Indonesia: Reforms to Meet Development Challenges

The Indonesian economy is experiencing structural changes and must deal with new challenges in an uncer¬tain international setting. In the past decade, its industry has undergone reprimarization (focus on mining and energy resources, palm oil, etc.), which was boosted by the sustained level of commodity prices (before the downward trend that occurred in 2011 and accelerated from June 2014). Logistics and connectivity costs in Indonesia are high due to infrastructure deficiencies, though this must be put into the context of the country’s parceled and dispersed nature (17,000 islands spread over a surface area of 2 million km2). The deficit in the productive supply of the industrial sector—at a time when demand from Indonesian households and enterprises is increasingly dynamic—partially explains the rise in imports of goods and services (76% of imports of raw materials and intermediary goods is accounted for by enterprises for their production). This situation has led to imbalances in Indonesia’s net international investment position (NIIP) since 2011, with the emergence of a current deficit in its balance of payments and a significant rise in its NIIP.