Finance Minister Sri Mulyani Indrawati told the House of Representatives on Tuesday that Indonesia's economy must grow at above 6 percent per year to avoid falling into the middle-income trap. (Antara Photo/M Risyal Hidayat)

Indonesia's Short-Term Growth Potential Maxed Out at 5.5%; Reform Needed: Finance Minister

JULY 16, 2019

Jakarta. Indonesia's economy will be unable to grow at more than 5.5 percent in the short term if structural problems hampering productivity are not resolved, Finance Minister Sri Mulyani Indrawati said on Tuesday. 

"Based on potential output related to production, it is estimated that our [economic] growth capacity is only in the range of 5.0 percent to 5.5 percent in the short term," the minister told the House of Representatives, as quoted by Antara news agency.

At such rate of growth, Indonesia is at risk of falling into the middle-income trap. According to the World Bank, a country is in the middle-income trap if its gross national product per capita has remained between $1,000 and $12,000 at 2011 prices. Indonesia's gross national product per capita is now $3,840.

Demographic experts and economists have warned that the country has about three decades left to benefit from a working-age population that is far greater than the number of children and the elderly. When the so-called demographic dividend expires in 2050, the country should have high productivity, comparable to a developed country, or the social cost of taking care of the economically inactive part of the population would burden the economy. 

To avoid the trap, "Indonesia's economy needs to grow at above 6 percent per year," the minister said.

She said Indonesia must continue its structural reform policies to increase the country's production capacity, especially in sectors that can accelerate investment inflows.

These policies include simplifying regulations and documentary requirements, improving the investment climate, or providing investment facilities. Structural reform can also be carried out by increasing skills and capacity in the labor force. 

President Joko "Jokowi" Widodo earlier said he would continue efforts to eradicate inefficiencies and red tape in government and develop local talent during his second term as president. 

Sri Mulyani said the structural reforms the government already carried out have had a positive impact so far. Annual growth in the Indonesian economy rose to 5.18 percent in the fourth quarter last year, amid global economic turmoil.