By 2012, the Indonesian economy had recovered from the 2008 global financial crisis, with gross domestic product (GDP) growth above 6%, the debt-to-GDP ratio declining, the fiscal deficit below 2% of GDP, and the primary balance in surplus. Inflation was low in comparison to previous periods and the current account was in surplus. Recognizing these fundamentals, the Fitch Ratings and Moody’s Investors Service returned Indonesia’s sovereign rating to investment grade. Despite these improvements, there were concerns from the government regarding the continued decline in commodity prices, the slowdown in global growth, and impacts that might have been transmitted to the Indonesian economy by the 2011 eurozone crisis. A scenario analysis undertaken by the Asian Development Bank (ADB) on the potential impact of the eurozone crisis confirmed that Indonesia’s economic growth would be negatively affected and the government’s access to finance could be affected through capital outflows and increasing bond spreads.
To mitigate the risks, the government, requested—and ADB approved—a $500 million loan for a countercyclical support program, with a precautionary financing option, in June 2012. The precautionary financing option allowed the government to postpone drawing from the loan until such time when the crisis shall have fully materialized, thereby, serving as a contingency financing scheme. The program was part of a wider contingent financing package requested by the government and approved by several other development partners, including the government of Australia, the government of Japan, and the World Bank.
Under the program’s implementation arrangement, the government committed to first meet its financing needs from market sources. The program loan was to be utilized only if market stabilization operations, utilization of alternative debt financing sources, and utilization of accumulative surplus cash were unable to fulfill financing needs. To measure this, the government, ADB, and other development partners agreed on a financing plan, which set out (i) the government’s financing targets for fiscal year 2012, (ii) the terms and circumstances under which the government could draw down the program, and (iii) the terms under which the financing plan could be rolled over and reissued in following years. During the program implementation period, the government issued the financing plan annually, and together with ADB and other development partners, regularly reviewed the parameters to assess whether disbursement from the loan was required. A major change in the implementation arrangement, involving a shift from commitment-linked to disbursement-linked repayment terms, enhanced the relevance of the program, as it made the repayment terms consistent with the contingent nature of the support.
Because of the program and related support from other development partners, the government was able to allocate additional resources for infrastructure development and the social sectors, while also introducing reforms to improve fiscal and macroeconomic management. In addition to adopting a sound financing plan, these reforms included the implementation of a bond stabilization framework, along with crisis management protocols, and the introduction of macroprudential measures to reduce the risks associated with capital outflows in 2015. The reforms improved market confidence, resulting in relatively stable bond yields and full subscription of government bonds for most of the program implementation period.
Targets in social spending were surpassed. Moreover, by supporting community development, conditional and unconditional cash transfers, and the introduction of a unified database to improve the targeting of social transfers to the poorest 40% of the population, the increased social spending effectively carried forward inclusive growth and poverty reduction despite the lingering financial and economic uncertainties.
Consequently, between 2012 and 2016, the percentage of the national population living below the poverty line dropped from 11.96 to 10.86. Expenditure inequality declined from 0.41 to 0.397. Access to finance increased, with 14.1% of the country’s households receiving business credit in 2016, compared to 9.44% in 2012. Unemployment rate fell from 7.68% to 5.61%.
Overall, the government’s strategy of maintaining priority capital and social expenditures to stimulate domestic demand, create jobs, and sustain poverty reduction, along with reforms to improve the efficiency of its expenditures, was highly successful in promoting sustained pro-poor economic growth. The program had the Directorate General of Debt Management as executing agency.
