Indonesia government launches more initiatives to boost economic growth

The Indonesian government's ambitious growth target of 5.7% this year (as stated in the revised budget) is unlikely to be met, given that the economy only grew by 4.7% y/y in Q1-2015 (slowing from 5.0% in Q4-2014). The economy is expected to grow by only 4.9% this year.

The government is seeking to provide more fiscal stimulus to prevent the economy from slowing further. According to a Bloomberg report on 10 June, Vice President Jusuf Kalla said the government and state-owned banks have agreed to cut lending rates to small businesses to 12% from 22-24% currently. 

The government will subsidise interest rates to state-owned banks in order to facilitate the move. By subsidising interest rates on loans to small businesses extended by state-owned banks, the government may be acknowledging that Bank Indonesia has no further room to cut rates, and that government action is also required to promote economic growth, given the recent and expected pressures on the Indonesian rupiah (IDR). 

Meanwhile, on 11 June Finance Minister Bambang Brodjonegoro announced the government's plan to reduce value added tax (VAT) for luxury goods but at the same time increase withholding tax for such goods to 10% (from 7.5%), effective next week. 

Reducing VAT on luxury goods is intended to encourage upper and uppermiddle income groups to increase consumption, while the increase in withholding tax for such goods is aimed at protecting and promoting the domestic industries producing them. 

"We think the government's current fiscal policies overemphasise the supply side, while the real problem lies with demand",says Standard Chartered.