial community, and since then investors have responded favourably to the government’s public investment and structural reforms.
The ADB expects Indonesia’s GDP to gradually improve from 4.8% in 2015 to 5.2% this year and 5.5% by 2017. This follows five years of decelerating growth in Indonesia, according to the ADB.
The country’s demographics and opportunities resulting from the China slowdown are also expected to drive growth. The country’s large population and growing ranks of middle-income consumers will continue to propel growth in domestic demand.
Meanwhile, rising wages and production costs in China should create new export opportunities for Indonesia as firms shift labour–intensive manufacturing capacity from China to ASEAN and other parts of Asia Pacific.
“Indonesia’s total exports are less than 1% of global trade in goods and services, highlighting the potential that expanding trade has for boosting demand for Indonesian goods and services,” the ADB said in its annual Asian Development Outlook.