T

he International Monetary Fund (IMF) is effectively reminding Indonesia of its own proverb that things are easier to achieve than to maintain, amid its recent domestic policy shifts.

Indonesia’s economic growth rate has been forecast to drop to 6.1 percent this year on weakening global conditions-lower than the government’s 6.5 percent target — but “free and open trade regime and investment climate will be important to propel growth further”, according to the international lender.

“It’s very important for Indonesia to continue to be seen as a very attractive destination for both trade as well as for investment [...] to the extent that the government can clarify and come up with a consistent, coherent framework — that will also assure investors,” Sanjaya Panth, division chief in the IMF’s Asia and Pacific Department, said on Friday.

Recent policies drafted by the government, such as the Energy and Mineral Resources Ministry’s export ban policy and Bank Indonesia’s (BI) plan to cap foreign ownership of local banks, have sparked concerns among investors that the country might not be as open to capital inflows as before.

Indonesia needs capital flows to help accelerate the economy, but strong domestic demand, which accounts for more than half of the country’s gross domestic product (GDP), will continue to drive robust growth for Southeast Asia’s biggest economy, according to the IMF.

Investment contributes more than 30 percent to Indonesia’s economy, while exports account for about 10 percent.

The IMF predicted that Indonesia would have a current account deficit of 1 percent of its GDP, which means that imports will soar more than exports, as has happened in recent months. But Panth considered it “natural” given the growing domestic economy and weakening external demand.

The pace and quality of growth of Indonesia’s economy, the IMF said, will be ensured through increased infrastructure investment to stimulate local economic activities and consumption, but rising fuel subsidies are “distorting the structure of the budget”.

“Our recommendation would be in the medium- and long-term to gradually eliminate all energy subsidies and replace that with cash transfers to the vulnerable. It’s important to protect the poor, but these subsidies are not going necessarily to the poor,” said Panth, who led an IMF mission that visited Jakarta over the past two weeks for discussions with BI and the government.

“Other than spending it on subsidies, if that money went to infrastructure, which is again a big issue, education, health—these are all areas that have more pressing needs.”

Spending for the fuel subsidy will likely go over its allocated budget by almost 60 percent this year, with the Finance Ministry setting aside Rp 216.8 trillion (US$23 billion) through the year end, compared with initial allocation of Rp 137.4 trillion.

The House of Representatives blocked the government’s plan in April to cut subsidies by raising subsidized fuel prices, instead allowing it to increase the prices when the local benchmark oil price, the Indonesia Crude Price (ICP), surpasses a certain threshold.

On consumer prices, the IMF is predicting an annual increase of 5 percent, still within BI’s inflation target range, and therefore there was no immediate need to make a move on the benchmark policy rate, which has been at a record low of 5.75 percent, according to Panth.

Indonesia’s headline inflation increased to 4.5 percent in June on an annual basis, after bottoming out at 3.6 percent in January.

Meanwhile, IMF managing director Christine Lagarde said in Tokyo on Friday that the agency would reduce its estimate for global growth this year on weakness in investment, jobs and manufacturing in Europe, the US, Brazil, India and China.