JAKARTA, Sept 20 (Reuters) - Efforts by Indonesian authorities to significantly narrow the current account deficit to help the rupiah might not be effective and could crimp economic growth, the World Bank said on Thursday.
Indonesia’s government and the central bank have taken measures to reduce the pressure on the rupiah as the currency recently plunged to its weakest level in 20 years, caught up in an emerging market sell-off.
Steps such as raising import taxes, delaying billions of dollars of infrastructure projects and widening the use of biodiesel are intended to cut imports and reduce a yawning current account deficit, which in the second quarter widened to 3 percent of GDP, the most in nearly four years.
Bank Indonesia has raised interest rates by 125 basis points since mid-May and spent billions in intervention to support the rupiah.
The World Bank, in its “Indonesia Economic Quarterly” report, said the import taxes on more than 1,000 items, mostly consumer goods, and delays in state investments are “unlikely to have a large impact on the current account in the near term”.
“Given the significant infrastructure gap in the country, these measures may have the unintended effects of weighing on potential growth and rendering longer-term consequences for the economy,” the multilateral lender said, adding that tighter fiscal and monetary policy both will weigh on growth in the immediate and medium-term.
Higher tariffs on consumer goods could also increase inflation and hurt private consumption, the bank said.
The World Bank maintained its forecast for Indonesia’s economy to grow 5.2 percent this year, and revised its 2019 forecast marginally to 5.2 percent from 5.3 percent.
Last year, the Washington-based bank estimated that Indonesia would need to invest $500 billion over five years to fill its infrastructure gap.
In response to the World Bank’s new report, Indonesia’s planning minister Bambang Brodjonegoro said the government is trying to solve a current account problem for the long term, not only for the near term.
At the report’s launch, World Bank Indonesia country director Rodrigo Chavez described the rupiah’s 9 percent drop against the U.S. dollar this year as a “moderate depreciation”.
He said that the rate should be seen as a “source of confidence” as the depreciation was less in nominal terms than other emerging market currencies had, leading to a real effective appreciation in the second quarter - although the report noted that the rupiah has fallen again in the third quarter.
Risks associated with a financial crisis for Indonesia remain small, it added. (Reporting by Tabita Diela; Writing by Gayatri Suroyo; Editing by Richard Borsuk)