October 2016 Pressures easing INDONESIA ECONOMIC QUARTERLY Pressures easing October 2016 Preface The Indonesia Economic Quarterly (IEQ) has two main aims. First, it reports on the key developments over the past three months in Indonesia’s economy, and places these in a longer-term and global context. Based on these developments, and on policy changes over the period, the IEQ regularly updates the outlook for Indonesia’s economy and social welfare. Second, the IEQ provides a more in-depth examination of selected economic and policy issues, and analysis of Indonesia’s medium-term development challenges. It is intended for a wide audience, including policy makers, business leaders, financial market participants, and the community of analysts and professionals engaged in Indonesia’s evolving economy. The IEQ is a product of the World Bank’s Jakarta office and receives editorial and strategic guidance from an editorial board chaired by Rodrigo Chaves, Country Director for Indonesia. The report is compiled by the Macroeconomics and Fiscal Management Global Practice team, under the guidance of Ndiame Diop, Practice Manager, and Hans Anand Beck, Senior Economist. Led by Masyita Crystallin, with responsibility for Part A, and Kelly Wyett, with responsibility for editing and production, the core project team comprises Magda Adriani, Arsianti, Indira Maulani Hapsari, Ahya Ihsan, Taufik Indrakesuma, Dhruv Sharma, and Violeta Vulovic. Administrative support is provided by Titi Ananto. Dissemination is organized by Jerry Kurniawan, GB Surya Ningnagara, Kurniasih Suditomo, Nugroho Sunjoyo, and Suryo Utomo Tomi, under the guidance of Dini Djalal. This edition of the IEQ also includes contributions from Bertine Kamphuis, Nikola Kojucharov, John Perrottet, and Andre Simangunsong (Part B.1, Tourism), Mateo Ambrosio, Emilie Cassou, Steven M. Jaffee, and Taimur Samad (Part B.2, Food security policy), Martin Albrecht, Claire Chase, Sarah Glavey, Martin Gambrill, Rahmi Kasri, Sitaram Machiraju, Vikram Rajan, Amin Robiarto Deviariandy Setiawan, and Ali Subandoro (Part C.1, WASH), Tazeen Fasih, Karthik Muralidharan, Menno Pradhan, Joppe de Ree, and Halsey Rogers (Part C.2, Teacher certification and beyond). The report also benefited from discussion with, and in-depth comments from, Tatiana Nenova, Massimiliano Cali, Nikola L. Spatafora, Ekaterine T. Vashakmadze, Maria Monica Wihardja, Nikhilesh Bhattacharya (Australia Department of Foreign Affairs and Trade), and Amanda Apsden and David Nellor (Australia Indonesia Partnership for Economic Governance). This report is a product of the staff of the International Bank for Reconstruction and Development/the World Bank, supported by funding from the Australian Government under the Support for Enhanced Macroeconomic and Fiscal Policy Analysis (SEMEFPA) program. The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent, or the Australian Government. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. The photographs are copyright of the World Bank except in part B that is copyright of Riaz Sharma. All rights reserved. For more World Bank analysis of Indonesia’s economy: For information about the World Bank and its activities in Indonesia, please visit www.worldbank.org/id. To receive the IEQ and related publications by email, please email madriani@worldbank.org. For questions and comments, please email hbeck@worldbank.org. Table of contents EXECUTIVE SUMMARY: PRESSURES EASING ................................................................ I  A. ECONOMIC AND FISCAL UPDATE ............................................................................... 1  1. Global financial market volatility has eased, but the global economy remains unsupportive of Indonesia’s growth ......................................................................................................................... 1  2. GDP growth picked up on the back of stronger government consumption...................................... 2  3. Inflationary pressures are lower due to stable food prices and declining transportation costs ......... 4  4. The current account deficit narrowed slightly in Q2 2016 ................................................................. 6  5. Stable domestic financial conditions and monetary policy easing bias ............................................ 8  6. Policy responded to weak revenue collection ...................................................................................10  7. After years of stagnation, poverty and inequality are falling again ...................................................17  8. Potential headwinds to the macro-fiscal outlook from external factors remain elevated .................19  B. SOME RECENT DEVELOPMENTS IN INDONESIA’S ECONOMY ........................ 20  1. Accelerating tourism development................................................................................................... 20  a.  Improving infrastructure and planning for sustainable tourism growth......................................................... 22  b.  Attracting investors and promoting linkages to the local economy ................................................................ 23  c.  Strengthening coordination and implementation capabilities to achieve results ........................................... 24  2. Why should Indonesia reframe and reorient its food security policy? ............................................. 26  a.  There growing concerns about the efficacy of Indonesia’s food security policies and public spending ....... 27  b.  The implications of changing dietary and food expenditure patterns for Indonesia’s food policy ................. 31  c.  How should Indonesia strategically re-orient its food security policy? .......................................................... 33  C. INDONESIA 2018 AND BEYOND: A SELECTIVE LOOK ........................................... 36  1. Ensuring universal access to safe water and sanitation services to reduce in stunting, poverty and inequality ...................................................................................................................................... 36  a.  A strengthened institutional framework has increased access to WASH in rural areas ................................. 37  b.  WASH is a key determinant of stunting .......................................................................................................... 39  c.  An integrated approach to WASH is required to reduce stunting and poverty ............................................... 41  d.  Continuing progress in rural WASH in order to reduce stunting and poverty ............................................... 42  2. Double for Nothing? Teacher Certification and Beyond ................................................................ 45  a.  The Teacher Certification Program ................................................................................................................. 46  b.  An evaluation of the teacher certification program ......................................................................................... 48  c.  What matters more for student learning? ........................................................................................................ 50  d.  From “Certification” to “Professional” allowance .......................................................................................... 52  APPENDIX: A SNAPSHOT OF INDONESIAN ECONOMIC INDICATORS ................ 53  LIST OF FIGURES Figure 1: Financial market volatility subsided in Q3 ................................................................ 1  Figure 2: Government consumption was the main driver of the pick-up and GDP growth ..... 3  Figure 3: Most high frequency indicators picked up in July and August ................................. 3  Figure 4: Headline CPI inflation has fallen on the back of moderating food prices ................ 5  Figure 5: Domestic rice prices eased in line with international trends .................................... 5  Figure 6: Strong public portfolio inflows drove a moderate BOP surplus ................................ 7  Figure 7: Exports increased for the first time in four quarters, but remained lower over the year ............................................................................................................................. 7  Figure 8: External financing needs remain stable .................................................................... 7  Figure 9: Government debt is increasingly held offshore ......................................................... 7  Figure 10: The Rupiah remained stable in Q3 .......................................................................... 9  Figure 11: Benign inflation provided room for monetary easing .............................................10  Figure 12: Credit and deposit growth continues to disappoint ................................................10  Figure 13: Year-to-date total revenue collection growth picked-up in the third quarter of the fiscal year… .............................................................................................................. 11   Figure 14: … primarily due to increased collection of CIT, domestic VAT, and tax amnesty proceeds .................................................................................................................... 11  Figure 15: Recently announced expenditure cuts in the 2016 revised Budget affected some key line ministries .....................................................................................................12   Figure 16: Poverty reduction in 2016, though greater than in recent years, remains slower than before 2011 ........................................................................................................17   Figure 17: The Gini coefficient in 2016 dropped below 40 for the first time since 2011 ..........18  Figure 18: The pick-up in commodity prices may be temporary .............................................19  Figure 19: Spending on tourism in Indonesia has high GDP and employment impacts relative to spending in other sectors .........................................................................21  Figure 20: The Asia Pacific market is key for Indonesia's tourism growth .............................21  Figure 21: Foreign visitor numbers have steadily gone up since 2006, but visitor growth has been uneven and affected by externalities ............................................................... 25  Figure 22: Foreign visitor growth targets for the 10 priority destinations are higher than the growth Bali achieved during its 5 fastest-growing years ......................................... 25  Figure 23: Indonesia’s total support to agriculture is rising and already higher than that of other emerging and OECD countries ..................................................................... 26  Figure 24: Central Government spending on agriculture has increased faster than agriculture GDP ......................................................................................................................... 26  Figure 25: Retail prices for rice are higher in Indonesia and the Philippines ........................ 28  Figure 26: The implicit tax on food consumers in Indonesia is very large, and has continued to increase while falling elsewhere .......................................................................... 28  Figure 27: Indonesia’s prevalence of stunting is much higher than in countries with similar levels of Gross National Income.............................................................................. 29  Figure 28: The prevalence of stunting changed little in recent years and actually increased in some areas ............................................................................................................... 29   Figure 29: Surplus labor in some areas remains locked into rice production, yielding low labor productivity ..................................................................................................... 30   Figure 30: Considerable food crop diversification has occurred in China, while for Indonesia rice remains dominant and the main change has been the conversion of forested land to oil palm ........................................................................................................ 30   Figure 31: Indonesia’s food spending patterns are changing, especially in urban areas .........31  Figure 32: Within Indonesia’s total food imports, imports of higher-value and processed foods are growing fast .............................................................................................. 33  Figure 33: Indonesia’s annual per capita food imports are low compared with other middle income countries ..................................................................................................... 33  Figure 34: Indonesia needs to rebalance its food security policy ........................................... 34  Figure 35: Growth in access to rural WASH increased following the adoption of STBM and PAMSIMAS.............................................................................................................. 38   Figure 36: Targeted public investments can trigger much larger investment by communities ................................................................................................................................. 39  Figure 37: There is a strong correlation between improved sanitation and reduced stunting 40  Figure 38: Poverty and stunting are declining, while WASH access is increasing ................. 43  Figure 39: Education sector spending has tripled since 2001 in real terms ............................ 45  Figure 40: Teacher performance was expected to improve through three channels .............. 47  Figure 41: The proportion of teachers with bachelor’s degrees increased .............................. 48  Figure 42: A representative sample of 20 districts was selected to take part in the evaluation ................................................................................................................................. 48  Figure 43: The certification program had no impact on student learning outcomes ............. 49  Figure 44: The certification program improved teachers’ financial situation and job satisfaction ............................................................................................................... 49  Figure 45: Teachers are predicted to perform better on test questions after improving their subject-matter knowledge ....................................................................................... 50  Figure 46: Selective hiring of high performing teachers can have a strong positive impact on student learning outcomes .......................................................................................51  Figure 47: Improving teacher subject knowledge and hiring better teachers can improve learning outcomes ....................................................................................................51   LIST OF APPENDIX FIGURES Appendix Figure 1: Real GDP growth..................................................................................... 53   Appendix Figure 2: Contributions to GDP expenditures ....................................................... 53  Appendix Figure 3: Contributions to GDP production........................................................... 53  Appendix Figure 4: Motorcycle and motor vehicle sales ........................................................ 53  Appendix Figure 5: Consumer indicators ............................................................................... 53  Appendix Figure 6: Industrial production indicators ............................................................. 53  Appendix Figure 7: Balance of payments ............................................................................... 54  Appendix Figure 8: Current account components .................................................................. 54  Appendix Figure 9: Exports of goods ..................................................................................... 54  Appendix Figure 10: Imports of goods .................................................................................... 54  Appendix Figure 11: Reserves and capital flows ..................................................................... 54  Appendix Figure 12: Inflation and monetary policy................................................................ 54  Appendix Figure 13: Monthly breakdown of CPI ................................................................... 55  Appendix Figure 14: Inflation comparison across countries................................................... 55  Appendix Figure 15: Domestic and international rice prices .................................................. 55  Appendix Figure 16: Poverty and unemployment rate ............................................................ 55  Appendix Figure 17: Regional equity indices ......................................................................... 55  Appendix Figure 18: Selected currencies against USD ........................................................... 55  Appendix Figure 19: 5-year local currency gov. bond yields ................................................... 56  Appendix Figure 20: Sovereign USD bond EMBIG spread ................................................... 56  Appendix Figure 21: Commercial and rural credit and deposit growth .................................. 56  Appendix Figure 22: Banking sector indicators ...................................................................... 56  Appendix Figure 23: Government debt ................................................................................... 56  Appendix Figure 24: External debt ......................................................................................... 56   LIST OF TABLES Table 1: In the base case, GDP growth is projected at 5.1 percent in 2016 ..............................iii  Table 2: In the base case, GDP growth is projected at 5.1 percent in 2016 and 5.3 percent in 2017 .............................................................................................................................. 6  Table 3: The current account deficit is expected to widen slightly in 2016 and 2017 ............... 8  Table 4: Revenue collection from the tax amnesty program has reached more than 50 percent of the target ................................................................................................................ 15  Table 5: The World Bank projects lower revenue and expenditure than in the 2016 Budget ..16  Table 6: Inequality has fallen due to increasing Middle 40 consumption, but Bottom 40 consumption has decreased .......................................................................................18   Table 7: Indonesia is globally competitive in natural and cultural resources, but faces infrastructure and enabling environment constraints ................................................21  Table 8: Training sanitation entrepreneurs helps increase latrine sales ................................. 42  LIST OF APPENDIX TABLES Appendix Table 1: Budget outcomes and projections ............................................................ 57  Appendix Table 2: Balance of payments ................................................................................. 57  Appendix Table 3: Indonesia’s historical macroeconomic indicators at a glance.................. 58  Appendix Table 4: Indonesia’s development indicators at a glance....................................... 59  LIST OF BOXES Box 1: What happens when the Government boosts public investment in Indonesia? ............ 4  Box 2: The Indonesia tax amnesty program ............................................................................15  Pressures easing Indonesia Economic Quarterly Executive summary: Pressures easing Indonesia’s economy Global growth was sluggish in the first half of the year, driven by weaker than remains resilient expected growth in advanced economies. In addition, China’s growth eased as despite weaker than expected as the economy continues to rebalance from investment- to consumption- expected global led growth, and as excess industrial capacity is reduced. However, import demand growth from China was weaker than expected. On the upside, the global financial market volatility leading up to and in the aftermath of the Brexit referendum in June has moderated significantly. Lower volatility in financial markets has contributed to the Rupiah’s stabilization against the US Dollar (in line with most other emerging market currencies). Indonesia’s growth remained resilient in Q2, partly supported by government expenditure, and is forecast to pick-up gradually on the back of stronger private investment supported by investment climate reforms and credible fiscal policy. This resilience stands in contrast to the performance of several other emerging market commodity exporters. Fiscal risks have Domestic fiscal risks have eased recently given announced expenditure adjustments eased; downside for 2016 and a more achievable 2017 draft Budget. Recent efforts by the risks to growth are Government contributed to strong revenue collection from the tax amnesty mostly external program by the end of phase 1 (of IDR 93.4 Trillion, 56.6 percent of target) and also helped moderate fiscal risks. This revenue is projected to raise public capital spending and hence have a positive impact on growth. On the other hand, external downside risks remain. These risks stem from the possibility of continued disappointing growth in major economies, the impact of a faster than expected slowdown in China’s growth, and heightened US monetary policy uncertainty and the potential for consequential financial market disruption. October 2016 THE WORLD BANK | BANK DUNIA i Pressures easing Indonesia Economic Quarterly GDP growth picked GDP growth accelerated to 5.2 percent year-on-year (yoy) in Q2 from 4.9 percent up to 5.2 percent yoy yoy in Q1, due to strong government consumption. Private consumption remained in Q2 supported by resilient while government consumption accelerated, growing at 6.3 percent from government 2.9 percent in Q1. Fixed investment grew at 5.1 percent yoy in Q2, from 5.6 percent consumption in Q1, supported mainly by public investment, implying subdued private investment. Despite government spending cuts announced in August of IDR 134 trillion, public capital expenditure from January to August was 19.3 percent higher than its level over the same period last year. Net exports did not contribute to growth in Q2, as both exports and imports continued to contract yoy. Benign inflation A lack of inflationary pressure has provided room for Bank Indonesia (BI) to cut its provided room for policy rate six times this year. In September, headline inflation continued its monetary policy downward trajectory, measuring 3.1 percent yoy, while core inflation was 3.2 yoy. easing The decline in inflation was partly due to more stable food prices, particularly for rice, and lower transportation costs attributable to the Government’s fuel price reductions earlier in the year. BI moved to a new policy rate, the 7-day reverse repo, in August in an effort to improve the transmission mechanism between the policy rate and bank rates. However, the impact of this change on interbank credit lines and the uneven distribution of liquidity in the banking system has so far been limited. The overall balance The overall balance of payments recorded a USD 2.2 billion surplus on the back of of payments strong capital flows and a narrowing current account deficit. The current account recorded a moderate deficit narrowed marginally to 2.0 percent of GDP, driven by an improvement in surplus the trade balance. Exports increased quarter-on-quarter (qoq) for the first time since Q2 2015. This growth was driven by manufacturing exports, which were the only export category to also increase over the year. Imports also increased in Q2 but are still down over the year. Both raw material and capital goods imports, leading indicators for private investment, are showing signs of a small pick-up. The financial account expanded due to strong public sector borrowing. External financing needs remain stable, although foreign ownership of government debt is increasing as a share of the total. The Rupiah has Relatively stable global financial markets and a BOP surplus helped stabilize the stabilized Rupiah, which regained some of the ground lost in Q2, and has since appreciated. Most other emerging market currencies have not performed as well. Domestic financial assets also performed relatively strongly compared with regional peers in Q3. The downward trajectory in credit growth in Indonesia has also stabilized partly due to BI’s monetary easing. A sharp pick-up in The Government’s tax amnesty program saw a sharp pick-up in revenue collection tax amnesty just prior to the end of the first phase of the program. Tax collections under the proceeds helped program reached IDR 93.4 trillion, 56.6 percent of the target, by the end of phase 1 bolster revenue on 30 September1 (see Box 2). Notwithstanding this outcome, the Government collection announced an expected overall revenue shortfall of IDR 219 trillion in 2016. At the same time, the Government announced further expenditure cuts of IDR 134 trillion to the 2016 revised Budget and increased the fiscal deficit to 2.7 percent of GDP (from 2.2 percent of GDP)2. With a view to improving credibility, and reducing the 1 Data accessed on October 11th 2016 at: http://www.pajak.go.id/statistik-amnesti. 2 Wirayani and Parlina, 2016, “Budget Deficit Set to Soar towards Legal Limit”, Jakarta Post, September 19, accessed at: http://www.thejakartapost.com/news/2016/09/19/budget-deficit-to- soar-toward-legal-limit.html. October 2016 THE WORLD BANK | BANK DUNIA ii Pressures easing Indonesia Economic Quarterly likelihood of such mid-year expenditure cuts, the 2017 draft Budget features more realistic revenue targets. Assuming the Government maintains the momentum of priority public investment, the World Bank projects the fiscal deficit to reach 2.6 percent of GDP in 2016 and 2.8 percent of GDP in 2017. The baseline outlook Looking ahead, the Table 1: In the base case, GDP growth is projected at 5.1 of 5.1 percent GDP World Bank percent in 2016 growth in 2016 and maintains its baseline 2015 2016p 2017p 5.3 percent in 2017 GDP growth outlook Real GDP (Annual percent 4.8 5.1 5.3 change) remains unchanged from the June 2016 Consumer price (Annual percent IEQ of 5.1 percent in index change) 6.4 3.6 4.4 2016 and 5.3 percent Current account (Percent of -2.1 -2.1 -2.3 in 2017. The balance GDP) projected pick-up in (Percent of Budget balance -2.6 -2.6 -2.8 growth this year and GDP) next year relies on a Source: BI; BPS; MoF; World Bank staff calculations stronger contribution from private investment in response to lower borrowing costs, a more credible government budget, and investment climate reforms. Private consumption is expected to remain resilient on the back of subdued inflationary pressure, a stable Rupiah, and expenditure associated with local election activities which will start in Q43. In addition, fiscal risks have eased on account of the more realistic revenue and expenditure targets in the draft 2017 Budget. On the revenue side, the Government expects that the planned revisions to the general tax law, income tax law (Ketentuan Umum Tata Cara Perpajakan, KUP), VAT law, and stamp duty law, as well as further increases in excise tax, will increase tax revenue and help achieve the 2017 revenue target. On the expenditure side, changes in the allocation of spending include: better targeting of electricity subsidies and the rice for prosperity program (Beras untuk Rakyat Sejahtera, RASTRA) and increased Village Funds transfers. The poverty rate fell The official poverty rate fell by 0.4 percentage points in Q1 2016, the largest yoy in Q1 2016, the decline in the last 3 years. Stable food prices, particularly for rice, made a large largest yoy decline in contribution to poverty reduction. In particular, improved management of rice the last 3 years; the imports and market operations by the government in late 2015 and early 2016 Gini coefficient also curbed rice price inflation during a typically volatile time of year. Expansions in fell, the largest social assistance programs may also have driven poverty reduction. For example, the annual drop since Family Hope conditional cash transfer program (Program Keluarga Harapan, PKH) the Asian financial was expanded from 2.8 million households to 3.5 million households in late 2015. crisis This expansion contributed as much as 0.1 percentage points to poverty reduction, or nearly one-third of the total observed decline. The Gini coefficient fell by 1.1 points to 39.7 in March 2016, the largest annual drop in the Gini since the Asian financial crisis, and one of only three substantive falls in the last 15 years. The major driver of this reduction was a reallocation of total national consumption from the top 20 percent of households (Quintile 5) to the middle 40 percent of households (Quintiles 3 and 4). However, the bottom 40 percent of households’ (Quintiles 1 and 2) share of consumption did not increase. 3 Local elections will be held on 15 February 2017, and cover 7 provinces including DKI Jakarta (out of 34 total provinces) and 94 districts (out of 504 total districts). October 2016 THE WORLD BANK | BANK DUNIA iii Pressures easing Indonesia Economic Quarterly Unlocking Given the protracted slowdown in global growth and trade, one way for Indonesia Indonesia’s tourism to boost export earnings in the medium term is to improve the tourism sector. potential requires Tourism also has the potential to unlock private investment, foster inclusive and infrastructure job-rich growth, and guide a targeted infrastructure investment program in tourism development, destinations. In light of this potential, the Government has developed an ambitious investment plan for the development of 10 priority tourist destinations. Implementing this plan promotion and will require efforts on multiple fronts. First, infrastructure development is required reforms, better to improve the accessibility and carrying capacity of these new tourist destinations. government The Government plans to prepare integrated tourism masterplans to guide such coordination, and development. These plans should also be used to ensure that development is improved environmentally sustainable. Second, licensing simplification, further revisions to implementation the Negative Investment List—such as for ecotourism facilities, spas, and travel capacity agencies—and further promotion efforts are required to attract foreign and domestic investment to the sector. Third, destination development will require strengthened local government implementation capability, and better coordination between central government agencies, subnational governments, and the private sector. Finally, destination development plans should be adjusted periodically to reflect global and domestic market dynamics and local conditions. To this end, tourism data needs to be better consolidated and more systematically analyzed to track results and inform potential mid-course corrections. There are growing Despite recent improvements in the rice price stabilization mechanism, the efficacy concerns about the of food security policies and public spending in Indonesia remain a concern. First, efficacy of Indonesia’s consumers are paying exceptionally high prices for food, with the Indonesia’s food country’s food trade restrictions and other policy interventions imposing a security policies, significant ‘tax’ on consumers. These high food prices have the most significant necessitating a adverse impact on the country’s poor and near poor, and have contributed to high rebalancing away rates of stunting. Second, despite government support and subsides, many of from a focus on rice Indonesia’s farmers have been unable to sustain a livelihood based on agriculture. production, and At the same time, changing dietary and food expenditure patterns are transforming towards a modern the landscape for Indonesia’s food policy, necessitating greater policy attention on food system the food system’s contributions to and burdens on public health and the environmental. In light of these findings, Indonesia should rebalance its food security policy away from a dominant focus on rice, and towards a modern food system which is more RICE: (i) Reliable, (ii) Inclusive, (iii) Competitive; and (iv) Eco-friendly. This will require shifts in public spending and in the modalities of public interventions. Integrating WASH As well as food policy, stunting is influenced by access to water, sanitation, and with other sectors— hygiene (WASH) services. Indonesia has already increased access to WASH in rural such as health, areas over the last decade owing to a shift in approach towards community nutrition, empowerment, and a strengthened institutional framework. Sustaining this success, agriculture, and and integrating WASH with other sectors—health, nutrition, agriculture, and social social assistance—is assistance—is now required to further improve access to WASH and, consequently, required to reduce address Indonesia’s high rate of stunting. Some collaboration among sectors is stunting already happening. For example, triggering activities have traditionally been used to stimulate an emotional response from the community to stop open defecation. More recently, they are also being used to increase community demand for improved water supply and good nutrition. However, more effort is required to mainstream an integrated approach to stunting. To begin, formative research would be useful in producing evidence-based messaging on the interlinkages of rural WASH, nutrition, and poverty. Such messaging could form the basis of integrated October 2016 THE WORLD BANK | BANK DUNIA iv Pressures easing Indonesia Economic Quarterly Behavioral Change Communication (BCC) frameworks and strategies. Further, local governments need enhanced capacity, increased resources, and better incentives to collaborate with other sectors and deliver integrated WASH services. Finally, existing WASH organizations, like Community-Based Operators (CBOs) responsible for overseeing local service delivery, can serve as useful entry points to provide services in other sectors. Increased teacher Another priority for the Government over the past decade has been improving qualifications are not education. While enrollment rates have substantially improved in recent decades, enough to improve Indonesia’s poor performance in international assessments of student learning student learning indicates that the key challenge in the sector may now be the quality of education. outcomes Recognizing this, the Government implemented a teacher certification program designed to improve teachers’ qualifications and motivation to perform, and increase the desirability of teaching as a profession. The program provides certified teachers with a generous professional allowance, which effectively doubles their salary. Certification requirements include a university bachelor’s degree and a portfolio of other training and experience. Importantly, requirements to demonstrate competency were dropped during the design phase. Potentially as a result, a recent evaluation found that the certification program had no impact on student test scores, even though many teachers were incentivized to upgrade their qualifications. Looking ahead, the hope is that the certification program has helped to lay the groundwork for further essential reforms in the sector. In particular, the certification program should shift to a system of teacher management and continuous professional development. Such a system would prioritize demonstrated professional competencies over education level and seniority. Without such improvements, the huge fiscal cost of the program would turn out to be “double for nothing”. October 2016 THE WORLD BANK | BANK DUNIA v Pressures easing Indonesia Economic Quarterly A. Economic and fiscal update 1. Global financial market volatility has eased, but the global economy remains unsupportive of Indonesia’s growth Global growth Global growth momentum continued to be sluggish in the first half of the year, with continued to weaker than expected advanced economy growth (particularly in the US). Emerging disappoint market growth was also relatively subdued. The impact on financial markets and growth of the political uncertainty following the UK Brexit vote has been limited to the UK thus far. Growth in China is expected to continue to ease as it continues the transition from import- and commodity-intensive industry and investment toward consumption and services. This may have a relatively larger short-term impact on Indonesia compared to relatively less commodity-dependent economies. Global financial The volatility seen in Figure 1: Financial market volatility subsided in Q3 market volatility global financial markets (growth index, yoy, percent) mostly subsided in leading up to and in the 35 140 Q3 aftermath of the Brexit referendum in June has 30 120 moderated significantly. MOVE (RHS) Volatility indicators such 25 100 as the MOVE (bond 20 80 markets) and VIX (equity markets) are close to or 15 60 below levels prior to the contagion from financial 10 VIX (LHS) 40 market volatility in China in September 2015 5 20 (Figure 1). Benefiting from global financial 0 0 Oct-2015 Apr-2016 Oct-2016 market stability, the Source: Bloomberg; World Bank staff calculations October 2016 THE WORLD BANK | BANK DUNIA 1 Pressures easing Indonesia Economic Quarterly Rupiah stabilized against the US dollar (in line with most other emerging market currencies). Reflecting a pick-up in global comodity prices, the prices of Indoneisa’s six major commodity exports continued to grow in Q3 relative to Q2 (with the exception of crude oil which declined slightly). In year to date terms, the prices of all six commodities have risen strongly. 2. GDP growth picked up on the back of stronger government consumption GDP growth picked Real GDP growth picked up to 5.2 percent year-on-year (yoy) in Q2 from 4.9 percent up to 5.2 percent yoy in Q1, due to strong government consumption. Total consumption growth yoy… remained robust in Q2, growing at 5.2 percent yoy. Despite government spending cuts of IDR 134 trillion announced in August, government investment accelerated; by the end of August, public capital expenditure was 19.3 percent higher than its level over the same period last year. Despite Bank Indonesia (BI) cutting its policy rate five times since the beginning of this year, the impact on credit growth has been limited. The World Bank’s forecasts for Indonesia’s GDP growth remain at 5.1 and 5.3 percent in 2016 and 2017 respectively. However, the outlook is subject to increased external risks, and will depend on the ongoing resilience of private consumption and a pick-up in private investment. ... driven mainly by Private consumption expenditure was stable in Q2, supported by lower inflation on government the back of stable food prices, a relatively stable Rupiah (see Section 3), and the consumption… seasonal impact of Ramadhan. It grew by 5.1 percent yoy in Q2, slightly above the 5.0 percent yoy growth recorded in the three previous quarters. Government consumption, however, was the main driver of the growth pick-up in Q2, growing at 6.3 percent yoy, up from 2.9 percent yoy in the first quarter (Figure 2). Government consumption’s contribution to yoy GDP growth was 0.5 percentage points in Q2 compared to a contribution of 0.2 percentage points in the previous quarter. …while private Total fixed investment spending growth was 5.1 percent yoy, down from 5.6 investment remained percent in the last quarter, and contributed 1.6 percentage points to yoy growth. In subdued contrast, public investment spending (deflated by the total investment deflator) grew by 45.7 percent yoy in Q2, indicating continuing improvement in expenditure disbursement. However, given Indonesia’s relatively small fiscal multiplier (see Box 1), the positive impact of this investment is likely to be small and temporary. Therefore, it is essential that increased public capital expenditure is accompanied by improvements in public investment management. Not only to improve the short- run impact of such investment on growth, but more importantly, to improve productivity in the long-run. Export and import Net exports did not contribute to growth in Q2, as both exports and imports growth seems to continued to contract yoy. However, the pace of contraction is slower than in Q1 have bottomed out, this year. Real exports contracted 2.7 percent yoy in Q2 compared with 3.5 percent but the contribution yoy in the first quarter. Similarly, real imports contracted by 3.1 percent yoy in Q2 of net exports to compared with -5.1 percent in Q1. GDP growth was still zero October 2016 THE WORLD BANK | BANK DUNIA 2 Pressures easing Indonesia Economic Quarterly Figure 2: Government consumption was the main Figure 3: Most high frequency indicators picked up in driver of the pick-up and GDP growth July and August (contributions to growth, percent yoy) (3 month moving average, percent yoy; BI consumer confidence index (RHS)) Stat. discrepancy* Net exports 30 140 Investment Retail Sales Index Government consumption 20 Consumer Confidence 120 10 Private consumption Index GDP 8 10 100 6 0 80 4 Cement Sales -10 60 2 -20 40 0 -2 -30 Motorcycle Sales 20 Motor Vehicle Sales -4 -40 0 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Note: *Stat. discrepancy includes change in inventories. Source: BI; BPS; World Bank staff calculations Source: BPS High frequency High frequency indicators were mixed in September, but still down over the year indicators showed (Figure 3). The Nikkei/Markit purchasing manager index (PMI) and retail sales survey mixed signals in increased in September. A negative trend was observed in the Bank of Indonesia’s September consumer confidence index and business expectation and realization indices. Motorcycle sales increased in September but still contracted by 15.7 percent yoy. The World Bank’s The World Bank’s projection for GDP growth remains at 5.1 percent for 2016 and projection for GDP 5.3 percent in 2017. Anticipating a revenue shortfall of IDR 219 trillion, the growth remains Government announced further expenditure cuts of IDR 134 trillion to the 2016 unchanged since the revised Budget and initially increased the fiscal deficit to 2.7 percent of GDP, June 2016 IEQ at 5.1 converging to the June 2016 IEQ estimates of IDR 236 in expenditure cuts and an percent for 2016… IDR 316 revenue shortfall. Private consumption is expected to remain resilient in line with benign inflation, a relatively stable Rupiah, and local election activities due to start in Q4. However, the effect of recent monetary easing has remained muted. Given a likely high base effect from high government investment growth this year the outlook for Q4 2016 and beyond will depend on a pick-up in private investment. …subject to The baseline growth scenario is subject to significant downside risks stemming from significant downside both domestic and external factors. Major external risks include slower than expected risks growth in major advanced economies, and the uncertainty around the timing of a US interest rate hike which could divert capital flows from emerging economies and possibly increase global financial market volatility. This risks will mainly affect 2017 growth given that there is only one quarter left in 2016. Domestic risk factors include a lower than expected recovery in private investment, and a higher than expected revenue shortfall, which could in turn negatively impact the Government’s infrastructure plans. On the other hand, as identified in the June IEQ, the upside risk to government revenue from the tax amnesty program has partly materialized. Tax amnesty revenues reached IDR 93.4 trillion (56.6 percent of the target) by the end of phase 1 (see Box 2). Additional revenue from the tax amnesty program that translates into government spending supportive of growth remains an upside risk to 2017 growth. October 2016 THE WORLD BANK | BANK DUNIA 3 Pressures easing Indonesia Economic Quarterly Box 1: What happens when the Government boosts public investment in Indonesia? Within the context of subdued global demand, the Indonesian Government has boosted public investment with a view to supporting demand in the short-run and increasing supply side capacity in the long-run by focusing on infrastructure spending specifically. Such a decision is currently considered particularly attractive by many governments because of low borrowing costs and benign inflationary pressures. A review of the relevant empirical literature suggests that in emerging and developing economies fiscal multipliers (the impact of increased public spending on growth) are much smaller than in advanced economies, mainly due to public investment inefficiencies, relatively immature financial markets and a lower ability to sustain higher levels of public debt due to a lack of fiscal credibility. These studies generally show that boosting public investment generates a small positive multiplier in emerging and developing economies. The World Bank has analyzed the size and timing of the economic impact of public investment spending using a similar empirical approach to that outlined in Blanchard and Perotti (2002), Ilzetzki et al (2009) and Tang et al (2010). The approaches uses a vector auto regression (VAR) framework and the following variables: CAPEX as proxy for public investment, real private investment, real government consumption expenditure, the policy interest rate, and real GDP. The analysis found that a one percent increase in public investment increases economic growth by approximately 0.2 percent (similar to the results in Tang et al (2010)) and that this impact tends to dissipate after four quarters. Sources: Tang, Liu, and Cheung, 2010, “Changing Impact of Fiscal Policy on Selected ASEAN Countries” ADB Working Paper Series on Regional Economic Integration, No. 70, December; Ilzetzki, Mendoza, and Vegh, 2009, “How Big are Fiscal Multipliers?” Center for Economic Policy Research (CEPR) Policy Insight, No. 39; Blanchard and Perotti, 2002, “An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output” Quarterly Journal of Economics 107(4): 1329–68. Note: Real private investment data is not published and was estimated using the difference between total investment and government capital expenditure as a proxy for public investment and then deflating this value using the investment deflator. 3. Inflationary pressures are lower due to stable food prices and declining transportation costs Both headline and In September, headline inflation continued its downward trajectory, measuring 3.1 core inflation percent yoy, while core inflation was 3.2 yoy (Figure 4). The decline in inflation was continued to decline partly due to more stable food prices, particularly for rice, and lower transportation on the back of costs attributable to the Government’s fuel price reductions earlier in the year. The moderating food moderation in rice price inflation was partly due to Government food price prices management. These efforts included managing Bulog’s rice stock, timely rice imports, and direct distribution of rice to the market. October 2016 THE WORLD BANK | BANK DUNIA 4 Pressures easing Indonesia Economic Quarterly Figure 4: Headline CPI inflation has fallen on the Figure 5: Domestic rice prices eased in line with back of moderating food prices international trends (percent change, yoy; last observation September 2016) (year-on-year growth, 3 month moving average, percent) 16 24 Domestic wholesale prices Rice 18 12 Domestic retail prices 12 6 Food 8 0 -6 4 International Thai rice prices -12 Core Headline -18 0 -24 Sep-13 Sep-14 Sep-15 Sep-16 Sep-13 Sep-14 Sep-15 Sep-16 Source: BPS; World Bank staff calculations Source: CEIC; World Bank staff calculations Domestic rice price While domestic rice price growth has moderated recently, they remain higher than stabilization efforts international prices. In September, the average domestic wholesale (IR64-I) rice have been effective price was IDR 10,010 per kg, while the comparable Thai (5 percent broken) rice price was IDR 5,495 per kg. The gap between the domestic and international wholesale rice prices remained high, hovering around 80 percent in September, from 57 percent in May. Looking ahead, the Indonesian Weather and Meteorology Bureau (BMKG) predicts unusually high rainfall caused by La Niña events could have an adverse impact on food production and distribution similar to events in the recent past – the 2010-2011 La Niña caused a 2 percent decline in paddy production. October 2016 THE WORLD BANK | BANK DUNIA 5 Pressures easing Indonesia Economic Quarterly Table 2: In the base case, GDP growth is projected at 5.1 percent in 2016 and 5.3 percent in 2017 (percentage change, unless otherwise indicated) Annual YoY in Fourth Quarter Revision to Annual 2015 2016 2017 2015 2016 2017 2016 2017 1. Main economic indicators Total Consumption expenditure 4.9 4.9 5.2 5.4 4.9 5.3 0.1 0.0 Private consumption expenditure 4.8 5.0 5.3 5.0 5.1 5.3 -0.1 0.0 Government consumption 5.4 4.2 5.1 7.3 3.9 5.6 1.2 0.2 Gross fixed capital formation 5.1 4.7 5.2 6.9 3.9 5.7 -0.5 -0.1 Exports of goods and services -2.0 -1.2 3.4 -6.4 4.4 3.6 0 -0.2 Imports of goods and services -5.8 -2.3 2.7 -8.1 -0.5 3.4 -1.3 -0.1 Gross Domestic Product 4.8 5.1 5.3 5.0 5.1 5.4 0.0 0.0 2. External indicators Balance of payments (USD bn) -1.1 1.4 5.8 - - - 0.0 0.0 Current account balance (USD bn) -17.7 -20.1 -24.9 - - - 1.0 0.0 As share of GDP (percent) -2.1 -2.1 -2.3 - - - 0.0 0.0 Trade balance (USD bn) 5.0 6.2 5.0 - - - 0.0 0.0 Capital & financial acc. bal. (USD bn) 17.1 22.4 32.1 - - - 0.0 0.0 3. Fiscal indicators Central gov. revenue (% of GDP) 13.1 12.9 - - - 0.8 - Central gov. expenditure (% of GDP) 15.6 15.4 - - - 0.5 - Fiscal balance (% of GDP) -2.5 -2.6 - - - -0.2 - Primary balance (% of GDP) -1.2 -1.0 - - - 0.4 - 3. Other economic indicators Consumer price index 6.4 3.6 4.4 4.8 4.0 4.7 0.0 0.0 GDP Deflator 4.2 2.7 4.4 4.0 3.6 4.5 -0.2 -0.1 Nominal GDP 9.2 7.9 10.0 9.2 8.8 10.1 -0.2 -0.1 4. Economic assumptions 1338 Exchange rate (IDR/USD) 13300 13300 - - - 0.0 0.0 9 Indonesian crude price (USD/bl) 49 41 51 - - - 1.0 2.0 Note: Exports and imports refer to volumes from the national accounts. All figures are based on revised and rebased GDP. Exchange rate and crude oil price assumptions are based on recent averages. Revisions are relative to projections in the June 2016 IEQ. Source: BPS; BI; CEIC; World Bank staff projections 4. The current account deficit narrowed slightly in Q2 2016 Strong public An increase in portfolio investment resulted in a moderate balance of payments portfolio inflows surplus in Q2, following a small deficit in the previous quarter (Figure 6). The current drove a moderate account deficit narrowed marginally to 2.0 percent of GDP, driven by an BOP surplus improvement in the trade balance. The financial account expanded due to strong public sector borrowing. External financing needs remain moderate, although foreign ownership of government debt is increasing as a share of the total. The current account The current account deficit improved slightly to 2.0 percent of GDP, from 2.1 deficit narrowed percent in the previous quarter. The trade surplus expanded to USD 1.7 billion in marginally to 2.0 Q2 as exports increased by 7.2 percent—the first qoq increase since Q2 2015. This percent of GDP in growth was driven by manufacturing exports, which were the only export category Q2 2016 and the to also increase over the year (Figure 7). For the most part, commodity exports trade surplus moved in line with their prices—down over the year but up in the quarter. Imports increased also increased in Q2, but fell by 7.8 per cent over the year, driven by volatile fuel imports. Raw material and capital goods imports similarly increased in the quarter but were down over the year. October 2016 THE WORLD BANK | BANK DUNIA 6 Pressures easing Indonesia Economic Quarterly Figure 6: Strong public portfolio inflows drove a Figure 7: Exports increased for the first time in four moderate BOP surplus quarters, but remained lower over the year (USD billion) (contributions to year-on-year growth, percentage points) 20 Current account Direct investment Oil and gas Coal Portfolio investment Other investment Mining Palm oil Overall balance Basic balance Rubber Manufacturing 15 10 Other Total exports 10 5 5 0 -5 0 -10 -5 -15 -10 -20 -15 -25 Jun-13 Jun-14 Jun-15 Jun-16 Jun-14 Jun-15 Jun-16 Note: Basic balance = direct investment + current account Source: BI; World Bank staff calculations balance Source: BI; World Bank staff calculations Direct and portfolio Direct investment increased slightly in Q2 to USD 3.0 billion. Portfolio flows were investment in also strong, driven by public sector borrowing. Private portfolio inflows were low and Indonesia was strong focused on equities. Net foreign purchases of Indonesian equities and government in Q2 bonds in Q3 suggest that portfolio flows will remain robust in Q3. Other investment posted a quarterly deficit, driven by an outflow of private sector assets, particularly currency and deposits. Figure 8: External financing needs remain stable Figure 9: Government debt is increasingly held (USD billion (LHS), percent (RHS)) offshore (USD billion (LHS), percent of total (RHS)) Private short term external debt Foreign Government short term external debt 250 65 Domestic Current account deficit % foreign owned (RHS) 100 External financing (% GDP) (RHS) 100% 200 62 External financing (% reserves) (RHS) 80 80% 150 59 60 60% 100 56 40 40% 50 53 20 20% 0 0% 0 50 2012 2013 2014 2015 2016* 2006 2008 2010 2012 2014 2016* Note: Short-term debt is calculated on a remaining maturing Note: * Projection basis; * Projection Source: BI; World Bank staff calculations Source: BI; World Bank staff calculations Indonesia’s external Indonesia’s projected gross external financing needs for 2016—the sum of the financing needs are current account deficit and external debt amortizations—remain stable, at stable and approximately USD 75 billion (8.0 percent of GDP and 71 percent of reserves) sustainable (Figure 8). The ratio short term to total external debt (7.2 percent) also remains October 2016 THE WORLD BANK | BANK DUNIA 7 Pressures easing Indonesia Economic Quarterly stable. However, the portion of government debt held off-shore has been gradually rising over the last decade, making government finances more exposed to international capital markets. The current account Looking forward, the Table 3: The current account deficit is expected to deficit is expected to expected current account widen slightly in 2016 and 2017 widen to 2.1 percent deficits for 2016 and 2017 (USD billion unless otherwise indicated) 2015 2016 2017 of GDP in 2016 and have been reduced by 0.2 Overall balance of 2.3 percent in 2017 percentage points to 2.1 payments -1.1 3.5 8.6 and 2.3 percent of GDP, % of GDP -0.1 0.4 0.9 respectively (Table 3), Current account -17.7 -18.9 -23.5 mainly due to a larger than % of GDP -2.1 -2.1 -2.3 expected trade surplus in Goods trade balance 13.3 14.0 14.7 Services trade balance -8.3 -7.8 -9.5 Q2. Imports, especially Income -28.2 -30.3 -34.4 capital goods imports, Transfers 5.5 5.2 5.7 increased by less than Capital and financial 17.1 22.4 32.1 expected in Q2. In accounts contrast, exports increased % of GDP 2.0 2.4 3.2 Direct investment 10.6 10.9 13.4 by more than expected, Portfolio investment 16.7 15.8 21.5 supported by higher Financial derivatives 0.0 -0.1 0.0 commodity prices in Q2. Other investment -10.3 -4.3 -2.8 Commodity prices Memo:     continued to rise through Basic balance -7.1 -8.0 -10.1 July-September, which will % of GDP -0.8 -0.9 -1.1 support exports in Q3. Note: Basic balance = direct investment + current account Conversely, growth is balance. Source: BI; World Bank staff calculations expected to remain suppressed in Indonesia’s major trading partners, putting downward pressure on exports. Overall capital inflows into Indonesia, particularly equity flows, are expected to remain strong in H2 as international investors search for yield in a low global interest rate environment. However, government bond flows are expected to taper off in H2 given the already high levels of government borrowing in H1. 5. Stable domestic financial conditions and monetary policy easing bias Domestic financial Relative stability in global financial markets helped stabilize the Rupiah in Q3 conditions are stable (Figure 10). Furthermore, Indonesian financial assets performed relatively strongly compared with asset prices in regional peers (Thailand and Malaysia) in Q3. Credit conditions showed some initial signs of easing but this was not sustained despite Bank Indonesia (BI) moving to a new, lower policy rate and retaining its easing bias. October 2016 THE WORLD BANK | BANK DUNIA 8 Pressures easing Indonesia Economic Quarterly The Rupiah has Regaining some of the Figure 10: The Rupiah remained stable in Q3 been stable ground lost in late Q2, the (index, January 4 2016 = 100) throughout Q3… Rupiah has appreciated 1.3 110 percent against the US USD/IDR dollar since the start of 108 July. This is in line with 106 other emerging economies, as shown by JP Morgan’s 104 Emerging Market Currency Index (EMCI) 102 (Figure 10). In year to date 100 JP Morgan EMCI terms, the Rupiah has maintained the strong 98 gains made in Q1 and has 96 appreciated 6.9 percent Jan-2016 Apr-2016 Jul-2016 Oct-2016 against the US dollar. Source: BI; JP Morgan; World Bank staff calculations …while borrowing The yield on government 10-year bonds has stabilized at 7.1 percent, after falling costs have 180 basis points since the start of the year, coinciding with falling global financial decreased… market volatility over the course of the year (notwithstanding increased volatility during the Brexit debate). JP Morgan’s Emerging Market Index (EMBI) spread for Indonesia also indicated a reduction in borrowing costs, declining 51 basis points between the end of June and October 19 (compared to a fall of 14 basis points in Q2). Similarly, the global EMBIG (a measure of emerging market US dollar borrowing costs) declined by 44 basis points over the same period (compared to a fall of 25 basis points during Q2). … and Indonesian The JCI continued its strong performance this year, rising 8.8 percent between the equities are near end of June to mid-October, driven by strong performances in the basics industry historical highs (mostly construction materials; up 24.0 since the end of June) and the finance sector (up 15.4 percent). The mining and miscellaneous sectors continue to be the driving force behind the gains over the year to date, with growth of 59 percent and 31 percent respectively. Indonesian equities are now around historical highs (last seen in April 2015). A monetary policy On 19 August Bank Indonesia (BI) moved to a new policy rate, the 7-day reverse easing bias has had repo, in an effort to improve the transmission mechanism between the policy rate limited impact on and bank rates. The impact of this change—on interbank credit lines and the domestic credit uneven distribution of liquidity in the banking system—has so far been limited. growth so far Given the stable Rupiah and benign inflationary pressures (Figure 11), as well as a small downward revision to BI’s 2016 growth forecast from 5.0–5.4 percent to 4.9– 5.3 percent, BI has been able to cut rates six times this year. Notwithstanding the monetary easing this year, both credit and deposit growth remains tepid (near six year lows) (Figure 12), partly due to an increase in non-performing loans (NPLs) over the course of this year. The recent pick-up in credit appear to have been short- lived and it remains to be seen whether the pick-up in deposit growth in August will be sustained. October 2016 THE WORLD BANK | BANK DUNIA 9 Pressures easing Indonesia Economic Quarterly Figure 11: Benign inflation provided room for Figure 12: Credit and deposit growth continues to monetary easing disappoint (year-on-year growth, percent) (year-on-year growth, percent) 8 18 7 16 Deposit growth Headline CPI 14 6 12 5 Core CPI 10 BI inflation target Credit growth 4 8 3 6 2 4 7 Day reverse repo rate 1 2 0 0 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Source: BI; World Bank staff calculations Source: BI; World Bank staff calculations 6. Policy responded to weak revenue collection The Government Revenue collection picked up significantly in Q3, due to the implementation of the introduced further first three months of the tax amnesty program. Tax collection under the program measures in alone reached IDR 93.4 trillion, 56.6 percent of the target, by the end of phase 1 on response to weak 30 September4 (see Box 2). Nevertheless, the Government announced an expected revenue collection overall revenue shortfall of IDR 219 trillion in 2016. At the same time, the early in the year Government announced further expenditure cuts of IDR 134 trillion to the 2016 revised Budget and increased the fiscal deficit to 2.7 percent of GDP (from 2.2 percent of GDP in the 2016 Budget)5. With a view to improving credibility, and reducing the likelihood of such mid-year expenditure cuts, the 2017 draft Budget (currently under discussion in the Parliament) features more realistic revenue targets. The tax amnesty has Revenue realization in the first nine months of 2016 increased significantly by 9.2 led to a pick-up in percent yoy in nominal terms (Figure 13), mainly driven by a sharp increase in non- year-to-date revenue oil and gas income taxes. Such taxes contributed 12.0 percentage points to yoy collection growth compared to 2.6 percentage points over the same period last year. This pick- up is mostly due to increased collection of corporate income taxes (CIT) and proceeds from the tax amnesty program (recorded under other non-oil and gas income taxes) (Figure 14). On the other hand, oil and gas-related revenues continued to detract from nominal growth in total revenue (by 5.5 percentage points), but at a lower rate than in the corresponding period last year (-9.5 percentage points), reflecting a slower decline in oil and gas prices this year. Domestic VAT increased significantly by 36.1 percent yoy, in line with reasonably robust private consumption growth. Import VAT continued to decline, but at a slower pace than last year, reflecting a smaller contraction in imports. 4 Data accessed on October 11th 2016 at: http://www.pajak.go.id/statistik-amnesti. 5 Wirayani and Parlina, 2016, “Budget Deficit Set to Soar towards Legal Limit”, Jakarta Post, September 19, accessed at: http://www.thejakartapost.com/news/2016/09/19/budget-deficit-to- soar-toward-legal-limit.html. October 2016 THE WORLD BANK | BANK DUNIA 10 Pressures easing Indonesia Economic Quarterly Figure 13: Year-to-date total revenue collection growth Figure 14: … primarily due to increased collection of picked-up in the third quarter of the fiscal year… CIT, domestic VAT, and tax amnesty proceeds (contributions to revenue growth yoy, percent) (contributions to revenue growth yoy, percent) 15 O&G related revenues 10 Jan-Sept 2014 Jan-Sept 2015 Jan-Sept 2016 Income taxes N-O&G 9 VAT/LGST 8 10 Excises 7 International trade taxes 6 Other 5 Total revenues 4 5 3 2 1 0 0 -1 -2 -5 -10 Jan-Sept 2014 Jan-Sept 2015 Jan-Sept 2016 Note: O&G stands for oil and gas, N-O&G stands for non-oil and Note: CIT stands for corporate income tax under Article 25 (excl. gas; LGST stands for luxury goods sales tax; “Other” includes: from extraction of oil and gas); PIT stands for personal income property taxes, other tax revenues; non-oil and gas non-tax tax collected under Article 21 and Article 25/Personal of the revenues; other non-tax revenues (profits of public enterprises, Income Tax Law No. 36 of 2008; WHT stands for withholding tax revenues from Public Service Agency (BLU), and other non-tax under Article 22; FT stands for final tax under the Article 4(2) of revenues (PNBP). the Income Tax Law; LGST stands for luxury goods sales tax; Source: MoF; World Bank staff calculations Other N-O&G represents non-oil and gas income taxes recorded under all other articles of the Income Tax Law, including the redemption fee under the tax amnesty program. Source: MoF; World Bank staff calculations Some recent tax Recent tax policy and administrative changes might have impacted negatively on policy and recent revenue performance. The two increases in the non-taxable income threshold administration (Penghasilan Tidak Kena Pajak, PTKP)6 this year contributed partly to a 2.2 percent changes may have decline in personal income tax (PIT) collection relative to January-September 2015. negatively impacted This followed another threshold increase in 2015, which was effective retroactively, tax collection triggering a seven-fold increase in PIT tax returns from 2015 to 2016 (from IDR 72.8 billion in Jan-Aug 2015, to IDR 494.6 billion in Jan-Aug 2016). Net collection of non-oil and gas corporate income taxes (CIT) recorded nominal growth of 6.2 percent, likely due to a 26.1 percent decline in non-oil and gas CIT returns in Jan- Aug 2016 relative to the corresponding period last year.7 In addition, excise taxes contributed -1.0 percentage points to revenue growth, reflecting a regulatory change to the payment of excise taxes by tobacco producers.8 Execution of 2016 Following a strong pick-up in first half of 2016, disbursement of the 2016 revised Budget is Budget reached 63 percent by end of September 2016 (a similar disbursement rate constrained by weak to that achieved over the same period last year), likely affected by the Government’s revenue collection expenditure cuts announcement in July. While still low, execution rates for capital 6 The first increase from IDR 24.3 million to IDR 36.0 million was implemented in 2015 (Ministry of Finance Regulation PMK-122/2015) and the second increase from IDR 36.0 million to IDR 54 million was introduced in 2016 (Ministry of Finance Regulation PMK-101/2016). 7 Gross non-oil and gas CIT receipts recorded a decline of 3.1 percent yoy. 8 Ministry of Finance Regulation PMK-20/2015, stating that, starting 2015, all stamp payments have to be made by December 31 of the current year. In the past, producers were allowed to postpone the payment of excise tariffs for 2 months after they ordered the excise stamps, regardless of the month of order. As a result, the Directorate General of Customs and Excises received almost no tobacco excise payments in January and February 2016; the first full-month payment was received in March 2016. October 2016 THE WORLD BANK | BANK DUNIA 11 Pressures easing Indonesia Economic Quarterly and material expenditures improved, rising to 36 and 57 percent by the end September (compared to 28 and 45 percent over the same period last year), despite the fact that the spending cuts were focused on material expenditure. The realizations of personnel expenditure and interest payments were on track at 69 and 77 percent. At 63 percent, disbursement of regional transfers was slightly lower due to the delay of revenue sharing and DAU transfers, which were part of the recent expenditure adjustments. To align the budget The Government announced further revisions to the 2016 fiscal outlook in July, with macroeconomic despite the revised 2016 Budget being approved on June 28.9 The projected revenue developments, the shortfall increased to IDR 219 trillion from the previous IDR 190 trillion, reflecting Government has weak year to date revenue collection and subdued economic activity. The revised down Government also announced a further round of expenditure cuts totaling IDR 134 revenue targets, trillion (6 percent of total expenditure) focusing on non-priority line ministries’ announced spending (through self-blocking) and postponement of transfers to subnational expenditure cuts, governments (SNGs). In addition, the Government increased its fiscal deficit and expanded the forecast to 2.5 percent of GDP (from 2.4 percent of GDP in the revised 2016 fiscal deficit Budget), and to 2.7 percent of GDP again in September10. These measures are expected to better align the budget with macroeconomic developments, preserve priority spending, and reduce the risk of end-year cuts. Though the cuts The IDR 134 trillion in Figure 15: Recently announced expenditure cuts in the focus on non-priority expenditure cuts are 2016 revised Budget affected some key line ministries spending, some key expected to come from (IDR trillion (LHS); percent of allocation (RHS)) line ministries are both central line ministries Budget cuts (IDR Tln) % of total (RHS) 9 35 also affected (IDR 65 trillion), and 8 30 transfers to SNGs (IDR 7 25 6 69 trillion). Expenditure 5 20 cuts at the central 4 15 government level focus on 3 2 10 non-priority spending 1 5 (such as official travel, 0 0 Public Work &… Village &… Research &… Environment &… Agriculture Social Health Police Defense Education Maritime & Fisheries Transport Religius Affairs MoF Energy meeting packages, honorariums, and other operational expenditure), as well as postponement of programs and activities that have not started11. Though the spending cuts Source: MoF; World Bank staff calculations focus on non-priority spending, some key line ministries—such as the Ministry of Public Work and Housing, the Ministry of Transport, and the Ministry of Agriculture—have still been 9 Jakarta Globe, 2016, “Sri Mulyani Gets Straight to Work, Tips Spending Cuts for Ministries and Regions”, 4 August, accessed at: http://jakartaglobe.beritasatu.com/business/sri-mulyani-gets- straight-work-tips-spending-cuts-ministries-regions/. 10 Wirayani and Parlina, 2016, “Budget Deficit Set to Soar towards Legal Limit”, Jakarta Post, September 19, accessed at: http://www.thejakartapost.com/news/2016/09/19/budget-deficit-to- soar-toward-legal-limit.html. 11 Presidential Instruction No. 8/2016. October 2016 THE WORLD BANK | BANK DUNIA 12 Pressures easing Indonesia Economic Quarterly forced to postpone some activities (Figure 15) 12. Expenditure measures for SNGs involve a delay in payment of the last quarter of the General Allocation Fund (DAU) and revenue sharing for fiscally sound SNGs, and cuts to the Special Allocation Fund (DAK) and Village Transfers (Dana Desa)13. Looking to 2017, the In August, the Government proposed a more realistic draft 2017 Budget (compared Government to the 2016 Budget) (Table 3)14. The 2017 Budget is expected to be finalized by the proposed a more end of October 2016. The fiscal deficit is forecast to be 2.4 percent of GDP, similar realistic revenue to the revised 2016 Budget but lower than the 2016 revised outlook of 2.7 percent target in the draft of GDP. The revenue target is set at a more realistic level of IDR 1,738 trillion. This Budget… is 2.7 percent lower than the revised 2016 Budget target but 10.9 percent higher than the revised revenue outlook announced by the Ministry of Finance (MoF) in July 2016. The projected nominal decline (relative to the revised 2016 Budget) in revenue is mainly driven by a decline in natural resource non-tax revenues and income tax revenues. The draft 2017 Budget assumes all tax proceeds from the tax amnesty program will go towards the 2016 Budget balance. The Government expects that the planned revisions to the general tax (KUP) law, Income tax law, VAT law and stamp duty law will increase tax revenue and help achieve the 2017 revenue target. However, the Government has not provided any details on the potential impact of these planned revisions. The Government is also planning to further increase the excise tax on cigarettes by 10.5 percent in 2017.15 …and measures to The draft 2017 Budget includes proposed expenditure of IDR 2,070 trillion, slightly further improve the lower than that of the 2016 revised Budget, but 6.4 percent higher than that of the quality of Ministry of Finance’s 2016 revised outlook. Proposed transfers to SNGs are 2.1 expenditure percent lower compared to the revised 2016 Budget, driven by a projected decline in revenue sharing (16.7 percent) and DAK (16.4 percent). However, transfers to Village Funds are 27.7 percent higher (from IDR 47 trillion to IDR 60 trillion). The draft 2017 Budget also includes a proposal to further improve the targeting of electricity subsidies for 450 VA and 900 VA customers categories16 and RASTRA (the rice for prosperity program) through a voucher distribution mechanism for 1.2 million households (out of 14.3 million recipients). The World Bank Given a broadly unchanged 2016 macroeconomic outlook relative to the June IEQ projects 2016 (although now with greater downside risk), and realized outturns from the tax revenues to reach amnesty program, the World Bank projects 2016 revenues to reach IDR 1,602 IDR 1,602 trillion, trillion (Table 5). The first phase of the tax amnesty program has already provided a including the tax significant boost to revenue collection of IDR 93.4 trillion. Since the outturns of the amnesty proceeds second and third phases of the program are still uncertain, the World Bank revenue projection does not take into account any potential proceeds beyond those already 12 Several national projects were put on hold, such as: Madiun-Kedungbanteng double-track railway project in East Java (part of the trans-Java railway project), Makassar-Parepare railway project in South Sulawesi (part of the trans-Sulawesi project), and port facilities construction in North Sumatra and Maluku. See: Wirayani, Susanty and Ribka, 2016, “Budget Cut Spillovers Loom”, Jakarta Post, August 5, accessed at: http://www.thejakartapost.com/news/2016/08/05/budget-cut-spillover- looms.html. 13 Wirayani, 2016, “Cash-strapped Budget Hits Indonesia”, Jakarta Post, September 1, accessed at: http://www.thejakartapost.com/news/2016/09/01/cash-strapped-budget-hits-ri.html. 14 The Budget Committee agreed to revise down their economic growth assumption for 2017 to 5.1 percent from 5.3 percent to minimize the risk of expenditure cuts in 2017. 15 http://www.thejakartapost.com/news/2016/09/30/govt-announces-10-54-percent-cigarette-excise- hike-for-next-year.html 16 http://jakartaglobe.beritasatu.com/business/electricity-subsidy-cut-41-2016-pln/ October 2016 THE WORLD BANK | BANK DUNIA 13 Pressures easing Indonesia Economic Quarterly realized in the first phase of the program. Accounting for the realized collection in the first phase of the program, the World Bank projects the total 2016 revenue shortfall to reach IDR 184.2 trillion (1.5 percent of GDP) relative to the approved Budget target. In line with a more optimistic macro-economic outlook for 2017 and with the expected impact of the ongoing tax administration reforms, the World Bank projects total revenues to reach IDR 1,708 trillion in 2017, 13.2 percent higher than the World Bank’s projection for 2016 revenue. This projected increase assumes IDR 98 trillion from improving macro-economic conditions, and IDR 101 trillion from tax administration and policy reform. The World Bank Taking into account significant progress in implementation of the first phase of the projects a fiscal tax amnesty program, despite broadly unchanged macro-economic outlook, the deficit of 2.6 percent World Bank projects fiscal deficit of 2.6 percent of GDP for 2016, slightly lower of GDP for 2016 and than the June 2016 IEQ of 2.8 percent of GDP. This slight downward revision 2.8 in 2017 assumes the revenues from tax amnesty are used to fund higher productive expenditure than previously projected (June 2016 IEQ), in particular capital expenditure and conditional (DAK) transfers to support infrastructure development. In addition, personnel expenditure is also revised up (relative to the June 2016 IEQ), since it is not part of the announced efficiency measures. On the other hand, material expenditure does not change (relative to the June 2016 IEQ), in line with the announced efficiency measures focusing on this spending. In 2017, the World Bank projects a fiscal deficit of 2.8 percent of GDP, assuming the Government’s policy intent to maintain the momentum of public investment especially for priority spending such as infrastructure, and social spending within the fiscal rule. These projected fiscal deficits are higher than the Government’s 2016 revised Budget and the 2017 draft Budget of 2.4 percent of GDP. Gross financing Gross financing needs have increased in recent years following weak revenue needs have recently collection, an increasing fiscal deficit, and the new policy to support SOEs through increased, however capital injections. In addition, the accumulated arrears of some expenditure the Government’s categories have also increased in particular energy subsidies and transfers to region.17 financing plan For 2016, the Government recently revised up its gross securities issuance needs for tracks the targets 2016 from IDR 611.4 trillion to IDR 654.4 trillion, in line with the upward revision well to the fiscal deficit target from 2.4 percent GDP to 2.7 percent GDP. Realized financing is broadly on track. By October 4, the Government had issued a total of IDR 589.2 trillion in bonds (90.0 percent of the new target). 17In the 2015 Audited State Budget, the government reports accumulated arrears by end 2015 of IDR 45 trillion for energy subsidies and IDR 41 trillion for transfers to SNGs October 2016 THE WORLD BANK | BANK DUNIA 14 Pressures easing Indonesia Economic Quarterly Box 2: The Indonesia tax amnesty program Design of the program The Indonesian Parliament passed a tax amnesty bill on June 28, 2016 (effective on July 18, 2018) to help reach the ambitious 2016 Budget revenue target by expanding the tax base, and to accelerate economic growth through asset repatriation. The tax amnesty program offers reduced tax liabilities for declarations made between July 2016 and March 2017 of previously undeclared assets, with lower tax rates for earlier declarations and for onshore and repatriated offshore assets (compared to non-repatriated offshore assets). 18 Tax payments made on previously undeclared assets are referred to as redemption fees (Uang Tebusan). The revised 2016 Budget projected that the program would generate IDR 165 trillion (1.3 percent of 2016 GDP) in revenue from redemption fees paid on declared and repatriated assets (based on the assumption that IDR 1,000 trillion of assets would be repatriated). This estimate was higher than that of the Bank of Indonesia’s (IDR 54 trillion revenue, IDR 560 trillion repatriated) and market estimates ranging from IDR 40 to 70 trillion.19 The Government was confident that the program would achieve its objectives due to pressure from the implementation of the Automatic Exchange of Information (AEOI) legislation between countries by 2018, which requires the global disclosure of assets. The incoming AEOI legislation incentivizes tax evaders to take advantage of the tax amnesty program before the risk of being detected increases. The tax amnesty program is being presented as a one-time opportunity, and it sets much higher penalties for underreporting of assets or assets declared outside of the amnesty period. Underreported assets or assets declared outside the amnesty period will be treated as additional income and bound by provisions in existing income tax laws and regulations. These include an additional penalty of up to 200 percent of the additional income for underreported assets. An additional feature of the program is that repatriated funds have to be invested in domestic assets for a minimum three-year period. Similarly, declared domestic assets cannot be transferred overseas for a three-year period. A breach of this commitment would result in the declared assets being liable to standard income taxes. Progress to date The first phase of the program received significant interest, with IDR 3,824 trillion in assets declared by October 11th and IDR 93.4 trillion in redemption fees collected (0.7 percent of GDP) (Table 4). In addition, the Directorate General of Tax collected a further IDR 3.1 trillion in tax arrears (payment of tax arrears is an eligibility requirement for the amnesty program). The progress in tax collection, through both redemption fees and collection of tax arrears, suggests that the Government’s objective of increasing revenue collection in 2016 via the tax amnesty program will be partly met. However, meeting the other objectives of the program—expansion of the tax base and boosting economic growth and investment through the repatriation of assets—will be more challenging as the value of repatriated assets remains very low. Thus far, the macroeconomic impacts of the tax amnesty have been benign. Fears of inflationary pressure, rapid exchange rate appreciation and “hot money” inflows have not materialized. Table 4: Revenue collection from the tax amnesty program has reached more than 50 percent of the target (IDR trillion, unless otherwise indicated) Assets Tax Total declared On shore Off shore (total) Off shore (repatriated) Collected % of the target 3,824 2,700 1,124 143 93.4 56.6 Source: MoF; World Bank staff calculations 18 2(4) percent in July-September 2016, 3(6) percent in October-December 2016, and 5 (10) percent in January-March 2017. Rate in parentheses applicable to off-shore declared but not repatriated assets. 19 The AEOI is expected to come into effect starting 2018. AEOI requires Reporting Financial Institutions (RFI's) to report to the tax authority (TA) of their country, which will then exchange the information with the TA of another country. As of November 2015, 96 countries have committed to begin the AEOI in accordance with the Standard by 2017 or 2018 reciprocally and with appropriate partners; 74 countries have signed a multilateral competent authority agreement ("MCAA") which permits participating countries to enter into agreements that provide for the AEOI. According to different sources, most of Indonesian off-shore assets are located in Singapore. As of now, Singapore has committed to the AEOI but has not signed the MCAA. Once both countries have signed the MCAA, RFIs in Singapore would then have to report information to Singapore’s Tax Authority. The information would then be exchanged with Indonesia’s tax office. Source: Credit Suisse, 2015. October 2016 THE WORLD BANK | BANK DUNIA 15 Pressures easing Indonesia Economic Quarterly Table 5: The World Bank projects lower revenue and expenditure than in the 2016 Budget (IDR trillion, unless otherwise indicated) 2015 2016 2016 2016 2017 2016 2017 Actual Revised Jan – Proposed World World audited Budget Budget Sept Budget Bank Bank A. Revenues 1,508 1,822 1,786 1,081 1,738 1,602 1,708 (% of GDP) 13.1 14.6 14.3 8.7 12.7 12.9 12.5 1. Tax revenues 1,240 1,547 1,539 896 1,496 1,397 1,482 (% of GDP) 10.7 12.4 12.3 7.2 10.9 11.2 10.8 Income taxes 602 757 856 501 785 749 760 Oil & Gas 50 41 36 25 33 23 23 Non-Oil & Gas 553 716 819 477 752 726 737 VAT/LGST 424 572 474 270 494 456 510 Property taxes 29 19 18 16 17 18 19 Excises 145 146 148 79 157 134 148 International trade taxes 35 40 36 25 34 35 39 Import duties 31 37 33 23 34 31 36 Export duties 4 3 3 2 0 4 4 Other taxes 6 12 7 5 9 6 7 2. Non-tax revenues 256 274 245 184 240 203 223 (% of GDP) 2.2 2.2 2.0 1.5 1.8 1.6 1.6 Natural resources revenues 101 125 91 37 80 48 53 Oil & Gas 78 79 69 23 57 26 29 Non-Oil & Gas 23 46 22 14 23 22 24 Other non-tax revenues 155 149 155 147 160 155 170 3. Grants 12 2 2 1 1 2 3 B. Expenditures 1,806 2,096 2,083 1,305 2,070 1,924 2,088 (% of GDP) 15.6 16.8 16.7 10.5 15.1 15.4 15.2 1. Central government 1,183 1,326 1,307 768 1,310 1,193 1,356 (% of GDP) 10.3 10.6 10.5 6.2 9.6 9.6 9.9 Personnel 281 348 343 236 n.a. 326 353 Material 233 325 281 159 n.a. 225 237 Capital 215 202 227 83 n.a. 216 296 Interest payments 156 185 191 147 221 191 219 Subsidies 186 183 178 104 175 172 180 Energy 119 102 94 68 92 106 102 Fuel 61 64 44 30 n.a. 43 57 Electricity 58 38 51 38 n.a. 63 45 Non-energy 67 81 83 36 83 66 78 Grants 4 4 9 1 2 2 2 Social 97 55 55 35 n.a. 54 61 Other 10 25 23 4 n.a. 6 7 2. Transfers to regions 623 770 776 538 760 731 732 (% of GDP) 5.4 6.2 6.2 4.3 5.5 5.9 5.3 Overall Balance -298 -274 -297 -224 -333 -322 -380 (% of GDP) -2.6 -2.2 -2.4 -1.8 -2.4 -2.6 -2.8 Assumptions Real GDP growth rate (%) 4.8 5.3 5.2 5.3 5.1 5.3 CPI (%) 6.4 4.7 4.0 4.0 3.9 4.6 Exchange rate (IDR/USD) 13,458 13,900 13,500 13,300 13,300 13,300 Crude-oil price (USD/barrel) 51 50 40 45 41 51 Note: The World Bank projection does not include potential revenues from the tax amnesty. Source: MoF October 2016 THE WORLD BANK | BANK DUNIA 16 Pressures easing Indonesia Economic Quarterly 7. After years of stagnation, poverty and inequality are falling again March 2016 data The official poverty rate Figure 16: Poverty reduction in 2016, though greater show the first fell by 0.4 percentage than in recent years, remains slower than before 2011 significant yoy points over the year to be (poverty rate, percent (LHS), change in poverty, percentage points reduction in poverty 10.9 percent in Q1 2016. (RHS)) in the past 3 years This was the largest yoy 20 2.5 decline in the last 3 years, 18 2 as the poverty rate almost 16 Poverty Rate (LHS) remained flat between 14 1.5 2013 and 2015 (Figure 1 12 16). However, this decline is still lower than 10 Change in Poverty, yoy (RHS) 0.5 the rates of reduction 8 0 achieved between 2007 6 -0.5 and 2011, which averaged 4 1.05 percentage points 2 -1 per year. 0 -1.5 Source: Susenas Stable food prices, Moderating inflation and stable food prices (see Section 3 above) have also particularly for rice, contributed to poverty reduction (since food prices feed into the calculation of the contributed to poverty line). In particular, improved management of rice imports and market poverty reduction operations by the government in late 2015 and early 2016 curbed rice price inflation during a typically volatile time of year. Between October 2015 and March 2016, Indonesian Bureau of Logistics (Badan Urusan Logistik, Bulog) imported 1.49 million tons of rice and channeled over 177,000 tons through open market operations. As a result, the March 2016 poverty line increased by only 7.2 percent yoy to IDR 354,386 per 6-month semester, lower than the poverty line increases between 2014- 2015 (9.26 percent) and 2013-2014 (11.45 percent). Social assistance Expansions in social assistance programs may also have driven poverty reduction expansion could also over the past year. For example, the Family Hope conditional cash transfer program have contributed to (Program Keluarga Harapan, PKH) was expanded from 2.8 million households to 3.5 poverty reduction million households in late 2015. World Bank simulations suggest that the expansion of this cash transfer contributed as much as 0.1 percentage points to poverty reduction, or nearly one-third of the total observed decline. The planned expansion of PKH to an additional 2.5 million households in 2016 could further boost poverty reduction by as much as 0.4 percentage points. October 2016 THE WORLD BANK | BANK DUNIA 17 Pressures easing Indonesia Economic Quarterly One measure of The Gini coefficient for Figure 17: The Gini coefficient in 2016 dropped below inequality has fallen March 2016 was 39.7, 40 for the first time since 2011 significantly in the falling by 1.1 points from (Gini coefficient, points (LHS), change in Gini coefficient, points past year 40.8 in March 2015. This (RHS)) is the largest annual drop 45 3.5 in the Gini since the 3 Asian financial crisis and 40 2.5 one of only three Gini (LHS) 2 substantive falls in the last 15 years. The Gini has 35 1.5 been relatively flat since 1 2011, but this year the 30 0.5 Gini coefficient fell below 0 40. More time is needed 25 -0.5 to see whether this marks yoy change (RHS) -1 the beginning of a period of falling inequality. 20 -1.5 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: Susenas The Gini is falling The major driver of Table 6: Inequality has fallen due to increasing Middle 40 because the Middle this reduction is that consumption, but Bottom 40 consumption has decreased 40 is catching up to the share of total (distribution of national consumption in Indonesia, percentage of total, the Top 20, but the national consumption March 2015 – March 2016) Period Bottom 40 Middle 40 Top 20 Bottom 40 are still of the Middle 40 March 2015 17.1 34.7 48.3 lagging behind percent of March 2016 17.0 36.1 46.9 households (Quintiles Change, 2015-2016 -0.1 +1.4 -1.3 3 and 4) has increased Source: Susenas at the expense of the Top 20 percent of households (Quintile 5) (see Table 6). With Indonesia’s rising inequality since the early 2000s being driven by fast growth in the consumption of the Top 20, this latest development indicates that the Middle 40 may be starting to catch up. However, the consumption of the Bottom 40 has not been catching up to either of the other two groups. In fact, their consumption share fell slightly over the year, meaning Indonesia’s growth is still far from equitably distributed. Ultimately, sustained In order to continue the acceleration of poverty reduction and sustain the trend of improvements in falling inequality, improvements in fiscal policy are needed. In particular, Indonesia fiscal policy are still must spend more on the programs that are most cost-effective at reducing needed inequality, such as direct transfers to poor and vulnerable households. Recent success in this area includes the previously-mentioned expansion of PKH. In addition, Indonesia must also collect more tax revenues in ways that are progressive20. 20For an in-depth look at the impact of Indonesia’s fiscal policy on inequality, see Section 2, Part C of the June 2016 IEQ. October 2016 THE WORLD BANK | BANK DUNIA 18 Pressures easing Indonesia Economic Quarterly 8. Potential headwinds to the macro-fiscal outlook from external factors remain elevated Downside risks from For Indonesia, risks from Figure 18: The pick-up in commodity prices may be the global the international temporary environment and environment stem from (Indonesia commodity price index, index 2014=100) commodity prices slower than expected 100 remain growth in advanced economies. This is 80 compounded by a stop- start recovery in the US 60 and uncertainty around interest rate normalization 40 by the US Federal Commodity price index Reserve. The growth 20 outlook for Europe also Commodity price index exc oil and gas remains subdued with 0 lower than expected annual growth rates for most major economies in the region. Political Source: World Bank; World Bank staff calculation uncertainty in the aftermath of Brexit continues to weigh on growth prospects for the UK. In addition, the recent increase in major commodity prices is not likely to be sustained given a moderate global growth outlook in the medium-term. Although room for In Indonesia, while monetary policy space exists, fiscal policy space remains more expansionary constrained by weak revenue collection. Indeed, the Government has announced fiscal policy is revenue shortfall figures for 2016 and has begun to cut expenditure (see Section 6). constrained, a While the expenditure cuts will not affect priority spending, they will affect several credible budget can infrastructure-related line ministries. While Government expenditure in the first half support business of 2016 has been the main driver of growth, this is not expected to continue in light confidence of these announced cuts. An upside risk from the tax amnesty program has partly materialized, but the benefits will depend on the quality of spending from the collected revenue. The Government’s announced revenue shortfall figures were seen as more realistic that those in the past. This improved budget credibility can help lower uncertainty for businesses and support further improvements in business confidence. October 2016 THE WORLD BANK | BANK DUNIA 19 Pressures easing Indonesia Economic Quarterly B. Some recent developments in Indonesia’s economy 1. Accelerating tourism development Tourism is a Tourism is a promising sector that could unlock private investment, foster inclusive promising growth and job-rich growth, boost export earnings, and guide a targeted infrastructure sector in the investment program in tourism destinations. If planned and managed well, tourism Indonesian economy can generate large employment and income multipliers for Indonesia, which can contribute to eliminating poverty and increasing shared prosperity. Ten million additional international tourists and an increase in spending per tourist to Thailand’s level (that is, 1.5 times Indonesia’s current average) would bring USD 16 billion in additional foreign exchange earnings annually. According to the World Travel and Tourism Council (WTTC), in Indonesia, every USD 1 million in travel and tourism spending supports around 200 jobs (of which 67 are direct jobs) and USD 1.7 million in GDP (Figure 19).21 With tourism destinations spread across the archipelago, tourism can also help reduce regional disparities within Indonesia. 21WTTC, 2015,“Indonesia: How does Travel and Tourism compare to other sectors?,” Benchmark report. October 2016 THE WORLD BANK | BANK DUNIA 20 Pressures easing Indonesia Economic Quarterly Figure 19: Spending on tourism in Indonesia has Figure 20: The Asia Pacific market is key for high GDP and employment impacts relative to Indonesia's tourism growth spending in other sectors (number of visitors, millions) (impact from USD 1 million in sector spending, USD million (LHS); number of jobs (RHS)) GDP impact (LHS) Employment impact (RHS) Singapore 2.0 500 Malaysia 1.8 450 China 1.6 400 1.4 350 Australia 1.2 300 Japan 1.0 250 South Korea 0.8 200 India 0.6 150 0.4 100 UK 0.2 50 USA 0.0 0 Philippines Taiwan France Germany 0.0 0.5 1.0 1.5 2.0 Source: WTTC Source: BI; World Bank staff calculations Indonesia has rich Indonesia has the potential to Table 7: Indonesia is globally competitive in tourism develop a world-class tourism natural and cultural resources, but faces endowments… industry, benefitting from its infrastructure and enabling environment rich tourism endowments and constraints (Travel and Tourism Competitiveness ranking out of 141 building on the success of countries) Bali. The World Economic Overall 2015 rank 50 Forum’s Travel and Tourism Enabling environment 80 Competitiveness Report 2015 Business environment 63 ranks Indonesia 17th (out of Safety and security 83 141 countries) on the national Health and hygiene 109 and cultural resources sub- Human resources and labor market 53 index, which captures the ICT readiness 85 principal reasons to travel Travel & Tourism policy and enabling conditions 9 (Table 7). However, on other Prioritization of Travel and Tourism 15 indicators, such as enabling International openness 55 environment, infrastructure Price competitiveness 3 Environmental sustainability 134 and environmental Infrastructure 75 sustainability, Indonesia is Air transport infrastructure 39 lagging behind. Overall, Ground and port infrastructure 77 Indonesia ranks 50th in the Tourist service infrastructure 101 Travel and Tourism Natural and cultural resources 17 Competitiveness Index, Natural resources 19 behind Thailand (35th), Cultural resources and business travel 25 Malaysia (25th) and Singapore Source: World Economic Forum, “Travel and Tourism Competitiveness Report, 2015” (11th). In 2015, Indonesia’s total number of international visitor arrivals was 10.2 million, while Thailand and Malaysia recorded 29.9 million and 25.7 million international visitor arrivals respectively.22 22Statistics Indonesia (Badan Pusat Statistik, BPS), 2016, International Visitor Arrival Statistics, 2015; Ministry of Tourism and Culture of Malaysia, http://www.tourism.gov.my/statistics; Thailand’s Department of Tourism, http://www.tourism.go.th/home/details/11/221/24710. October 2016 THE WORLD BANK | BANK DUNIA 21 Pressures easing Indonesia Economic Quarterly … and can tap into Global, regional and domestic tourism demand is growing. Worldwide, the tourism the booming global industry is projected to grow by 4.2 percent in real terms per annum over the next tourism demand decade, outpacing global economic growth. China continues to lead global outbound travel, which in turn benefits near-by Asian destinations. Spending by Chinese outbound travelers increased 25 percent in 2015 to reach USD 292 billion, as total Chinese outbound travelers rose 10 percent to 128 million, and spending per traveler also rose.23 In 2015, Singapore, Malaysia, China, Australia, and Japan were the top five sources of visitors to Indonesia (Figure 20). International visitor arrivals in Indonesia increased by 8.4 percent in 2015 and the average length of stay increased by 11 per cent to 8.53 days. However, daily expenditures decreased from USD 154 per day in 2014 to USD 142 per day in 2015. Trips by domestic travelers in Indonesia in 2015 increased to 255 million from 251 million in 2014.24 The Government To fulfil Indonesia’s tourism potential, the Government has identified ten tourism aims to transform destinations for priority development, with an emphasis on closing their Indonesia’s economy infrastructure gap.25 The Government’s National Medium-Term Development Plan through an (Rencana Pembangunan Jangka Menengah Nasional, RPJMN) 2015-2019, sets a number ambitious plan for of objectives to increase the role of tourism in the Indonesian economy. In 2015, tourism development the Ministry of Tourism’s budget for promotional activities quadrupled from IDR 300 million to IDR 1.2 trillion. In March 2016, the Indonesian Government extended its free visa facility to 169 countries to attract more foreign tourists. However, promotion alone, without policy reform and targeted infrastructure investments for multiple destinations, can overcrowd established destinations such as Bali, erode natural and cultural resources, and spoil the Indonesian “brand”. Recognizing this, in late 2015 President Joko Widodo urged his Cabinet to accelerate the development of the ten priority tourism destinations. a. Improving infrastructure and planning for sustainable tourism growth Infrastructure Indonesia ranks in the bottom half of countries on several infrastructure-related development is tourism competitiveness indicators (Table 7)—ground and port infrastructure, required to improve tourist service infrastructure (e.g. hotels, car rental companies), health and hygiene the accessibility and (e.g. access to sanitation), ICT readiness, and environmental sustainability (e.g. carrying capacity of wastewater treatment). To address this, the Government plans to invest in air, tourist destinations... water, and road connectivity, basic infrastructure and services, and tourism infrastructure and services. … and should be Between 2013 and 2015, Indonesia’s performance deteriorated on two tourism carefully planned to competitiveness indicators: natural resources (from 6th to 19th) and environmental ensure sustainability (from 125th to 134th). Poor access to basic services, such as water environmental supply, sanitation, sewer connections, and solid waste collection, has already eroded sustainability… natural assets in some tourist destinations in Indonesia. In addition, rapid unmanaged growth of the tourism industry could further decrease the competitiveness of the assets on which future growth in tourism depends. The experiences of Nepal, Cambodia and Kenya suggests that such an outcome can be 23 WTTC, 2016, “Travel and Tourism: Economic Impact 2016”: World; UNWTO, 2016, World Tourism Barometer, Volume 14, May. 24 Ministry of Tourism, 2015, “Passenger Exit Survey 2015”; and BPS, 2016, “International Visitor Arrival Statistics 2015”. 25 Lake Toba, Lombok, Borobudur, Thousand Islands, Labuan Bajo on Flores island, Wakatobi, Morotai, Belitung, Mount Bromo, and Tanjung Lesung (Ujung Kulon, Krakatau, Carita). October 2016 THE WORLD BANK | BANK DUNIA 22 Pressures easing Indonesia Economic Quarterly difficult to manage or reverse, resulting in a continued decline in the value of tourism endowments. …through integrated The Government plans to prepare integrated tourism masterplans for each of the tourism masterplans priority tourism destinations, which could provide a strong framework for effective and sustainable tourism development. These will guide the scale and spatial location of future growth, as well as establish policies and practices to ensure key assets are protected and environmental impacts are properly managed and monitored. Masterplans will be informed by detailed tourism demand projections, leading to assessments of the scale and type of public and private investments required to support this future growth. The masterplanning process will also incorporate a comprehensive consultation program, ensuring all stakeholders have a chance to contribute. Strong coordination capabilities and mechanisms are necessary to make this comprehensive consultation happen, but are not yet in place. b. Attracting investors and promoting linkages to the local economy The Government The Government expects significant private investment in the tourism sector, and expects significant early indicators are promising. Total foreign and domestic direct investment in private investment in hotels and restaurants, a relevant indicator of the tourism sector, reached nearly the tourism sector… USD 1 billion in 2015—an increase of 45.5 percent compared to 2014, while the number of investment licenses approved in the hotel and restaurant sectors quintupled, from 52 in 2014 to 266 licenses in 2015.26 ...but licensing However, to achieve the Ministry of Tourism’s targeted USD 10 billion in private processes and investment in the 10 tourism destinations by 2019, further efforts to attract promotion efforts investment are needed. Licensing simplification is one important aspect. As a first need to be step, it will be essential to establish an inventory of the number and type of business strengthened licenses needed (at the national and subnational level) to establish a tourism-related business. The revision of the Negative Investment List (Daftar Negatif Investasi, DNI)27 earlier this year has further opened the tourism sector to foreign investment, although limitations remain. In other business fields maximum foreign capital allowances have been relaxed, but not removed altogether.28 Moreover, ground transportation rental, a tourism-related business area, has not been opened to foreign investors. This can affect the range and quality of car rental offerings and tour operations. Increased tourist Tourist spending can generate significant economic gains in tourist destinations, if spending can mostly spent on locally produced goods and services. Data from Indonesia’s input- generate significant output tables29 suggests that the majority of tourist spending stays in the Indonesian local economic economy; around 20 percent of the spending goes towards imported goods and gains…. services. The share that stays in the economy (i.e. for local goods and services) has strong subsequent multiplier impacts as a result of indirect effects (the resulting increase in output and employment for other sectors supplying inputs to support 26 Investment Coordinating Board, http://www.bkpm.go.id/en/investing-in-indonesia/statistic. Total direct investment in hotels and restaurants consist of USD 650.2 million FDI and IDR 4 trillion domestic investment. 27 Presidential Regulation No.44/2016. 28 Maximum foreign capital allowances remain at 51 percent for ecotourism facilities and spas, and 67 percent (or 70 percent for investors from ASEAN countries) for travel agencies, non-star, one and two start hotels, motels, and organizers of meetings, incentives, conferences, and events (MICE). 29 Drawn from the tourism satellite account produced by Statistics Indonesia (Badan Pusat Statistik, BPS) and the Ministry of Tourism, which are available at the national level and for certain provinces. October 2016 THE WORLD BANK | BANK DUNIA 23 Pressures easing Indonesia Economic Quarterly the rise in tourism spending), and induced effects. That is, the additional spending by those deriving income from growing tourism activity. Some studies suggest that the total impact of tourism spending can be 1.7 to 3 times its direct impact.30 …but capacities of However, in the absence of improvements in local capacities, firms and individuals local firms and will struggle to participate in and benefit from the economic opportunities created workers to by the development of selected destinations outside Bali. Outside of Bali, participate in the Indonesia’s workforce has limited skills to provide a full range of tourism tourism economy experiences (such as tour guides, cuisine, cultural heritage) in a profitable and remain limited sustainable manner. Furthermore, most firms in the less developed and emerging destinations do not meet the goods and services quality standards needed to serve as suppliers for the international-class hotels and tourism operators these destinations aim to attract. c. Strengthening coordination and implementation capabilities to achieve results Coordination and Tourism destination development requires a combination of closely aligned public planning are critical and private interventions and inter-ministry/agency coordination at the national and for effective subnational level. At the national level, these coordination mechanisms are already destination being developed. However, given that Indonesia is highly decentralized, provincial- development, but are and destination-level coordination mechanisms and implementation capabilities are still largely absent also critical, but are still weak or absent. Furthermore, private sector representation at all levels—important for gauging and testing investor interest—would need to be ensured through coordination team membership, regular invitations to meetings, and/or observer status. Even with a full Even with a full range of integrated public support, risks to tourism growth remain. range of integrated Visitor numbers declined 11.3 percent in the year following the first Bali bombing in public support, risks October 2002, and 8.6 percent in the two years following the second Bali bombing. remain… The most recent attack in Jakarta in January 2016, along with a heightened global awareness of security issues (particularly amongst western tourists), are likely to be dampening factors in the immediate outlook for international tourism to Indonesia (Figure 21). While the impact of sporadic attacks tends to be more short-term, the impacts increase as attacks become more frequent. Foreign tourist arrivals to Turkey for the first six months of 2016 were down 4.15 million or 27.8 percent compared to the same period the previous year following the regular pattern of terrorist attacks.31 30 Recent WTTC studies of Indonesia’s tourism sector suggest spending multiplier values ranging from 1.7 to 3. 31 Turkey’s Ministry of Culture and Tourism, http://www.kultur.gov.tr/EN,162852/number-of- arriving-departing-visitors-foreigners-and-ci-.html October 2016 THE WORLD BANK | BANK DUNIA 24 Pressures easing Indonesia Economic Quarterly Figure 21: Foreign visitor numbers have steadily gone Figure 22: Foreign visitor growth targets for the 10 up since 2006, but visitor growth has been uneven and priority destinations are higher than the growth Bali affected by externalities achieved during its 5 fastest-growing years (international visitor arrivals 2001-2015, in million (LHS), percent (fastest 5-year CAGR of foreign visitors in Bali's history compared to (RHS)) implied 2014-2019 CAGR in 10 destinations) International visitors (number, left axis) 300 Annual growth (percent, right axis) 250 1st Bali 2nd Bali Global List of visa free bombings bombings recession countries 12 25 200 Average of 10 (dates expanded approx.) 20 150 destinations 10 15 100 8 10 50 6 5 0 0 4 -5 2 -10 0 -15 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 year Source: BPS; World Bank staff calculations Note: CAGR stands for compound annual growth rate Source: World Bank Bali Tourism Project Completion Report; Ministry of Tourism 10 destination development plans; BPS. …suggesting the Flexibility will be needed in Indonesia’s ambitious plans for accelerating ten tourism need for continuous destinations to adjust to global and domestic market dynamics and local conditions. monitoring and The international visitor growth targets for the ten priority destinations are revision ambitious and higher than the growth Bali achieved during its five fastest-growing years (Figure 22). The targets need to be backed by an assessment of market demand and investor interest. Detailed data on tourist numbers and their profiles is already available, as are statistics on hotels and tourism-related investments. However, the statistics will need to be better consolidated and more systematically analyzed to enable holistic tracking of the Government’s efforts and results and inform potential mid-course corrections. October 2016 THE WORLD BANK | BANK DUNIA 25 Pressures easing Indonesia Economic Quarterly 2. Why should Indonesia reframe and reorient its food security policy? Food security is a In recent years, food security policy has been framed by the Food Law 2012 which long-standing area of defined core objectives in terms of (i) ensuring physical and economic access for the national policy entire population to food which is diverse, safe and nutritious; (ii) improving the attention welfare of farmers; (iii) minimizing reliance on imports for core staple foods; and (iv) achieving overall ‘food sovereignty’ (that is, being in control of the country’s own food circumstances). Long-standing policy instruments have included public investments, input and credit subsidies, trade restrictions, state enterprise food market interventions and storage, and social safety nets. Figure 23: Indonesia’s total support to agriculture is Figure 24: Central Government spending on rising and already higher than that of other emerging agriculture has increased faster than agriculture GDP and OECD countries (IDR trillion, LHS; percent, RHS) (total support to agriculture as percent of agricultural gross receipts; 1995-97 vs 2012-14) 6% Extension services Irrigation Other agriculture subsidies Fertilizer subsidies 100 8% 5% R&D MoA non-social aid 1995-97 2012-14 90 MoA social aid 7% 4% 80 Central AG spending/AG GDP (RHS) 6% 70 3% 60 5% 2% 50 4% 1% 40 3% 30 0% 2% 20 10 1% -1% 0 0% Source: OECD 2016. Agricultural Policy and Evaluation Report 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 Over the past Indonesia’s total support to agriculture32 is proportionally the highest and fastest decade, the growing among OECD countries and middle income peers (Figure 23). In 2015, the Government has total support to agriculture in Indonesia was equivalent to 4.6 percent of GDP substantially compared with 3.2 percent for China, 1.0 percent for Japan, 0.7 percent for the increased its European Union, 0.5 percent for Vietnam, and 0.4 percent for the United States— spending in order to countries and regions that are typically thought to provide high levels of protection achieve food security and support to agriculture. A significant proportion of Indonesia’s public spending goals for agriculture has gone to subsidize fertilizer and other inputs (Figure 24), while there has been a long-term underinvestment in the types of public goods vital for agricultural productivity and competitiveness. These public goods include: research 32Defined by the OECD as the monetary value of gross transfers from taxpayers and consumers arising from policy measures that support agriculture. This includes public investments, subsidies, market price support measures, etc. This is a much broader category than ‘public expenditure’ in agriculture. October 2016 THE WORLD BANK | BANK DUNIA 26 Pressures easing Indonesia Economic Quarterly and development (R&D), infrastructure, farm advisory services, agricultural education, plant protection, animal disease control, and food safety.33 a. There growing concerns about the efficacy of Indonesia’s food security policies and public spending Indonesia’s Since the beginning of this decade, domestic retail prices for rice have been 50 to 70 consumers are percent higher than those in Vietnam, Thailand, and other countries in the Greater paying exceptionally Mekong Region (Figure 25). Indonesian consumers are also paying very high prices high prices for food for foods rich in protein and micronutrients, including most fruits and vegetables and poultry products. One study found that prices of these higher nutrient foods are substantially higher in Indonesia than in Singapore, a country which lacks an agricultural sector and imports nearly all of its food.34 Furthermore, price levels have continued to diverge. While international prices for cereals have fallen sharply since mid-2012, Indonesia has continued, until very recently, to experience moderate to high food inflation. Indonesia’s food The OECD35 estimates that over the 2013-2015 period, Indonesian consumers were trade restrictions and ‘taxed’ the equivalent of USD 98 billion as a result of restrictions placed on the other policy imports of staple and higher value foods, and the impacts of domestic agricultural interventions impose and food market interventions by the Government (Figure 26).36 In 2015 alone, the a massive ‘tax’ on cost burden on Indonesian consumers was estimated at USD 36 billion, much consumers higher than an estimated burden of USD 22 billion for the entire (28 country) European Union, a region whose long-standing agricultural and other policies have been known to substantially increase food prices for consumers. In per capita terms, the tax on Indonesian consumers was USD 1300 in 2015 compared with USD 437 in the European Union, and USD 189 in Vietnam. Such aggregate policy impacts have, at least in the past, undercut Indonesia’s broader efforts to improve food security and nutritional outcomes. 33 International experience indicates the superiority of public investment over subsidies in promoting agricultural productivity growth and rural poverty reduction. For example, one study of 15 Latin American countries found that a reallocation of 10 percent of agricultural spending from subsidies to public goods was associated with an increase in per capita agricultural income by 2.3 percent. See: R. Lopez and G. Galinato, 2007, “Should governments stop subsidies to private goods? Evidence from rural Latin America”, Journal of Public Economics, 91 (5), p. 1071-1094. 34 In February 2015, the prices for carrots, mangoes, and oranges were 50 percent higher in Jakarta than in Singapore, while eggs, honey and chicken were over 25 percent more expensive. See S. Marks, 2015, “Non-tariff Trade Regulations in Indonesia: Measurement of their Economic Impact”, Working Paper, Australia Indonesia Partnership for Economic Governance. 35 The database link can be found in OECD, 2016, Agricultural Policy and Evaluation Report. 36 Analysis provided in the June 2016 edition of the IEQ highlighted that non-tariff measures implemented on wheat imports between 2008 and 2014 resulted in the price of wheat flour being 22 percent higher than it would have been without such measures. Restrictions on the use of Jakarta port for fruit and vegetable imports, begun in 2012, have resulted in significantly higher prices for certain items in Jakarta in comparison with Surabaya, the required port of entry. October 2016 THE WORLD BANK | BANK DUNIA 27 Pressures easing Indonesia Economic Quarterly Figure 25: Retail prices for rice are higher in Indonesia Figure 26: The implicit tax on food consumers in and the Philippines Indonesia is very large, and has continued to increase (USD/ton) while falling elsewhere (USD billons) 1.0 Indonesia Turkey Mexico Vietnam Brazil 40 0.9 Indonesia Philippines 35 0.8 0.7 30 0.6 Thailand 25 0.5 Cambodia 20 0.4 15 0.3 Myanmar Viet Nam 10 0.2 0.1 5 0.0 0 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 2010 2011 2012 2013 2014 2015 Source: FAO GIEWS Source: OECD Agriculture Statistics The adverse impacts According to Susenas 2013 data, the budget share of food for households at the of high food prices lowest decile of per capita expenditure was 61 percent. For households up to and are most significant including the seventh decile, the budget share of food still exceeded 50 percent for the poor and near compared with only 30 percent for those in the richest decile. For the entire poor… population, rice accounted for 8 percent of total spending and 18 percent of food expenditure. For the poorest decile, however, these shares were 22 percent and 35 percent, respectively. Nationally, 92 percent of households are net buyers of rice. Even though many of the nation’s poor are rice farmers, more than 87 percent of poor households buy more rice than they sell. High rice prices also crowd out spending by the poor on more nutritious foods.37 As a result, Indonesia has continued to score poorly in national measures of dietary diversity and quality.38 Several studies suggest that Indonesia’s poor and near-poor have not been able to afford a nutritiously balanced diet.39 37 Analysis by the World Bank suggests that an 11 percent increase in rice prices reduces rice consumption by only 0.08 percent, yet has a spiraling effect of reducing vegetable and fruit consumption by 3.2 percent and 4.2 percent, respectively. For an earlier analysis of cross-price elasticities, see A. Widaryono, 2012, “An Analysis of Protein and Calorie Consumption in Central Java”, Economic Journal of Emerging Markets, October 4(2), p. 115-126. 38 In the Economist Intelligence Unit’s 2015 Global Food Security Index ratings, Indonesia’s score for dietary quality was ranked 88th of the rated 109 countries. All of the 21 countries rated lower are low income countries. 39 For example: World Food Programme, 2012, “Minimum Cost of a Nutritious Diet: First Results in Indonesia”, Jakarta. October 2016 THE WORLD BANK | BANK DUNIA 28 Pressures easing Indonesia Economic Quarterly …contributing to Higher national cereals Figure 27: Indonesia’s prevalence of stunting is much limited progress in production over the past higher than in countries with similar levels of Gross improving decade has not translated National Income Indonesia’s into improved nutritional (GNI per capita, USD (x axis); stunting prevalence, children under 5, percent (y axis)) nutritional outcomes outcomes—nationally and especially among the 60 Burundi eastern islands. With an under 5 child stunting rate 50 Lao PDR of 37 percent in 2013, and Myanmar a widespread incidence of 40 Indonesia micronutrient deficiencies, Philippines Indonesia’s nutritional 30 Equatorial Zimbabwe status is more akin to a Peru Guinea Haiti low income country than a 20 Thailand Malaysia Vietnam rapidly growing and Mongolia urbanizing middle income 10 Colombia Turkey China Suriname country (Figure 27). Jamaica Despite growing 0 recognition of this 0 2000 4000 6000 8000 10000 12000 undernutrition problem, Note: Gross National Income per capita figures are for the most there has been little recent available period 2012-2014. Stunting prevalence figures are for the most recent available period 2010-2014, except for Singapore progress in reducing (2000), Malaysia (2006), and Brunei (2009). The dotted line at 30 stunting rates since the percent indicates the WHO cutoff for “high stunting” prevalence. Source: WDI, 2015 mid-2000s (Figure 28). While there are multiple contributing factors (including inappropriate infant feeding practices, low access to clean water and sanitation, etc.)40, Indonesia’s agro-food system and its long-standing food policies are not playing their necessary role to address this national problem, which will have major short- and longer-term adverse impacts on productivity and human development. Figure 28: The prevalence of stunting changed little in recent years and actually increased in some areas (percent of under 5 population stunted) 70 2007 2010 2013 60 50 40 30 20 10 0 Bangka Belitung… Banten Bali North Sulawesi South Sulawesi Central Sulawesi South Kalimantan Jambi Gorontalo West Sulawesi Riau Islands DI Yogyakarta Jakarta Maluku East Kalimantan West Java East Java North Sumatra Central Java South Sumatra Riau West Kalimantan West Sumatra Bengkulu Papua North Maluku Central Kalimantan Aceh Lampung West Papua West Nusa Tenggara Indonesia East Nusa Tenggara South East Sulawesi Source: RISKESDAS 2007, 2010, 2013 40 In 2013, the share of the population lacking access to improved water and sanitation was 33 percent and 40 percent, respectively. Only 42 percent of infants aged less than 6 months were exclusively breast-fed, well below the national target of 85 percent. See Kementerian PPN/Bappenas, 2014, “Indonesian Health Sector Review: Nutrition”, Jakarta. October 2016 THE WORLD BANK | BANK DUNIA 29 Pressures easing Indonesia Economic Quarterly Many of Indonesia’s Restrictions on rice, maize and sugar imports and various non-tariff measures protected farmers applied to animal and horticultural products have somewhat protected Indonesian have been unable to farmers from competition.41 However, there is no evidence that this protection has sustain a livelihood translated into higher prices for farmers given their limited market power vis-à-vis based on agriculture processors and distributors. In addition, for most farmers specialized in rice or other cereals production, small farm sizes and lack of access to reliable irrigation and advisory services are among the factors keeping them trapped in a situation of low labor productivity and farm income. Fertilizer subsidies have not reversed a national trend in declining rates of growth in rice yields. In fact, problems of unbalanced (or excessive) nutrient use have likely been exacerbated by fertilizer subsidies, contributing to soil degradation, water pollution and high green-house gas emissions.42 This has reinforced a negative cycle that hurts both farmers and consumers. High food prices have put upward pressures on hired labor and rented land costs for farmers, especially in Java. Comparatively high production costs43 (paired with low milling efficiencies and high logistical costs) make Indonesian farmers uncompetitive, seemingly necessitating their protection which, in turn, harms consumers. An entirely different policy approach is needed to break this cycle both now and for the longer-term. Figure 29: Surplus labor in some areas remains locked Figure 30: Considerable food crop diversification has into rice production, yielding low labor productivity occurred in China, while for Indonesia rice remains (8 hour person-days per hectare per crop) dominant and the main change has been the conversion of forested land to oil palm (food crop land coverage, percent) 160 1994-99 2013 Maize Rice, paddy 140 Wheat Fruits, Vegetables, Pulses Oilcrops Roots & Tubbers 120 100 100% 80 60 80% 40 60% 20 0 40% 20% 0% 1990 1995 2000 2005 2010 2013 1990 1995 2000 2005 2010 2013 China Indonesia Source: Bordey et al (2014) Benchmarking the Cost and Profitability Source: FAOSTAT of Paddy Rice Production in Selected Asian Rice Bowls 41 While for nearly all OECD countries the nominal protection coefficient (i.e. producer prices/border prices) has been declining in recent years, for Indonesia it has been increasing—from an average of 25 percent over the 2010-2012 period to 40 percent in 2015. OECD, 2016. 42 With proper soil nutrient practices, farmers have been found to obtain higher yields with lower use of fertilizer and realizing somewhat higher incomes. R. Buresh, Nutrient Best Management Practices in Rice, IFA Indonesia Seminar, Jakarta, April 23, 2014. Nitrogen which is not absorbed by the plant may run-off into water sources or be converted into nitrous oxide and emitted. 43 Borday et al, 2014, found that rice production costs per hectare in West Java were USD 1849 compared with USD 1207 in Thailand, USD 1059 in Vietnam and USD 868 in India. The production costs per kilogram of rice were more than one-third higher in Indonesia than in Thailand and India and more than double the cost in Vietnam. October 2016 THE WORLD BANK | BANK DUNIA 30 Pressures easing Indonesia Economic Quarterly Addressing the farm Elsewhere in the region, a process of structural transformation is occurring within income problem will agriculture—featuring patterns of land consolidation, increased mechanization, require structural major shifts in (and diversification of) agricultural land use, and large changes in the changes (rather than composition of agricultural GDP.44 Many surplus workers are leaving agriculture, relying on protection such that the productivity of those who remain is increasing. These structural and subsidies) changes have been occurring at a much slower pace in Indonesia (Figure 29 and Figure 30). This is likely due to insecure land tenure, policy-induced distortions in incentives, and a long pattern of underinvestment in critical public goods. b. The implications of changing dietary and food expenditure patterns for Indonesia’s food policy Broader structural Income growth, Figure 31: Indonesia’s food spending patterns are shifts are changing demographic changes and changing, especially in urban areas the landscape in other lifestyle changes are (composition of average monthly expenditure) which Indonesia’s contributing to structural Prepared food and beverages Beverage, spices, tobacco, misc Oil and fats Vegetables, legumes, fruits food policy is shifts in the patterns of Fish, meat, eggs and milk Cereals, tubers made… domestic food 100% consumption and expenditure, and in the 80% systems in which people obtain and purchase their 60% food. In particular, dietary 40% diversification is occurring rapidly in urban 20% Indonesia; per capita rice 0% consumption is falling 1998 2001 2004 2007 2010 2013 1998 2001 2004 2007 2010 2013 while consumption of and spending on animal Urban Rural products, fruits, Source: BPS vegetables, and a widening range of processed foods is rising (Figure 31).45 Out-of- home eating is becoming more prominent, as are a range of modern food retailers. Changes in food consumption and expenditure have been relatively slower in rural areas due to access and affordability constraints, yet have nevertheless shown some dynamism. For example, the share of rural food expenditure for processed foods rose from 8 percent in the early 2000s to 19 percent a decade later. As observed in other countries, these trends are expected to continue in Indonesia over the coming decades, giving rise to a structure of food consumption and spending that will look very different from that of today—both quantitatively and qualitatively.46 44 D. Dawe, 2015, “Agricultural Transformation of Middle Income Asian Economies: Diversification, Farm Size, and Mechanization”, ESA Working Paper, No. 15-04, FAO, Bangkok. Also, World Bank, 2016, “Transforming Vietnamese Agriculture: Gaining More from Less”, Hong Duc Publishing. 45 Nationally, the income elasticity of demand for rice was -0.05 percent in 2013 compared with 1.76 percent for fruit, 1.93 percent for eggs/dairy products, and 2.53 percent for meat. (Unpublished analysis made by N. Minot of IFPRI for this study, based upon Susenas data). 46 For example, it is projected that the share of rice in national food expenditures will fall from 17.7 percent in 2013 to 8.2 percent by 2035. And, that the share of food spending occurring out of the home will rise from 26 percent today to more than 40 percent by 2035, see N. Minot, 2016, forthcoming, IFPRI. October 2016 THE WORLD BANK | BANK DUNIA 31 Pressures easing Indonesia Economic Quarterly …raising concerns Indonesia is beginning to experience a ‘double burden’ of malnutrition. While the about the incidence of undernutrition remains high, overweight and obesity rates among contribution and adults are steadily growing. Among male children, the rate of obesity is now equal to burden of the food the rate of undernourishment (at 12 percent). Within East and Southeast Asia, system on public Indonesia has experienced the fastest rate of growth in the incidence (and deaths health… attributed to) diabetes and other diet-related non-communicable diseases.47 Enormous public health and human development costs may lay ahead. Animal disease risks and food safety concerns are also growing in Indonesia. For several other countries in the region—including China and Vietnam—food safety and animal disease risks have emerged as core food security concerns, and Indonesia may face this prospect in the absence of concerted public and private action. ...as well as flagging The environmental footprint of Indonesia’s agro-food system has been very the need to reduce significant, adversely affecting productivity (for example, through the depletion of the environmental fisheries resources), human health (for example, through fires created for land footprint of the food clearing), the availability and quality of water for non-agricultural use, and the system agricultural sector’s international and domestic reputation. Another emerging issue is food waste and its adverse socio-economic, environmental and livelihood impacts. There is evidence of growing levels of food waste in Indonesia48 and this will become ever more challenging with further urbanization and the shifts toward processed foods and out-of-home eating. Measures will be needed to improve the incentives and capabilities to apply more environmentally sustainable practices in agriculture and other food value chain functions. Changing the food Official statistics indicate that a very high proportion of national requirements for demand has rice and maize (for feed) are being met from domestic production, except in implication for food exceptional years when adverse weather conditions occur (i.e. the 2015-16 ENSO trade event). Yet, with dietary changes, Indonesia is now experiencing an acceleration of imports for those grain and oilseed commodities for which it is not an efficient producer (i.e. wheat and soybeans). Imports of some higher value foods and multiple (semi-) processed foods have recently been 4 to 6 times higher, in value terms, than combined rice and maize imports (Figure 32). Some of these imports represent complementary supply (i.e. of temperate fruits or certain fish species which cannot be grown in Indonesia); other imports are intermediate products or ingredients which are blended with domestic raw materials to generate final consumer products. Domestic consumers gain access to a wider variety of foods while Indonesia’s food companies can grow and, in some cases, target the rapidly expanding middle class in ASEAN and other Asian countries. While not currently predicted for the upcoming decade49, a future return to higher international commodity prices cannot be completely ruled out. Still, Indonesia’s per capita food imports, in value terms, are low by international standards (Figure 33). While significant competitiveness challenges remain—especially in the primary 47 As international evidence points to a link between childhood stunting and the development of obesity and chronic diseases later in life, Indonesia faces the risk of enormous future public health costs and losses in productivity. See for example: C. Victora, 2008, “Maternal and Child Undernutrition: Consequences for Adult Health and Human Capital”, The Lanset, Volume 37, No. 9609, p. 340-357. 48 FAO food balance sheets indicate that Indonesia experiences more than 100kg of food waste per capita per year, a figure two and a half times that of South Korea, a country which has instituted effective programs to prevent or limit food waste. Food waste is prominent in Indonesia’s municipal solid waste, two-thirds of which ends up in landfills. http://faostat.fao.org/site/354/default.aspx 49 See World Bank, 2016, “Commodities Market Outlook”, July, Washington, D.C. October 2016 THE WORLD BANK | BANK DUNIA 32 Pressures easing Indonesia Economic Quarterly production and logistical dimensions of many of Indonesia’s fruit, vegetable, and animal products value chains—food imports need not necessarily be considered as an indication of agricultural failures. Other middle income countries with very successful agricultural sectors are opting for both higher food exports and food/feed imports, ostensibly reflecting a pattern of efficiency in utilizing available natural and human resources.50 Figure 32: Within Indonesia’s total food imports, Figure 33: Indonesia’s annual per capita food imports imports of higher-value and processed foods are are low compared with other middle income countries growing fast (USD) (USD billion) Fruit and Vegetable Semiprocessed Food 12 300 Processed Food Chile 10 250 8 200 Thailand 6 150 Mexico 4 100 Vietnam Philippines 2 50 Indonesia Brazil 0 0 2001 2003 2005 2007 2009 2011 2013 2015 2001 2003 2005 2007 2009 2011 2013 Source: ITC/Comtrade and WDI Source: ITC/Comtrade and WDI c. How should Indonesia strategically re-orient its food security policy? It would be Indonesia has ambitious goals for green economic growth, rising prosperity, and beneficial for international competitiveness. Such a vibrant, forward-looking society requires Indonesia to refine equally ambitious goals related to its agro-food sector. Meeting targeted commodity its food policy production targets is not sufficient. The goal should be to develop a modern food aspirations—from system which is more (i) Reliable, (ii) Inclusive, (iii) Competitive; and (iv) Eco- rice to RICE friendly. That is, rebalance attention beyond a dominant focus on rice to pursue a broader concept of RICE. These RICE attributes embody the aims already set out in the Food Law, and place greater emphasis on resilience, flexibility, health- promotion, consumer responsiveness, efficiency, and environmental sustainability. Specific indicators can be defined to fit Indonesia’s distinctive characteristics and values, such that performance can be accurately monitored and measured. Pursuing this agenda Food policy is a much broader sphere than simply agricultural policy. A significant will require a more proportion of agricultural policy is food-related, yet food policy also includes balanced and various dimensions related to health/nutrition, transport/logistics, trade, social coordinated effort protection, and environmental protection. An urbanizing middle income Indonesia across many sectors needs a balanced food policy in which there is consistency and synergy among the multiple sectoral policies and programs which impact the country’s food system and 50For example, Vietnam continues to expand its exports of a wide range of food and other agricultural commodities, yet over the past 5 to 10 years, its imports of feedgrains and other feed ingredients have surged and now exceed the annual value of its high volume rice export trade. These imports of feedgrains have enabled a large and competitive increase in domestic pork and poultry product production, servicing expanding demand, including from among the poor and near-poor. October 2016 THE WORLD BANK | BANK DUNIA 33 Pressures easing Indonesia Economic Quarterly its different stakeholders (Figure 34). There is a need for greater balance between consumer preferences and food supply dimensions, as well as between primary production and food system challenges beyond the farm-gate. From a dominant focus on cereals production and assuring a diet with adequate calories, future policy should give more balanced attention across food nutrients—carbohydrates, micro- nutrients, and protein—and between the quality of food (and diets) and the quantities available. Figure 34: Indonesia needs to rebalance its food security policy Agricultural Productivity, Sustainability and Diversification Rural Livelihoods and Trade and Infrastructure Safety Nets and Other Food and Feed Market Measures to Address Business and Trade Management Cereals Production Food Vulnerability Facilitation and Productivity Safety Nets Food Safety Integrated Management and Approaches to Consumer Nutrition Protection Source: World Bank Considerable efforts A reliable food system is one which can ensure ample availability of staple and other are needed to forge a foods which are safe to eat; it is one which is flexible and able to mitigate more reliable (R) and production and market performance risks posed by weather, other natural factors resilient food affecting plant/animal health, and other ‘external’ shocks (including international system… market developments). Reliability also relates to having accurate information (about production, prices, food safety, etc.). The pertinent policy agenda is multi-faceted. For example, it includes measures to develop more drought and flood-tolerant crop varieties, improve access to irrigation services, strengthen pest and disease surveillance and control, raise the performance and credibility of food safety regulatory oversight, and facilitate farmer and company investments in crop and food storage. A reliable food system is one in which both internal and international trade is supported and facilitated. In that regard, improving port infrastructure, and implementing on-going reforms to enable more competitive markets for freight forwarding, storage, distribution, and auxiliary shipping services will be critical. …and one which is An inclusive food system is one which can provide stable and remunerative more inclusive (I) livelihoods for many people (in its agricultural, manufacturing and services and health dimensions) and is able to fully meet the food and nutritional security needs of the promoting entire population, especially its lower income segments. This entails a multi-faceted agenda. Protecting farmers should give way to measures which empower farmers (such as collective action in water management and in commercial functions) and facilitate important structural changes (such as land consolidation and agricultural diversification) which will help to increase farm productivity and incomes. A more inclusive food system may require some intensified efforts to develop and implement differentiated food and nutritional security approaches in different regions—taking into account natural resources, demographics, institutional capacities, connectivity, and food preferences. Safety net programs designed to October 2016 THE WORLD BANK | BANK DUNIA 34 Pressures easing Indonesia Economic Quarterly improve economic access to food, such as RASTRA (the rice for prosperity program), could be accompanied by complementary measures (such as nutrition awareness programs and local food gardens) to promote dietary diversity. A range of policies A more competitive food system will be one which attains higher and sustained and programs are levels of productivity in its use of labor, capital, and natural resources. It will be able needed to strengthen to realize better synergies and economies of scale/scope, and, as a result, can better the competitiveness meet domestic and international consumer needs and preferences for food variety, (C) of Indonesian quality, affordability, safety, and ethics. Unit costs will need to be reduced at the food and farm and multiple value chain stages. Measures will be needed to revitalize public agriculture… agricultural research and extension while encouraging private R&D and advisory and other technical services. Improvements will be needed in the enabling environment for private investment in logistical services, food manufacturing, and distribution, and in the regulatory framework for consumer protection. Programs for agricultural (and agribusiness) education may need to be strengthened to foster the next generation of entrepreneurial farmers and agro-enterprise operators. …and to make the There is a strong need for efforts to prevent, reduce, and rehabilitate the adverse food system more environmental impacts associated with Indonesia’s food supply and distribution and eco-friendly (E) contribute positive ecosystem services where possible. The Government has at its disposal a wide range of advocacy, regulatory, enabling and other tools to influence the behavior of farmers, fishers, and firms toward practices which have a lower environmental footprint. For example, technical and financial support can be provided to promote the adoption of sustainable practices at the local level, while applying approaches of integrated management of multi-functional landscapes on a larger scale. A mix of regulations, spatial planning measures and economic incentives will be needed to address agricultural pollution, better manage fisheries resources, and protect wildlife and sensitive natural ecosystems from agricultural encroachment.51 The move toward a Pursuing this type of RICE agenda would involve a shift from price to non-price (re-) balanced policy interventions by the Government, from primarily supplying private goods to for sustainable food strengthening the prioritized provision of public goods. In a modernizing and and nutritional market-driven food system, the Government would ‘lead less but facilitate more’. security will require The Government does not need to be a major food (and input) market operator nor shifts in public provide a full range of services. Yet it needs to be effective in facilitating spending and the investments, initiatives and behavioral changes among farmers, agro-enterprises, modalities of public service providers and consumers. Pursing a rebalanced food and nutrition security interventions policy will also require a reallocation of government spending. Most importantly, replacing the large, poorly targeted fertilizer subsidy program with a comprehensive soil fertility and water management program could have a greater impact on farm productivity at much lower cost. With the down-scaling and narrower targeting of fertilizer subsidies, the fiscal dividend could be redeployed to allow for a large phased increase in investments in agricultural and rural infrastructure, and the range of public goods highlighted above. Such a reoriented pattern of public spending will yield the types of productivity gains, farm income gains, and improvements in agricultural and value chain resilience, competitiveness, and sustainability that will be essential for Indonesia’s longer term food and nutritional security. 51See B. Leimona et al., 2015, “Indonesia’s Green Agriculture Strategies and Policies: Closing the Gap Between Aspirations and Applications”, ICRAF, Jakarta. October 2016 THE WORLD BANK | BANK DUNIA 35 Pressures easing Indonesia Economic Quarterly C. Indonesia 2018 and beyond: A selective look 1. Ensuring universal access to safe water and sanitation services to reduce in stunting, poverty and inequality After achieving the Indonesia has made considerable progress in the water, sanitation and hygiene MDG target for (WASH) sector over the past decade. The country reached its Millennium water supply, Development Goal (MDG) for water supply, with 87 percent of its citizens Indonesia now benefiting from access to improved52 water supply in 2015. However, the MDG for targets universal sanitation was missed by a narrow margin. Sanitation access increased significantly access to water and from 35 percent in 1990 to 61 percent in 2015 (the target was 62.4 percent). sanitation by 2019 Progress in rural areas has been the main contributor to this achievement, with access doubling from 24 percent to 47 percent for sanitation, and increasing from 61 percent to 79 percent for water supply—a growth rate three times higher than that in urban areas53. Following these achievements, the Government is now targeting universal access to water supply and sanitation services by 2019, in line with the new Sustainable Development Goals (SDGs). Income inequality Achievements in the WASH sector coincide with a period of overall economic coincides with growth and a reduction in the poverty rate from 23.4 percent in 1999 to 10.9 inequality in access percent in 2016. At the same time, however, income inequality has risen. The Gini to WASH services Index increased by 10 percent points, from 30.0 to 39.7, between 2000 and 201654. Inequality is also evident in the WASH sector. There is a large gap in access to 52 An improved drinking-water source is defined as one that, by nature of its construction or through active intervention, is protected from outside contamination, in particular from contamination with fecal matter. An improved sanitation facility is defined as one that hygienically separates human excreta from human contact. 53 Joint Monitoring Programme WHO-Unicef, 2015. 54 See World Bank report on ‘Indonesia’s Rising Divide’ for more on this topic http://www.worldbank.org/en/news/feature/2015/12/08/indonesia-rising-divide October 2016 THE WORLD BANK | BANK DUNIA 36 Pressures easing Indonesia Economic Quarterly improved, rural, WASH services between those in the poorest and richest quintile of the income distribution55. In rural area, 57 percent of the poorest quintile have access to water services compared to 93 percent in the highest quintile. In sanitation, only 36 percent of the poorest quintile have access to improved sanitation compared to 87 percent in the highest quintile. About one-third of this inequality can be traced back to circumstances into which children are born or that develop soon thereafter. For example, Susenas data show that a child born to non- poor parents with at least a high school education in Jakarta has a 94 percent likelihood of having access to improved sanitation compared with a 2 percent likelihood for a child born to poor and less educated parents in Papua or the Moluccas56. There are still 24 There is a recognized link between poor sanitation, water-borne diseases, million rural people malnutrition and stunting (chronic malnutrition). Children exposed to a dirty without access to environment and poor nutrition at an early age experience diminished growth and improved water, 62 cognitive potential, leading to lower human capital attainment.57 The scale of this million without problem in Indonesia is large; there are around 9 million stunted children,58 and it is access to improved estimated that stunting and malnutrition lead to a 2-3 percent loss in GDP59. sanitation, and 9 million stunted A sustained rural WASH program, integrated with other sectors, is critical to children achieving universal access to water and sanitation, and contributing to reducing poverty and stunting. This section provides a brief overview of: (a) the path to achieving universal access to WASH, (b) the importance of WASH in reducing stunting, (c) examples of collaboration between the WASH sector and other related sectors, and (d) options for furthering a sustained and integrated rural WASH program. a. A strengthened institutional framework has increased access to WASH in rural areas A community-led Indonesia has significantly transformed its approach to rural sanitation. It has approach to WASH moved away from a top-down subsidy-based approach focusing on building latrines, has been and towards community empowerment to increase demand for safe sanitation and mainstreamed hygiene, and private sector provision. Based on a number of successful pilots, this through STBM and approach was scaled up to multiple provinces before being adopted as the national PAMSIMAS… rural sanitation strategy in 2008, namely the Community-based Total Sanitation (Sanitasi Total Berbasis Masyarakat, or STBM) approach. STBM has three components: 1) creating demand for safe sanitation and hygiene through community empowerment and behavior change; 2) increasing the supply of affordable and aspirational sanitation facilities by the private sector; and 3) enhancing the enabling policy environment. PAMSIMAS, the national program for community-based rural water supply and sanitation, launched in 2008, integrated the STBM approach, bringing water and sanitation policies closer together. 55 WSP, 2015, “Water Supply and Sanitation in Indonesia: Turning Finance into Service for the Future”. 56 World Bank, 2015, “Indonesia Systematic Country Diagnostic: Connecting the Bottom 40 percent to the Prosperity Generation”, World Bank East Asia and Pacific, September 57 Victora, Adair, Fall, Hallal, Martorell, Richter, and Sachdev et al, 2008, “Maternal and Child Undernutrition: Consequences for Adult Health and Human Capital” Lancet 371(9609), 340 58 Ministry of Health, 2013, “Basic Health Research (Riset Kesehatan Dasar, Riskesdas)” 59 World Bank, 2014, “Better Growth Through Improved Sanitation and Hygiene Practices” October 2016 THE WORLD BANK | BANK DUNIA 37 Pressures easing Indonesia Economic Quarterly ….this changed This changed approach, Figure 35: Growth in access to rural WASH increased approach, along with along with an improved following the adoption of STBM and PAMSIMAS a strengthened institutional framework that (the purple lines represent the increase required to achieve Indonesia’s institutional divided roles and national target of universal WASH access by 2019) framework, has responsibilities, and shared Rural Water Rural Sanitation improved rural contributions among 100% WASH access stakeholders at all levels, laid the foundation for 80% improvements in rural WASH access. Access to 60% rural sanitation increased annually by an average of 40% 2.2 percent between 2009 and 2015 (Figure 35). This 20% followed average annual growth of only 1.6 percent 0% between 2000 and 200860. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Average annual growth in access to rural water supply Source: SUSENAS, BPS, 2016. also increased over the same periods, from 1.4 percent to just over 2 percent.61 Financing for rural The World Bank’s 2015 Service Delivery Assessment (SDA) on Water and water supply mostly Sanitation in Indonesia noted that despite clear mandates and regulations, it remains comes from difficult to get a comprehensive picture of the total budget and expenditure in the government-led sector62. Funding for rural water supply comes from multiple sources (domestic programs and is still revenue, donor grants and concessional loans), and is almost exclusively channelled very limited through PAMSIMAS, with expenditure at the national level (APBN), provincial and district level (APBD), and villages level (village fund). PAMSIMAS’s budget is USD 1,600 million over a 14-year period ending in 2020 (an average of USD 115 million per year). However, this falls far short of the USD 772 million in annual capital expenditure the SDA study estimates would be required to achieve universal access to rural water supply. As such, ongoing research is investigating the potential of other sources of funds (such as user fees, the Government, or development partners), and other sources of finance (such as microfinance institutions or local banks). … while most In contrast, rural sanitation is increasingly financed through household investment, financing for rural as the Government does not provide subsidies. The SDA study estimates capital sanitation comes expenditure requirements of USD 414 million annually to achieve universal access from households to rural sanitation. Most of this would have to come from households for improved latrines, while the Government would deliver demand creation activities (such as behavior change campaigns) and policy support (such as sector regulation to mainstream proven approaches). 60 Statistics Indonesia, 2016, “Survei Sosial Ekonomi Nasional”. 61 BPS revised the formula for access to water in 2011. The new formula includes access for bathing and washing in addition to drinking water. The access rose from 45.9 percent in 2010 to 52.3 percent in 2011, BPS, 2011. 62 See World Bank, 2015, “The 2015 Service Delivery Assessment (SDA) on Water and Sanitation in Indonesia”, available at: http://documents.worldbank.org/curated/en/326971467995102174/Water- supply-and-sanitation-in-Indonesia-turning-finance-into-services-for-the-future. October 2016 THE WORLD BANK | BANK DUNIA 38 Pressures easing Indonesia Economic Quarterly Targeted public Following the STBM Figure 36: Targeted public investments can trigger investment in approach, targeted public much larger investment by communities sanitation has investments have been able (USD million, ratio) triggered much to trigger much larger 70 Community Contribution 14 larger investments by investment by communities communities. For example, 60 12 Local Government between 2009 and 2011, the 50 Spending 10 World Bank’s Total Ratio of community to Sanitation and Sanitation 40 government contribution 8 Marketing Project’s (RHS) investment of USD 3 30 6 million triggered local 20 4 government investment of USD 1.7 million and 10 2 household contributions of USD 7.8 million. Further, 0 0 data from the national 28 district in East Java 277 districts STBM web-based Source: World Bank; STBM monitoring system show that between January 2014 and August 2016, local governments in 277 cities and districts spent USD 4.5 million under the STBM program (mostly for demand creation, capacity building, monitoring, and policy support), triggering investment of USD 55.8 million from households (Figure 36). b. WASH is a key determinant of stunting 1 child out of every 3 The prevalence of stunting in Indonesia rose to 37.2 percent in 2013, up from 35.6 in Indonesia is percent in 2010 and 36.8 percent in 2007.63 With almost 9 million stunted stunted children—or 1 out of 3—Indonesia’s stunting prevalence is higher than its regional peers, such as Myanmar (35 percent), Vietnam (23 percent) and Thailand (16 percent) (Figure 27). Indonesia is among the five countries with the highest number of stunted children64. Stunting reflects According to the World Health Organization65, stunting reflects chronic chronic undernutrition during the most critical periods of growth and development in the undernutrition first 1,000 days of life. Stunting is associated with an under-developed brain leading during the first 1,000 to long-lasting harmful consequences including diminished mental ability and days of life learning capacity66. Stunting is influenced by a number of interlinked factors, 63 Indonesian Ministry of Health Basic Health Survey. While stunting has remained largely flat in recent years, access to WASH has improved overtime. However, this does not negate a relationship between WASH and stunting. The apparent contradiction in the time series data may reflect the deterioration of other important determinants of stunting in the last decade (such as nutrition factors). Further, cross sectional data (stunting rates and access to improved sanitation by province) do show the expected negative correlation (Figure 37). 64 Other countries include: India, Nigeria, Pakistan, and China. See The Global Nutrition Report, 2016. 65 See WHO conceptual Framework for Childhood Stunting, 2013 for full details http://www.who.int/nutrition/ events/2013_ChildhoodStunting_colloquium_14Oct_ConceptualFramework_colour.pdf 66 Victora, et.al, 2008, “Maternal and Child Undernutrition: Consequences for Adult Health and Human Capital”, Lancet 371(9609), 340. October 2016 THE WORLD BANK | BANK DUNIA 39 Pressures easing Indonesia Economic Quarterly including access to nutritious food, caring practices, access to health services, and access to WASH67. Improving sanitation Inadequate sanitation Figure 37: There is a strong correlation between reduces child can impact child improved sanitation and reduced stunting stunting nutritional status (stunting, percent of children under 5 (LHS); improved sanitation through multiple facilities, percent of population with access, (x axis)) pathways, most 30 R² = 0.4397 importantly through reduction in diarrheal 25 disease and infection from harmful parasites 20 due to fecal contamination in the 15 environment. Improved WASH can also help 10 reduce anemia and play an important role in 5 preventing environmental 0 20 40 60 80 100 enteropathy . Although 68 WASH is not the only Note: Data by province factor affecting stunting, Source: Riskesdas, 2013 Indonesian data have shown a strong relationship between improved sanitation and reduced stunting (Figure 37). Provincial data show that access to basic sanitation and safe drinking water are associated with taller children69. This gain in height is larger when basic sanitation and safely managed water are accompanied by access to adequate food and health services. An impact evaluation study in East Java showed that children exposed to a Rural Sanitation Program had lower average rates of parasitic infection, as well as improvements in height and weight, compared to children that did not benefit from the program70. Other studies, such as in Cambodia71, Mali72, and India,73 and global econometric studies74 find that children in households that do not practice open defecation (OD) are less stunted. In line with this research, international programs intended to address stunting have started to incorporate a focus on WASH. The Scaling Up Nutrition (SUN) Movement, which the Government joined in September 2012, mainstreams WASH as a 67 Adopted from UNICEF, 1990, “Strategy for Improved Nutrition of Children and Women in Developing Countries”, available at:http://siteresources.worldbank.org/INTLACREGTOPNUT/Resources/UNICEF_Framework.p df 68 A condition whereby the intestine has been damaged due to frequent infection which causes a reduction in nutrition absorption capacity. 69 World Bank and MoH, 2015, “Operationalizing a Multi-Sectoral Approach for the Reduction of Malnutrition in Indonesia: An Application using the 2007 and 2013 Riskesdas”, July 2015. 70 WSP, 2013, “Impact Evaluation of a Large-Scale Rural Sanitation Project in Indonesia”. 71 WSP, 2013, “Investing in the Next Generation: Growing Tall and Smart with Toilets, Stopping Open Defecation Improves Children’ Height in Cambodia”. 72 Pickering, et al, 2015, “Effect of a Community-Led Sanitation Intervention on Child Diarrhoea and Child Growth in Rural Mali: A Cluster-Randomised Controlled Trial”, The Lancet Global Health 3, no. 11: e701-e711. 73 Hammer et al, 2016, “Village Sanitation and Child Health: Effects and External Validity in a Randomized Field Experiment in Rural India”, Journal of Health Economics 48: 135-148. 74 Spears, 2013, “How Much International Variation in Child Height Can Sanitation Explain?” Policy Research Working Paper 6351, World Bank, Washington, DC. October 2016 THE WORLD BANK | BANK DUNIA 40 Pressures easing Indonesia Economic Quarterly nutrition-sensitive intervention.75 Similarly, the National Nutrition Improvement Acceleration Program within the Framework of the First Thousand Days of Life prioritizes WASH as part of a multi-sectoral response to stunting76. The Government of The Government of Indonesia has committed to reduce the rate of stunting to 28 Indonesia percent nationally by 2019. As such, government and donor funding is being committed to reduce directed towards stunting. For example, the Government signed a USD 130 million the rate of stunting compact with the Millennium Challenge Corporation (MCC) in 2013 to fund the from 37 percent in Community-Based Health and Nutrition Program to Reduce Stunting (PKGBM)77. 2013 to 28 percent by PKGBM is currently being implemented in 64 districts in 11 provinces and aims to 2019 tackle stunting by integrating a nutrition program with the STBM approach to rural sanitation. c. An integrated approach to WASH is required to reduce stunting and poverty Some collaboration An integrated approach across water, agriculture, health and nutrition is required to among practitioners address stunting and poverty. Collaboration between some of these sector is already in different sectors is taking place in selected areas within the STBM, PAMSIMAS and PKGBM already taking place programs. For example, PAMSIMAS (water program) and PKGBM (nutrition to address stunting program) have integrated the STBM approach to rural sanitation to generate and poverty consumer demand for toilets and strengthen the supply of sanitation goods and services. Harmonization of Harmonization of monitoring and reporting systems is another way to ensure that monitoring and WASH objectives are considered in nutrition projects (and vice versa). The reporting systems PAMSIMAS MIS now draws on data collected through the STBM program to can help support produce comprehensive reports on water and sanitation. Similarly, the PKGBM integrated service program initiated a joint data analysis forum to generate statistics around the delivery determinants of undernutrition, including: sanitation, nutrition, maternal and child health, and infectious disease. Demand for services Triggering activities have traditionally been used to stimulate an emotional response that can address from the community to stop open defecation. More recently, they are also being stunting can be used to increase community demand for improved water supply and good nutrition. triggered by BCC For example, the Ministry of Health (with support from the Millennium Challenge campaigns and then Account Indonesia (MCA-I)) is delivering integrated behavior change strengthened by communication (BCC) messages about stunting during STBM triggering events and training community in marketing materials.78 By August 2016, the MCA-I had trained 2,400 sanitation personnel and nutrition professionals and cadres to communicate these messages79. 75 For more information on SUN in Indonesia see http://scalingupnutrition.org/sun- countries/indonesia. 76 Other interventions include: psychosocial stimulation for babies and children, family planning, household nutrition gardens, and cash transfers for nutrition. For more information on SUN in Indonesia see http://scalingupnutrition.org/sun-countries/indonesia 77 For more information see: https://www.mcc.gov/where-we-work/program/indonesia-compact 78 Other common BCC channels include local media and cultural events. 79 See MCA-I training and monitoring system for more information: http://monev- chnpmcai.org/index.php/traininglist. October 2016 THE WORLD BANK | BANK DUNIA 41 Pressures easing Indonesia Economic Quarterly The supply side of Establishing a Table 8: Training sanitation entrepreneurs helps increase latrine rural WASH is base of sales continuously entrepreneurs to 2012 2013 2014 2015 Active entrepreneurs improving, which serve the demand (cumulative) 74 117 194 273 also contributes to created for Latrine sales per year 14,486 8,394 17,635 16,045 local economic sanitation not Sales/entrepreneur/month 16 6 8 5 development only helps to Note: Data was retrieved from www.stbm-indonesia.org and covers 5 provinces scale up access to (West Java, Central Java, East Java, Bali and West Nusa Tenggara). WASH, but also Source: STBM MIS system, October 2015 has an impact on overall economic development in communities. The supply side of rural WASH is continuously improving through the adoption of new technology and training of entrepreneurs. Since 2010, the Government has trained a total of 1,945 masons80 to be potential sanitation entrepreneurs, of whom 273 have become active entrepreneurs (Table 8). These entrepreneurs have sold 63,760 healthy latrines worth IDR 90 billion81. Moreover, through sanitation entrepreneur associations, some entrepreneurs have received support from local banks or micro finance institutions to expand their businesses. Improved pit latrines are among the most economic solutions with a unit cost of around USD 30 per household per year. In rural areas, the economic benefits of pit latrines exceed costs by a factor of at least seven82. Overall, supply side WASH activities can not only deliver sanitation services and economic benefits to communities, but can also help set up profitable businesses. Community Community-Based Operators (CBOs) are essential to ensuring sustainable WASH organisations set up services over time, but once they are established and well-functioning, they can to deliver water serve as useful entry points to provide other services. It is estimated that around services can serve as 25,000 CBOs already exist in Indonesia. Around 12,000 of these associations were useful entry points to formed under the PAMSIMAS program and are called BPSPAMSs (Governing provide services in Body for Water Supply Systems and Sanitation). Efforts to strengthen the other sectors performance of BPSPAMS have since been conducted with the assistance of the Ministry of Home Affairs. d. Continuing progress in rural WASH in order to reduce stunting and poverty Reducing stunting Since 2008, increased investment and a strengthened institutional framework have will require further improved access to WASH in rural areas. However, service delivery bottlenecks integration between remain. Fundamental causes of poor local service delivery include: an inefficient rural WASH, allocation of spending at the sub-national government level; technical capacity and nutrition, and coordination constraints; and weak incentives and accountability structures for poverty delivering results83. Addressing these bottlenecks, and further integrating WASH programs with other sectors can help reduce stunting and poverty. 80 Amongst local professions, the skills of a mason are most suited to building latrines. 81 WSP, 2015, “Scaling Up Rural Sanitation and Hygiene in Indonesia”, www.stbm-indonesia.org 82 For more detail, see WSP, 2011, “The Economic Returns of Sanitation Interventions in Indonesia. 83 WSP, 2015, “Water Supply and Sanitation in Indonesia, Turning Finance into Service for the Future”, World Bank Group. October 2016 THE WORLD BANK | BANK DUNIA 42 Pressures easing Indonesia Economic Quarterly Integrated data on In a multi-sector Figure 38: Poverty and stunting are declining, while WASH, nutrition and environment, integrated, WASH access is increasing poverty is an comprehensive, reliable and (access to rural WASH, poverty rate, and stunting prevalence in important first step comparable data are key for children under 5, percent) effective analysis and policy 60 making. Although BPS and Access to drinking water (%) MOH provide overall 50 figures (Figure 38), more Stunting % detailed integrated data (on 40 WASH, nutrition and Access to sanitation (%) 30 poverty) are not yet available.84 Different data 20 collection methods, availability of time series 10 data, and definitional Poverty headcount differences are some of the 0 barriers to such integrated 2000 2002 2004 2006 2008 2010 2012 data. There is also a need to strengthen the capacity of Source: BPS and Riskesdas, MOH technical units within the Government to use and share evidence and data for policy planning. Synergies between Synergies between sectors can be obtained in many ways, including: (i) using sectors can be common measurement indicators, benchmarks, and tools; (ii) co-locating programs obtained in many in geographies with high rates of stunting; (iii) using existing targeting strategies and ways the delivery platforms of social protection programs to deliver BCC messages about WASH and nutrition at a larger scale; (iv) and using reciprocal arrangements between nutrition and WASH delivery systems to deliver BCC messages. Early global evidence already suggests that including integrated BCC messages in WASH programs can enhance their impact on health and nutrition objectives. Looking ahead, more research is required to develop evidence-based messaging on the linkages between rural WASH, nutrition and poverty for use in integrated BCC campaigns. The synergies in shaping nutrition linked WASH behaviors can also be obtained by utilizing additional tools (such as ‘nudges’ for hand washing and hygiene) that influence choices and actions of the target groups. These can be rigorously tested and evaluated for impact and further scaled-up. A number of policy Achieving universal access to WASH will require greater resources and better use of reforms can help existing resources. Fiscal transfers to local governments, investments by the mobilise resources financial sector and private sector can all contribute to achieving better outcomes. and improve the For example, a soft regulatory framework for public-private-community efficiency of partnerships (PPCP) will allow engaging private and social enterprises for inclusive spending and sustainable delivery of WASH and nutrition services in communities. In parallel, local governments could be incentivised to improve performance by increasing their share of the Special Allocation Fund (DAK). This would further incentivize them to focus on targeted sectors and hold them accountable through a results-based approach. PAMSIMAS already delivers “results-based-financing” to local governments as a reward for delivering rural water services and securing co-funding 84For example, an integrated map that overlays poverty, stunting and WASH access would be useful for planning integrated programs. October 2016 THE WORLD BANK | BANK DUNIA 43 Pressures easing Indonesia Economic Quarterly from communities. This is a promising way to mobilize provincial and district governments even for programs aimed at nutrition results. Improving service Existing capacity building strategies require a comprehensive review for achieving delivery will also universal WASH access, as well as pursuing WASH-nutrition links by leveraging require capacity non-traditional platforms such as: local governments, health service providers, building and nutrition counsellors, WASH enterprises, and nutrition enterprises. Capacity knowledge sharing… building and knowledge sharing platforms should be more innovative and cost effective at strengthening the institutional capacity of non-water institutions to ensure they can deliver WASH services in the last mile. For example, associations of BPSPAMS are a cost effective way for sharing technical knowledge. A similar approach could be adopted through associations of health service providers, WASH enterprises and nutrition enterprises. …and greater The Village Law provides a strong foundation for villages to play an increasing role community in sustainable and accountable service delivery. Enhancing their capacity to deliver engagement programs and aligning incentives to collaborate with other sectors will help local governments deliver integrated WASH and nutrition services. Community involvement to monitor implementation of key programs on the ground can also help improve local government performance. PAMSIMAS and STBM already promote such involvement and promote values such as transparency, accountability and integrity. For example, PAMSIMAS has established a complaint-handling mechanism that can be accessed by text message, phone, website, or email. October 2016 THE WORLD BANK | BANK DUNIA 44 Pressures easing Indonesia Economic Quarterly 2. Double for Nothing? Teacher Certification and Beyond85 Now that Indonesia The economic literature provides mounting evidence that the quality of education, has substantially as measured by cognitive skills assessed in international learning assessments, improved enrollment contributes more to a country’s economic growth than mere years of education.86 rates, its key Indonesia has successfully expanded access to education in recent decades, with Net education challenge Enrollment Rates (NER) now exceeding 92 and 75 percent at primary and has become secondary levels respectively. However, Indonesia’s poor performance in improving the international assessments of student learning indicates potential problems with the quality of education quality of education in Indonesia. Almost 40 percent of Indonesia’s 15 year-old students score in the lowest or second-to-lowest competency levels (of 6 levels) in the OECD’s Programme for International Student Assessment (PISA) for math and science. The constitutional The Government is Figure 39: Education sector spending has tripled mandate to allocate committed to expanding since 2001 in real terms 20 percent of the quality education, as (IDR trillion at 2013 prices (LHS), percent (RHS)) annual budget to evidenced by its Central, LHS Central-MoEC, LHS Central-MoRA, LHS Central-MoRTHE, LHS education speaks constitutional mandate to Central-other ministries, LHS Provinces, LHS volumes for the allocate 20 percent of its Districts, LHS 300 20 Government’s annual budget to education Total education spending 18 commitment to (Figure 39). The 250 as % national spending, RHS 16 education Government has also 14 200 actively tried to address Total education spending 12 access and quality of 150 as % GDP, RHS 10 education through various 8 100 policies and programs over 6 the last four decades. 50 4 2 Starting with the rapid 0 0 expansion of schooling, and the building of tens of thousands of new primary Note: Central and sub-national spending figures refer to realized schools, Indonesia managed spending, except in 2014 where sub-national spending figures are estimated using sub-national budgets. However, total education to more than double the spending may be underestimated as these figures may not fully number of new entrants capture BOS spending realization in sub-national governments into primary school Source: World Bank COFIS database using MoF data between 1973 and 197987. However, while the school construction program had clear benefits, its rapid implementation also had downsides: schools were built so fast that there were not enough trained teachers to fill them and new teachers were hastily trained. This process is said to have diluted the quality of the teaching force in Indonesia. This dilution of quality was subsequently the reason for some of 85 The majority of this section summarizes two separate papers: Joppe de Ree, Karthik Muralidharan, Menno Pradhan, Halsey Rogers, 2015, “Double for Nothing? Experimental Evidence on the Impact of an Unconditional Teacher Salary Increase on Student Performance in Indonesia”, NBER Working Paper No. 21806; and World Bank, 2015, “Indonesia: Teacher certification and beyond. An empirical evaluation of the teacher certification program and education quality improvements in Indonesia”. 86 Woessmann, 2003, “Specifying human capital”, Journal of Economic Surveys 17(3), 239–270; Hanushek and Woessmann, 2008, ‘‘The role of cognitive skills in economic development’’, Journal of Economic Literature 46(3), 607–668; Hanushek and Woessmann, 2009, “Do better schools lead to more growth? Cognitive skills, economic outcomes, and causation”, NBER Working Paper No. 14633, Cambridge, MA, National Bureau of Economic Reasearch. 87 World Bank, 1989, “Indonesia: Basic education study”. October 2016 THE WORLD BANK | BANK DUNIA 45 Pressures easing Indonesia Economic Quarterly Indonesia’s more recent education reform programs, such as the teacher certification program. a. The Teacher Certification Program Indonesia’s poor In 2000 Indonesia decided to participate in an Organization of Economic PISA results in 2000 Cooperation and Development (OECD) initiative called PISA, the Programme for prompted the International Student Assessment, which measures academic achievement in math institutionalization and science in representative samples of 15-year-olds in a number of countries of a generous around the world. Indonesia’s poor performance in this assessment marked the professional starting point for massive government investment in Indonesia’s education system allowance upon in the post-Suharto period. Indonesia’s new leaders understood that something completion of a dramatic was needed to upgrade (or restore) the profile of the teaching profession. teacher certification Indonesia's answer was the formulation and implementation of Law No. 14/2005 program on Teachers and Lecturers (known as the Teacher Law). The flagship program under the new law was a teacher certification program that aimed to reestablish some of the esteem that the teaching profession had lost during the rapid expansion of education in the 1970s and 1980s. The program promised teachers a generous professional allowance, equal to their base salary, upon successful completion of the program. Certification, therefore, essentially doubled teachers’ take-home pay.88 The initial design of the program was such that to qualify for certification, teachers first had to obtain a university bachelor’s degree and second, as additional proof of competency, had to demonstrate their skills through a written competency test, classroom observation, and a portfolio of past training and experience. The idea was that teachers without the right teaching skills would have a clear financial incentive to upgrade their skills to the standard required. However, diluted In the early 2000s, political momentum built around the certification program. certification However, the regulations proposed in the initial design were significantly watered conditions down when the proposed bill was presented in parliament. Under pressure from undermined the teacher unions, the requirement to demonstrate competency, through tests and potential benefits of classroom observation for instance, was dropped and only a portfolio assessment of the program past training and experience was retained.89 Many observers worried that only acquiring a bachelor’s degree from one of the country’s teacher training institutions would not be enough to ensure a minimum level of teacher quality. This concern was partly based on a large body of empirical research that raised skepticism about the benefits of formal academic qualifications for teachers. However, such research typically concentrates on more advanced economies where teachers with a bachelor’s degree are compared with those who have a master’s degree90. The situation in Indonesia was strikingly different, as a quarter of all 2.7 million teachers in 2005 (and a third of all primary teachers) had no more than a high-school diploma. In this context, it was not unreasonable to expect that if this group obtained a university bachelor’s degree, the quality of the learning environment would improve. 88 Some teachers also receive other allowances in addition to their base pay. In that case, the certification allowance does not double their pay, although it significantly increases it. 89 See: Woessman, 2003; Hanushek and Woessman, 2008, 2009. A more in-depth discussion on the political economy of this process is provided by Chang, Shaeffer, Al-Samarrai, Ragatz, De Ree, and Stevenson, 2013. 90 Hanushek and Rivkin, 2006, “Teacher Quality”, in Hanushek and Welsch, Handbook of the economics of education, Vol. 2. October 2016 THE WORLD BANK | BANK DUNIA 46 Pressures easing Indonesia Economic Quarterly Nevertheless, the The certification program, and the associated doubling of take-home pay, was quality of education expected to improve the quality of education through three channels: improved was expected to motivation to perform (behavioral mechanism), improved teacher qualifications improve through (academic upgrading mechanism), and increased desirability of teaching as a three mechanisms profession (attraction mechanism) (Figure 40).91 In-service teachers who qualified for certification in 2005/06, based on already having a bachelor’s degree, would only be affected by the behavioral mechanism. Those already in the system (in-service teachers and students enrolled in a teacher training college) would be affected by the academic upgrading mechanism and the behavioral mechanism. Finally, potential teacher candidates would be affected by the first two mechanisms and the attraction mechanism. Figure 40: Teacher performance was expected to improve through three channels The attraction mechanism. The academic upgrading The behavioral mechanism. Increasing teacher salaries mechanism. Those without a Higher levels of pay might mean means that the profession bachelor’s degree need a one to relying less on second jobs and becomes more attractive in become eligible for certification. help motivate teachers to relation to other professions. This In the process of obtaining a prepare better for class or might attract a higher caliber degree, teachers might improve become timelier. high-school graduate to the their knowledge and skills, teaching profession. making them better teachers. GROUP 1. In-service teachers who qualified for certification in 2005/06. GROUP 2. In-service teachers who did not qualify for certification in 2005/06 + students enrolled in teacher training colleges in 2005/06. GROUP 3. Pre-service teacher candidates in 2005/06 prior to enrolling in a teacher training college. Source: World Bank, 2015 91While the base salary of a junior teacher with a university bachelor’s degree roughly translates to the median wage of all workers with a bachelor’s degree in Indonesia, the base salary and the professional allowance combined translates into roughly the 90th percentile of the same income distribution. October 2016 THE WORLD BANK | BANK DUNIA 47 Pressures easing Indonesia Economic Quarterly b. An evaluation of the teacher certification program The Government A rigorous randomized Figure 41: The proportion of teachers with bachelor’s collaborated with the evaluation of the roll-out of degrees increased World Bank to the teacher certification (percentage) rigorously evaluate program was conducted by 2005/06 20011/12 2015 100 the teacher the Government and the certification World Bank, and financially 80 program, and learn supported by the Dutch from the results Government, through the 60 Dutch Education Support Program (DESP). The 40 evaluation provides some sobering results. Despite a 20 large increase in the 0 proportion of teachers with Primary Junior Secondary Senior Secondary a bachelor’s degree (Figure Note: The evaluation ended in 2012, before the proportion of 41), and the resultant heavy teachers was as high as shown in 2015 fiscal costs (see part d Source: World Bank calculations based on the NUPTK 2005/06 and NUPTK 2011/12 data sets92 below), no discernable improvement in student learning outcomes was observed over the evaluation period (2009-2012). These results are based on a unique matched student-to-teacher database, collected specifically for the evaluation of the teacher certification program, where primary and junior secondary students were tracked for 2.5 years as they progressed through school. Their performance across time was then linked to survey information and subject-matter test scores of their teachers. The data are representative of 40 percent of the public primary and public junior secondary schools in Indonesia and have full geographic coverage—from districts in Sumatra in the west to the southern Maluku islands in the east (Figure 42).93 Figure 42: A representative sample of 20 districts was selected to take part in the evaluation (sample districts are highlighted) Source: World Bank 2015 92http://jendela.data.kemdikbud.go.id/jendela/index.php/chome/dashboard/ 93About 80,000 students were tested in each of the three rounds, November 2009, April 2011 and April 2012. October 2016 THE WORLD BANK | BANK DUNIA 48 Pressures easing Indonesia Economic Quarterly The certification In both primary and junior secondary schools, the evaluation found no difference in program had no student test scores in language, mathematics, or science between treatment and impact on student control schools (Figure 43). This likely reflects the fact that teachers in treatment test scores in schools (those that participated in the certification program) did not put in greater language, effort in response to the pay increase. That is, there was no difference between mathematics, or treatment and control schools with respect to teacher test scores, the likelihood of science pursuing further education (beyond that required for certification), or self-reported absence rates. The pay increase was successful in achieving some of the objectives of the certification program, namely: improving teachers' financial situation, job satisfaction, and ability to better focus on teaching by reducing the need to hold outside jobs (Figure 44). Figure 43: The certification program had no impact on Figure 44: The certification program improved student learning outcomes94 teachers’ financial situation and job satisfaction (deviation from the control group, measured in standard deviations of (percent of teachers) test scores) 0.15 baseline (November 2009) midline (April 2011) endline (April 2012) 0.10 50% Effect of the 40% 0.05 intervention 30% 0.00 20% 10% -0.05 95% confidence interval 0% treatment control treatment control -0.10 Fraction of teachers Fraction of teachers with a Midline (April 2011) Endline (April 2012) reporting financial stress second job Source: World Bank 2015 Source: World Bank 2015 94The reported effects are obtained from a regression of midline and endline standardized student test scores on a dummy variable indicating whether a school is in the treatment group, standardized baseline student test scores (set to zero when baseline scores are not available), a dummy variable indicating whether a student’s baseline test score is not available, and a full set of 20 district dummy variables. The estimated effect at the midline is practically zero, while the estimated effect at the endline is 2 percent of a standard deviation. Standard errors allow for arbitrary clustering at the school level and are estimated at around 0.04. This means that these estimates are not statistically significantly different from zero and reasonably precisely estimated. 95-percent confidence bands around the effect estimates are presented. See De Ree, Muralidharan, Pradhan, and Rogers, 2015, for the complete analysis, more estimates and details. October 2016 THE WORLD BANK | BANK DUNIA 49 Pressures easing Indonesia Economic Quarterly c. What matters more for student learning? Teachers’ observed Other measures of teacher Figure 45: Teachers are predicted to perform better on subject-matter knowledge and quality test questions after improving their subject-matter knowledge was were also collected as part knowledge much better at of the evaluation. From (percent of teachers correctly answering two questions) predicting student these variables, teachers’ baseline learning outcomes observed subject-matter projection, following a standard deviation increase than teachers’ knowledge (as measured 80 in teacher's subject matter knowledge academic by specific teacher 70 qualifications assessments conducted in 60 the evaluation) was much 50 better at predicting student learning outcomes than 40 teachers’ academic 30 qualifications. It follows 20 that improving teachers’ 10 low levels of subject 0 content knowledge could 1 2 lead to more rapid and relatively larger gains in Source: World Bank 2015 student learning (compared to obtaining a bachelor’s degree). Figure 45 reflects how teachers performed against two specific test items95 and their predicted performance after some improved subject content knowledge.96,97 World Bank (2015) projects that with such an improvement in teachers’ subject content knowledge, the student learning outcomes in PISA can improve by about 20 points between 2015 and 2019 (Figure 47, below). Though an increase of 20 points is not enough to catch up with immediate neighboring countries, it would still be an improvement that has not yet been seen in the last few rounds of PISA. With the increased Attracting the top performing graduates to the teaching profession can also have an desirability of impact on student learning outcomes. There are some clear indications that the teaching as a teaching profession has indeed become more popular among high-school graduates, profession, and that this is leading to higher-quality graduates entering teacher training. A Indonesia has the survey of students in a sample of 15 teacher training colleges found that cohorts unique opportunity who enrolled more recently have higher national exam scores than earlier cohorts to select only the (relative to the national average of the respective cohort)98. best into the profession However, Indonesia is not taking advantage of the popularity of the teaching profession to select the most promising high-school graduates. In addition, it is unclear whether the current system has the checks and balances in place to hire the best, or even the best trained candidates, and provide them with teaching jobs in schools. The increased desirability of teaching as a profession has led to a surge in private teacher training colleges, which appear to be operating without much quality control or government oversight. It is unclear how this expansion has impacted the 95 These test items are simple questions that are part of the regular high school curriculum. For details, see World Bank, 2015. 96 This increase corresponds to one standard deviation increase in teacher performance as defined in World Bank, 2015 and has been translated into what it means in terms of correct response rate to two selected test items from the assessment to make it intuitive for the readers. 97 Improved content knowledge could include subject specific training for the teachers. 98 Indonesia Ministry of Education and Culture, 2009 and Chang, Shaeffer, Al-Samarrai, Ragatz, De Ree, and Stevenson, 2013. October 2016 THE WORLD BANK | BANK DUNIA 50 Pressures easing Indonesia Economic Quarterly average quality of those enrolled. If the number of teacher training colleges generally adjusts to match the demand for vacancies, then the system will fail to weed out lower-caliber high-school graduates. Other countries in which there is excess demand for vacancies in teacher training colleges use this opportunity to select only the best performing students to enter the teacher training institutions. Finland—one of the top-performers on PISA—is an example of this. Employing the best Employing the best Figure 46: Selective hiring of high performing teachers can improve teachers can improve teachers can have a strong positive impact on learning outcomes learning outcomes in the student learning outcomes long-run (Figure 46). For (average PISA score) instance, under an optimistic target pessimistic optimistic scenario, retiring 460 teachers of average quality are replaced with a new 440 cohort of teachers performing at the level of 420 the current top 15 percent. Under the target scenario, 400 retiring teachers are replaced with teachers 380 performing at the level of the current top 30 percent. The pessimistic scenario 360 2000 2010 2020 2030 2040 2050 shows what happens when new cohorts of teachers are Source: World Bank 2015 no better than the retiring cohorts they replace. Comparing scenarios it is clear that unless the potential of the attraction mechanism is harnessed by ensuring the quality of teacher training institutions, the teacher certification program will fail to achieve its intended goals. Improving teacher Therefore, it is imperative Figure 47: Improving teacher subject knowledge and subject knowledge that teachers have the hiring better teachers can improve learning outcomes can yield short term opportunity to improve (PISA score99) learning gains, but their subject-matter 460 longer term gains knowledge in the short will materialize from term, and that in the 440 hiring better teachers medium term the Government evaluates the predicted learning gains from 1.0 420 quality of incoming standard deviation increase in teachers' subject matter knowledge teachers (Figure 47). 400 Improving subject matter knowledge would include intensive in-service 380 predicted learning gains from training geared specifically better intake (target) towards curriculum related 360 2000 2003 2006 2009 2012 2015 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045 2048 subject matter. Source: World Bank 2015 99To provide context, the PISA OECD average in Mathematics for 2012 was 494, with the best performing systems such as Shanghai, China and Singapore scoring 613 and 573 respectively. Vietnam also performed well (511), while Thailand (427) and Malaysia (421) were further behind. October 2016 THE WORLD BANK | BANK DUNIA 51 Pressures easing Indonesia Economic Quarterly d. From “Certification” to “Professional” allowance The teacher In the past fifteen years, Indonesia has tripled its spending on education. Much of certification program the increase has gone towards the certification allowance100. With roughly 2 million has had huge fiscal potentially eligible teachers in the country, full implementation of the program will implications cost around IDR 65 trillion each year (approximately 62 percent of total education spending in 2015). In terms of fiscal impact, the teacher certification program is by far the largest education reform in recent decades. The hope is that the program has helped to lay the groundwork for further essential reforms in the sector. Teaching is once again a popular profession. However, if the professional allowance continues to be linked to simply completing a bachelor’s degree and weak certification conditions, the fiscal cost will surge further as more teachers join the profession. Competency With the qualification of teachers much improved as a result of the certification assessments and program, Indonesia should now focus on the system of teacher management and performance continuous professional development. Such a system would prioritize demonstrated appraisals can help professional competencies101 over education level and seniority (intermediate ensure that teachers outcomes that contribute to competency). Recognizing this, the Government and other established the Teacher Professional Management System (TPMS) in 2013. An stakeholders are held important change with respect to earlier systems is that the TPMS more explicitly accountable for the emphasizes the interplay between competency assessment, performance appraisal progress they make and continuous professional development. Competency assessments and performance appraisals identify gaps in a teacher’s knowledge and skills. These appraisals should subsequently feed into a system of planning, training and continuous professional development. By undertaking assessments and appraisals after a period of in-service training, teachers and other stakeholders are held accountable for the progress they make. Re-assessment of in- The TPMS could function better if teachers and other stakeholders were financially service teachers and rewarded for meeting higher competency standards. That is, part of the professional incentives for allowance could be linked to performance in order to motivate teachers to exert continued continuous effort. The challenge with implementing such a policy is setting targets performance can and goals based on demonstrated competencies, rather than more easily observed improve the quality proxies. Further, targets and goals should be based on indicators that can be reliably of teaching obtained, that are important (ideally, scientifically proven to be so) for better teaching, and that measure competency with reasonable levels of precision. Overall, developing and implementing reliable and effective assessments for the TPMS is a formidable challenge that cannot be resolved overnight. A continuous system The Government is currently emphasizing both the short-run goal of improving in- of re-assessment and service teacher training programs, with a focus on subject content knowledge, as performance well as the medium to long-term goal of improving the teacher selection process incentives can through testing new teachers (graduates) on their knowledge, teaching skills, enhance the quality learning context skills, and personal skills. Without such improvements, the huge of teaching fiscal cost would indeed turn out to be “double for nothing”. 100World Bank, 2013 101In this regard, competency refers to both subject matter knowledge and pedagogic ability. The evaluation of the certification program has already found that teachers’ subject matter knowledge matters for student performance (see sub-section c). Other studies also show that pedagogical knowledge is an extremely important element of teacher competency. See for example: World Bank, 2016, “A Video Study of Teaching Practices in TIMSS Eighth Grade Mathematics Classrooms Understanding What Teaching Practices are Used, Why They are Used and How They Relate to Student Learning”. October 2016 THE WORLD BANK | BANK DUNIA 52 Pressures easing Indonesia Economic Quarterly APPENDIX: A SNAPSHOT OF INDONESIAN ECONOMIC INDICATORS Appendix Figure 1: Real GDP growth Appendix Figure 2: Contributions to GDP expenditures (percent) (contribution to real GDP growth yoy, percent) 4 8 Private cons. Gov cons. Investment Net exports 8 Stat.discrepancy* GDP Year-on-year (RHS) 3 6 6 Qurter on Quarter seasonally 4 2 adjusted (qoq sa) 4 2 Average qoq sa 0 1 2 -2 0 0 -4 Jun-10 Jun-12 Jun-14 Jun-16 Jun-13 Jun-14 Jun-15 Jun-16 Source: BPS; World Bank staff calculations Note: * includes changes in stocks. Source: BPS; World Bank staff calculations Appendix Figure 3: Contributions to GDP production Appendix Figure 4: Motorcycle and motor vehicle sales (contribution to real GDP growth yoy, percent) (seasonally-adjusted sales growth yoy, percent) Agriculture Mining and constr. 40 Manufacturing Comm & transport Trade, hotel & rest Other services Cement sales 8 GDP 20 Motor vehicle sales 6 0 4 -20 2 Motorcycle sales 0 -40 Jun-13 Jun-14 Jun-15 Jun-16 Sep-13 Sep-14 Sep-15 Sep-16 Source: BPS; World Bank staff calculations Source: CEIC; World Bank staff calculations Appendix Figure 5: Consumer indicators Appendix Figure 6: Industrial production indicators (retail sales index 2010=100) (PMI diffusion index; industrial production growth yoy, percent) 55 15 200 BI Retail sales index Industrial production (RHS) BI Consumer Survey Index 180 53 10 160 51 5 140 49 0 120 47 -5 100 Manufacturing PMI 45 -10 80 Sep-13 Sep-14 Sep-15 Sep-16 Sep-13 Sep-14 Sep-15 Sep-16 Source: BI; World Bank staff calculations Source: BPS; Nikkei/Markit: ; World Bank staff calculations October 2016 THE WORLD BANK | BANK DUNIA 53 Pressures easing Indonesia Economic Quarterly Appendix Figure 7: Balance of payments Appendix Figure 8: Current account components (USD billion) (USD billion) Current account Capital and financial 16 Errors and omissions Overall BoP inflows 16 8 Goods trade Secondary income 8 0 0 -8 Current account -8 Primary income Services trade -16 -16 Jun-13 Jun-14 Jun-15 Jun-16 Jun-13 Jun-14 Jun-15 Jun-16 Source: BI; World Bank staff calculations Source: BI; World Bank staff calculations Appendix Figure 9: Exports of goods Appendix Figure 10: Imports of goods (USD billion) (USD billion) 16 16 Total Exports (fob) Total Import (cif) 12 12 Manufacturing 8 8 Raw materials 4 4 Oil and gas Oil and gas Capital goods Consumer goods Mining Agriculture 0 0 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Source: BPS; World Bank staff calculations Source: BPS; World Bank staff calculations Appendix Figure 11: Reserves and capital flows Appendix Figure 12: Inflation and monetary policy (USD billion) (percent) 12.0 125 10 3.8 International Reserves Headline inflation, yoy 100 7 8.0 BI policy rate 2.6 75 4 4.0 1.4 Core inflation, 50 1 yoy 0.0 0.2 25 -2 Non-resident portfolio inflows, (RHS): Headline inflation mom (RHS) Equities SUN SBI Global bonds -4.0 -1.0 0 -5 Sep-13 Sep-14 Sep-15 Sep-16 Sep-13 Sep-14 Sep-15 Sep-16 Source: BI; MoF; World Bank staff calculations Source: BPS; BI; World Bank staff calculations October 2016 THE WORLD BANK | BANK DUNIA 54 Pressures easing Indonesia Economic Quarterly Appendix Figure 13: Monthly breakdown of CPI Appendix Figure 14: Inflation comparison across countries (percentage point contributions to monthly growth) (change yoy) 3 Core Administered India * Volatile Headline Indonesia * China * 2 Philippines Malaysia 1 USA * Korea 0 Thailand * Singapore Japan -1 Sep-13 Sep-14 Sep-15 Sep-16 -1 0 1 2 3 4 5 Source: BPS; World Bank staff calculations *Note: September 2016; others August. Source: BPS; CEIC; World Bank staff calculations Appendix Figure 15: Domestic and international rice Appendix Figure 16: Poverty and unemployment rate prices ( percent) (percent LHS, wholesale price, in IDR per kg RHS) 150 11,000 20 Domestic, IR64-II quality (RHS) 125 9,000 16 100 7,000 Poverty rate Thai rice price, 15% broken (RHS) 12 75 5,000 Unemployment rate 8 50 3,000 25 1,000 4 Percentage spread 0 -1,000 0 Sep-13 Sep-14 Sep-15 Sep-16 2003 2005 2007 2009 2011 2013 2015 Source: Cipinang wholesale rice market; FAO; World Bank staff Source: BPS; World Bank staff calculations calculations Appendix Figure 17: Regional equity indices Appendix Figure 18: Selected currencies against USD (daily index in local currency, October 11 2013=100) (monthly index October 2013=100) 250 105 India Shanghai-China 200 Indonesia 85 South Africa 150 BSE-India Turkey Brazil JSI-Indonesia 65 100 SET-Thailand SGX-Singapore 50 45 Oct-13 Oct-14 Oct-15 Oct-16 Oct-13 Oct-14 Oct-15 Oct-16 Source: CEIC; World Bank staff calculations Source: CEIC; World Bank staff calculations October 2016 THE WORLD BANK | BANK DUNIA 55 Pressures easing Indonesia Economic Quarterly Appendix Figure 19: 5-year local currency gov. bond Appendix Figure 20: Sovereign USD bond EMBIG yields spread (percent) (basis points) 10 420 60 Indonesia spreads less overall EMBIG index spread (RHS) 8 360 0 Indonesia 6 300 -60 Malaysia 4 240 -120 Thailand 2 180 -180 Indonesia EMBIG bond spread (LHS) Singapore United States 0 120 -240 Oct-13 Oct-14 Oct-15 Oct-16 Oct-13 Oct-14 Oct-15 Oct-16 Source: CEIC; World Bank staff calculations Source: JP Morgan; World Bank staff calculations Appendix Figure 21: Commercial and rural credit and Appendix Figure 22: Banking sector indicators deposit growth (monthly, percent) (growth yoy, percent) 30 100 Loan deposit ratio 5 25 Commercial and rural bank loans 80 4 Return on assets (RHS) 20 60 3 Private deposit Non performing loan (RHS) 15 40 2 Capital adequacy ratio (RHS) 10 20 1 Liquidity asset ratio 5 0 0 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Source: BI; World Bank staff calculations Source: BI; World Bank staff calculations Appendix Figure 23: Government debt Appendix Figure 24: External debt (percent of GDP; USD billion) (percent of GDP; USD billion) 60 Utang LN swasta, kanan 360 Private external debt, RHS 60 320 Utang LN pemerintah, kanan Public external debt, RHS 50 Total LN negeri terhadap PDB 300 Total external debt to GDP 45 240 40 240 30 180 30 160 20 120 15 80 10 60 0 0 0 0 2007 2009 2011 2013 2015 2008 2010 2012 2014 2016 August August Source: BI; MoF; World Bank staff calculations Source: BI; World Bank staff calculations October 2016 THE WORLD BANK | BANK DUNIA 56 Pressures easing Indonesia Economic Quarterly Appendix Table 1: Budget outcomes and projections (IDR trillion) 2012 2013 2014 2015 2016 2017 Revised Proposed Actual Actual Actual Actual Budget Budget A. State revenue and grants 1,338 1,439 1,550 1,508 1,786 1,738 1. Tax revenue 981 1,077 1,147 1,240 1,539 1,496 2. Non-tax revenue 352 355 399 256 245 240 B. Expenditure 1,491 1,651 1,777 1,807 2,083 2,070 1. Central Government 1,011 1,137 1,204 1,183 1,307 1,310 2. Transfers to the regions 481 513 574 623 776 760 C. Primary balance -53 -99 -93 -142 -106 -111 D. SURPLUS / DEFICIT -153 -212 -227 -298 -297 -333 (percent of GDP) -1.8 -2.2 -2.1 -2.6 -2.4 -2.4 Note: Budget balance as percentage of GDP uses the revised and rebased GDP. Source: MoF; World Bank staff calculations Appendix Table 2: Balance of payments (USD billion) 2015 2016 2013 2014 2015 Q1 Q2 Q3 Q4 Q1 Q2 Balance of payments -7.3 15.2 -1.1 1.3 -2.9 -4.6 5.1 -0.3 2.2 Percent of GDP -0.8 1.7 -0.1 0.6 -1.3 -1.9 2.2 -0.1 0.9 Current account -29.1 -27.5 -17.7 -4.1 -4.3 -4.2 -5.1 -4.8 -4.7 Percent of GDP -3.2 -3.1 -2.1 -1.8 -1.9 -1.7 -2.2 -2.1 -2.0 Trade balance -6.2 -3.0 5.0 1.2 1.5 2.0 0.2 1.6 1.7 Net income & current transfers -22.9 -24.5 -22.7 -5.4 -5.8 -6.2 -5.3 -6.3 -6.4 Capital & Financial Account 22.0 44.9 17.1 5.0 2.0 0.2 9.9 4.6 7.4 Percent of GDP 2.4 5.0 2.0 2.2 0.9 0.1 4.3 2.0 3.2 Direct investment 12.2 14.7 10.6 1.6 3.9 1.8 3.3 2.7 3.0 Portfolio investment 10.9 26.1 16.7 8.5 5.6 -2.2 4.9 4.4 8.4 Other investment -0.8 4.3 -10.3 -5.3 -7.4 0.4 2.0 -2.5 -3.9 Errors & omissions -0.2 -2.2 -0.5 0.5 -0.7 -0.6 0.3 -0.1 -0.6 Foreign reserves* 99.4 111.9 105.9 111.6 108.0 101.7 105.9 107.5 109.8 Note: * Reserves at end-period. Source: BI; BPS; World Bank staff calculations October 2016 THE WORLD BANK | BANK DUNIA 57 Pressures easing Indonesia Economic Quarterly Appendix Table 3: Indonesia’s historical macroeconomic indicators at a glance 2000 2005 2010 2011 2012 2013 2014 2015 1 National Accounts (% change)    Real GDP 4.9 5.7 6.2 6.2 6.0 5.6 5.0 4.8    Real investment 11.4 10.9 8.5 8.9 9.1 5.0 4.6 5.1    Real consumption 4.6 64.0 4.1 5.1 5.4 5.7 4.7 4.9    Private 3.7 0.9 4.8 5.1 5.5 5.5 5.3 4.8    Government 14.2 6.6 0.3 5.5 4.5 6.7 1.2 5.4    Real exports, GNFS 30.6 16.6 15.3 14.8 1.6 4.2 1.0 -2.0    Real imports, GNFS 26.6 17.8 17.3 15.0 8.0 1.9 2.2 -5.8    Investment (% GDP) 20 24 31 31 33 32 33 33    Nominal GDP (USD billion) 165 286 755 893 918 913 890 862    GDP per capita (USD) 857 1,396 3,167 3,688 3,741 3,668 3,530 3,374 Central Government Budget (% GDP)2    Revenue and grants 20.8 16.8 14.5 15.5 15.5 15.1 14.7 13.1    Non-tax revenue 9.0 5.0 3.9 4.2 4.1 3.7 3.8 2.2    Tax revenue 11.7 11.7 10.5 11.2 11.4 11.3 10.9 10.7    Expenditure 22.4 17.3 15.2 16.5 17.3 17.3 16.8 15.7    Consumption 4.0 2.8 3.6 3.8 3.9 4.1 4.0 4.5    Capital 2.6 1.1 1.2 1.5 1.7 1.9 1.4 1.9    Interest 5.1 2.2 1.3 1.2 1.2 1.2 1.3 1.4    Subsidies 6.3 4.1 2.8 3.8 4.0 3.7 3.7 1.6    Budget balance -1.6 -0.6 -0.7 -1.1 -1.8 -2.2 -2.1 -2.6    Government debt 97.9 44.3 24.5 23.1 23.0 24.9 24.7 26.8    o/w external government debt 51.4 23.4 11.1 10.2 9.9 11.2 10.2 11.9    Total external debt (including private sector) 87.1 47.1 26.8 25.2 27.5 29.2 32.9 36.0 3 Balance of Payments (% GDP)    Overall balance of payments .. 0.2 4.0 1.3 0.0 -0.8 1.7 -0.1    Current account balance 4.8 0.1 0.7 0.2 -2.7 -3.2 -3.1 -2.1    Exports GNFS 42.8 35.0 22.0 23.8 23.0 22.5 22.3 19.8    Imports GNFS 33.9 32.0 19.2 21.2 23.2 23.2 22.7 19.2    Trade balance 8.9 2.9 2.8 2.7 -0.2 -0.7 -0.3 0.6    Financial account balance .. 0.0 3.5 1.5 2.7 2.4 5.1 2.0    Direct investment -2.8 1.8 1.5 1.3 1.5 1.3 1.7 1.2    Gross official reserves (USD billion) 29.4 34.7 96.2 110.1 112.8 99.4 111.6 101.7 Monetary (% change)3    GDP deflator1 20.4 14.3 8.3 7.5 3.8 5.0 5.4 4.2    Bank Indonesia interest key rate (%) .. 9.1 6.5 6.0 5.8 7.5 7.8 7.5    Domestic credit (eop) .. 24.3 22.8 24.6 23.1 21.6 11.6 10.4    Nominal exchange rate (average, IDR/USD)4 8,392 9,705 9,087 8,776 9,384 10,460 11,869 13,389 Prices (% change)1    Consumer price Index (eop) 9.4 17.1 7.0 3.8 3.7 8.1 8.4 3.4    Consumer price Index (average) 3.7 10.5 5.1 5.3 4.0 6.4 6.4 6.4    Indonesia crude oil price (USD per barrel, eop)5 28 53 79 112 113 107 60 36 Source: 1 BPS and World Bank staff calculations, using revised and 2010 rebased figures; 2 MoF and World Bank staff calculations; 3 BI; 4 IMF; 5 CEIC October 2016 THE WORLD BANK | BANK DUNIA 58 Pressures easing Indonesia Economic Quarterly Appendix Table 4: Indonesia’s development indicators at a glance 2000 2005 2010 2011 2012 2013 2014 2015 1 Demographics Population (million) 213 227 242 245 248 251 254 258 Population growth rate (%) 1.3 1.2 1.3 1.3 1.3 1.3 1.3 1.2 Urban population (% of total) 42 46 50 51 51 52 53 53.7 Dependency ratio (% of working-age population) 55 54 51 51 50 50 49 49.0 Labor Force2 Labor force, total (million) 98 106 117 117 120 120 122 122 Male 60 68 72 73 75 75 76 77 Female 38 38 45 44 46 45 46 46 Agriculture share of employment (%) 45 44 38 36 35 35 34 33 Industry share of employment (%) 17 19 19 21 22 20 21 22 Services share of employment (%) 37 37 42 43 43 45 45 45 Unemployment, total (% of labor force) 8.1 11.2 7.1 7.4 6.1 6.2 5.9 6.2 Poverty and Income Distribution3 Median household consumption (IDR 000 per month) 104 211 374 421 446 487 548 623 National poverty line (IDR 000 per month) 73 129 212 234 249 272 303 331 Population below national poverty line (million) 38 35 31 30 29 28 28 29 Poverty (% of population below national poverty line) 19.1 16.0 13.3 12.5 12.0 11.4 11.3 11.2 Urban (% of population below urban poverty line) 14.6 11.7 9.9 9.2 8.8 8.4 8.3 8.3 Rural (% of population below rural poverty line) 22.4 20.0 16.6 15.7 15.1 14.3 14.2 14.2 Male-headed households 15.5 13.3 11.0 10.2 9.5 9.2 9.0 9.3 Female-headed households 12.6 12.8 9.5 9.7 8.8 8.6 8.6 11.1 Gini index 0.30 0.35 0.38 0.41 0.41 0.41 0.41 0.41 Percentage share of consumption: lowest 20% 9.6 8.7 7.9 7.4 7.5 7.4 7.5 7.2 Percentage share of consumption: highest 20% 38.6 41.4 40.6 46.5 46.7 47.3 46.8 47.3 Public expenditure on social security & welfare (% of GDP)4 .. 0.4 0.4 0.4 0.4 0.6 0.5 0.6 Health and Nutrition1 Physicians (per 1,000 people) 0.16 0.13 0.29 .. 0.20 .. .. Under five mortality rate (per 1000 children under 5 years) 52 42 33 32 30 29 28 27 Neonatal mortality rate (per 1000 live births) 22 19 16 16 15 15 14 14 Infant mortality (per 1000 live births) 41 34 27 26 25 24 24 23 Maternal mortality ratio (modeled est., per 100,000 live births) 265 212 165 156 148 140 133 126 Measles vaccination (% of children under 2 years) 74 77 78 80 85 84 77 69 Total health expenditure (% of GDP) 2.0 2.8 2.9 2.7 2.9 2.9 2.8 .. Public health expenditure (% of GDP) 0.7 0.8 1.1 1.1 1.2 1.2 1.1 .. Education3 Primary net enrollment rate (%) .. 92 92 92 93 92 93 97 Female (% of total net enrollment) .. 48 48 49 49 50 48 49 Secondary net enrollment rate (%) .. 52 61 60 60 61 65 66 Female (% of total net enrollment) .. 50 50 50 49 50 50 51 Tertiary net enrollment rate (%) .. 9 16 14 15 16 18 20 Female (% of total net enrollment) .. 55 53 50 54 54 55 56 Adult literacy rate (%) .. 91 91 91 92 93 93 95 Public spending on education (% of GDP)5 .. 2.7 3.5 3.6 3.8 3.8 3.6 .. Public spending on education (% of spending)5 .. 14.5 20.0 20.2 20.1 20.0 19.9 20.6 Water and Sanitation1 Access to an improved water source (% of population) 78 81 85 85 86 86 87 87 Urban (% of urban population) 91 92 93 93 94 94 94 94 Rural (% of rural population) 68 71 76 77 77 78 79 80 Access to improved sanitation facilities (% of population) 44 53 57 58 59 60 61 61 Urban (% of urban population) 64 70 70 71 71 72 72 72 Rural (% of rural population) 30 38 44 45 46 47 48 48 Others1 Disaster risk reduction progress score (1-5 scale; 5=best) .. .. .. 3.3 .. .. .. .. Proportion of seats held by women in national parliament (%)6 8 11 18 18 19 19 17 17 Source: 1 World Development Indicators; 2 BPS (Sakernas); 3 BPS (Susenas) and World Bank; 4 MoF, Bappenas, and World Bank staff calculations, only includes spending on rice distribution for the poor (RASTRA), health insurance for the poor, scholarships for the poor, and Family Hope Program (PKH) and actuals; 5 MoF; 6 Inter-Parliamentary Union October 2016 THE WORLD BANK | BANK DUNIA 59 Supported by funding from the Australian Government (Department of Foreign Affairs and Trade, DFAT), under the Support for Enhanced Macroeconomic and Fiscal Policy Analysis (SEMEFPA) program.