Indonesia Second Financial Sector Reform Development Policy Financing

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Indonesia Second Financial Sector Reform Development Policy Financing (P173232)
Document of
The World Bank
FOR OFFICIAL USE ONLY

Report No: PGD263
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
PROGRAM DOCUMENT FOR A
PROPOSED LOAN
IN THE AMOUNT OF US$ 400 MILLION TO
THE REPUBLIC OF INDONESIA
FOR THE
INDONESIA SECOND FINANCIAL SECTOR REFORM DEVELOPMENT POLICY FINANCING

May 13, 2021
Finance, Competitiveness And Innovation Global Practice

East Asia And Pacific Region
This document has a restricted distribution and may be used by recipients only in the performance of their official
duties. Its contents may not otherwise be disclosed without World Bank authorization.
.
The World Bank
Republic of Indonesia
GOVERNMENT FISCAL YEAR
January 1 – December 31
CURRENCY EQUIVALENTS
(Exchange Rate Effective as of May 12, 2021)
Currency Unit: Rupiah (IDR)
US$ 1.00 = IDR 14,203
ABBREVIATIONS AND ACRONYMS
ADB Asian Development Bank CMEA Coordinating Ministry of Economic Affairs

AF Additional Financing CMSF Capital Market Strengthening Facility
AFD French Development Agency COVID-19 Coronavirus disease 2019
API Application Program Interface CPF Country Partnership Framework
ASEAN Association of Southeast Asian Nations CPI Consumer Price Index
ATM Automated Teller Machine CSO Civil Society Organizations
Bappenas Badan Perencanaan Pembangunan DFAT Department of Foreign Affairs and Trade
Nasional (National Development Planning DFS Digital Financial Services
Agency)
DJAHU Direktorat Jenderal Administrasi Hukum
BI Bank Indonesia Umum (Directorate General Legal Affairs)
BKF Badan Kebijakan Fiskal (Fiscal Policy DJPPR Direktorat Jenderal Pengelolaan
Agency) Pembiayaan dan Risiko (Directorate
BMGF Bill and Melinda Gates Foundation General of Financing and Risk Management
BMKG Badan Meteorologi, KIlimatologi dan DNDF Domestic Non-Deliverable Forward
Geofisika (Meteorological, Climatology and DNKI Dewan Nasional Keuangan Inklusi (National
Geophysics Agency) Council for Financial Inclusion)
BNI Bank Negara Indonesia DPF Development Policy Financing
BNPB Badan Nasional Penanggulangan Bencana DPL Development Policy Loan
(National Disaster Management Authority)
DPO Development Policy Operation
BoP Balance of payments
DRFI Disaster Relief Financing and Insurance
BPBD Badan Penanggulangan Bencana Daerah
DRM Disaster Risk Management
BPK Badan Pemeriksa Keuangan (Audit Board)
DTKS Indonesia Social Registry
BPPU Blueprint Pengembangan Pasar Uang
(Money Market Development) EAP East Asia Pacific
BRI Bank Rakyat Indonesia EPK Edukasi dan Perlindungan Konsumen
(Education and Consumer Protection
BTN Bank Tabungan Negara Commission)
CAD Current Account Deficit ENSO El Nino Southern Oscillation
CAR Capital Adequacy Ratio ESMS Environmental and Social Management
CCB Capital Conservation Buffer System
ESG Environmental, Social, and Governance KSSK Komite Stabilitas Sistem Keuangan
ESS Environment and Social Standard (Financial System Stability Coordinating
Forum)
FDI Foreign Direct Investment
KUR Kredit Usaha Rakyat (People’s Business
FI Financial Institution Credit)
FSAP Financial Sector Assessment Program Laku Pandai Layanan Keuangan Tanpa Kantor
FSOL Financial Sector Omnibus Law (Branchless Banking Service)
FSPs Financial Service Providers LARs Loans at Risk
FX Forex (Foreign Exchange) LCR Liquidity Coverage Ratio
FY Fiscal Year LCT Least Cost Test
G2P Government to Person LKD Layanan Keuangan Digital (Digital
Financial Services)
GAC Global Affairs Canada
LKPP Lembaga Kebijakan Pengadaan
GDP Gross Domestic Product Barang/Jasa Pemerintah (National Public
GFC Global Financial Crisis Procurement Agency)
GIIPs Good International Industry Practices LPDB Lembaga Pengelola Dana Bergulir
GNP Gross National Product KUMKM Koperasi, Usaha Mikro, Kecil dan
Menengah (Revolving Fund Management
GoI Government of Indonesia Institution for Cooperatives and Micro,
GRiF Global Risk Financing Facility Small and Medium Enterprises)
GRS Grievance Redress Service LPS Lembaga Penjamin Simpanan (Indonesia
Deposit Insurance Corporation)
GSMA Global System for Mobile
Communications Association LSSR Large Scale Social Restrictions
IBRD International Bank for Reconstruction MAPS Methodology for Assessing Procurement
and Development Systems
IDR Indonesian Rupiah MCICP Multi-Country Investment Climate
Program
IDRAR Indonesia Resilience and Reconstruction
MFD Maximizing Finance for Development
IDRIP Indonesia Disaster Resilience Initiatives
Project MFI Monetary Financial Institutions
IFC International Finance Corporation MoF Ministry of Finance
IFSSP Indonesia Financial Sector Strengthening MoLHR Ministry of Law and Human Rights
Program MPSJKI Master Plan Sektor Jasa Keuangan
IHPS Ikhtisar Hasil Pemeriksaan Semester Indonesia (Master Plan for Indonesia
(Summary of Semester Audit Reports) Financial Sector)
IIGF Indonesia Infrastructure Guarantee Fund MSMEs Micro, Small and Medium-sized
Enterprises
IMF International Monetary Fund
NBFI Non-Bank Financial Institution
InfraSAP Infrastructure Sector Assessment
Program NFIS National Financial Inclusion Strategy
IPF Investment Project Financing NIMs Net Interest Margins
IPS Indonesia’s Payment System NPG National Payment Gateway
JICA Japan International Cooperation Agency NPLs Non-performing Loans
KfW Kreditanstalt Für Wiederaufbau (German NPS National Payment System
Development Bank) NSFR Net Stable Funding Ratio
KOMINFO Kementerian Komunikasi dan NWFIS National Women’s Financial Inclusion
Informatika (Ministry of Communication Strategy
and Informatics)
OJK Otoritas Jasa Keuangan (Indonesia
KPPA Kementerian Pemberdayaan Perempuan Financial Service Authority)
dan Perlindungan Anak (Ministry of
Women Empowerment and Child OPCS Operations Policy and Country Services
Protection)
PA Prior Action ROA Return on Assets
PBC Performance Based Conditions ROE Return on Equity
PBL Policy Based Loan RRR Reserve Requirement Ratio
PDK Peraturan Dewan Komisioner (Board of SBN Government Bonds
Commisioners Regulation) SCD Systematic Country Diagnostic
PEFA Public Expenditure and Financial SCV Single Customer View
Accountability
SEADRIF Southeast Asia Disaster Risk Insurance
PEN Pemulihan Ekonomi Nasioanl (National Facility
economic recovery program)
SECO Swiss State Secretariat for Economic Affairs
Perppu Peraturan Pemerintah Pengganti
Undang-undang (Government SIKS NG Indonesia Information System
Regulation in-lieu of Law) SLIK Sistem Layanan Informasi Keuangan
Perpres Peraturan Presiden (Presidential decree) (Financial Information Service System)
PFM Public Financial Management SMEs Small and Medium-sized Enterprises
PforR Program for Result SNKI Strategi Nasional Keuangan Inklusi
(National Financial Inclusion Strategy)
PIK Pusat Informasi dan Komunikasi
(Information and Communication SN-PPPK Strategi Nasional Pengembangan dan
Center) Pendalaman Pasar Keuangan (National
Strategy for Financial Market) Development
PKH Conditional Cash Transfers Program
SOEs State‐owned enterprises
PKPU Penundaan Kewajiban Pembayaran
Utang (Suspension of Debt Payment SPSE Sistem Pengadaan Secara Elektronik
(Electronic Procurement System)
PKSK Pusat Kebijakan Sektor Keuangan
(Financial Sector Policy Centre) TA Technical Assistance
PMK Peraturan Menteri Keuangan (Minister ToT Terms of Trade
of Finance Regulation) UK FCDO United Kingdom Foreign Commonwealth &
PMN Penanaman Modal National (State Development Office
Capital Participation) UMI Ultra-Micro Financing
POJK Peraturan Otoritas Jasa Keuangan US United States
(Indonesia Financial Service Authority
Regulation) USAID United States Agency for International
Development
PPKSK Pencegahan dan Penanganan Krisis
Sistem Keuangan (Preventation and USD US Dollar
Resolution of Financial System Crises) VAT Value Added Tax
PPP Public-Private Partnership WB World Bank
Prolegnas Program Legislasi Nasional (National WBG World Bank Group
Legislation Program) WHO World Health Organization
QR code Quick Response Code WHT With-holding Tax
QRIS QR Code Indonesia Standard
Regional Vice President: Victoria Kwakwa

Country Director: Satu Kahkonen
Regional Practice Group Director: Hassan Zaman
Practice Manager: Cecile Thioro Niang
Task Team Leader: Francesco Strobbe
The World Bank
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REPUBLIC OF INDONESIA
INDONESIA SECOND FINANCIAL SECTOR REFORM DEVELOPMENT POLICY FINANCING
TABLE OF CONTENTS
SUMMARY OF PROPOSED FINANCING AND PROGRAM .......................................................................3
1. INTRODUCTION AND COUNTRY CONTEXT ...................................................................................5

2. MACROECONOMIC POLICY FRAMEWORK....................................................................................8
2.1. RECENT ECONOMIC DEVELOPMENTS................................................................................. 8
2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY.............................................. 10
2.3. IMF Relations .................................................................................................................... 17
3. GOVERNMENT PROGRAM ........................................................................................................ 17
4. PROPOSED OPERATION ............................................................................................................ 20
4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION ............................... 20
4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS ....................................... 26
4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY ............................... 45
4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS .................... 46
5. OTHER DESIGN AND APPRAISAL ISSUES .................................................................................... 47
5.1. POVERTY AND SOCIAL IMPACT ......................................................................................... 47
5.2. ENVIRONMENTAL, FORESTS, AND OTHER NATURAL RESOURCE ASPECTS ...................... 49
5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS ............................................................... 50
5.4. MONITORING, EVALUATION AND ACCOUNTABILITY ....................................................... 53
6. SUMMARY OF RISKS AND MITIGATION ..................................................................................... 53
ANNEX 1: POLICY AND RESULTS MATRIX .......................................................................................... 56
ANNEX 2: FUND RELATIONS ANNEX .................................................................................................. 61
ANNEX 3: LETTER OF DEVELOPMENT POLICY..................................................................................... 65
ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE .................................................. 70
ANNEX 5: ROLE OF KEY COUNTERPARTS, FINANCIAL SECTOR BACKGROUND AND KEY FINANCIAL
SECTOR STATISTICS.......................................................................................................................... 73
ANNEX 6: GENDER ANALYSIS ........................................................................................................... 82
ANNEX 7: ADJUSTMENTS TO THE COUNTRY PROGRAM IN RESPONSE TO COVID-19 ......................... 86
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The Indonesia Second Financial Sector Reform Development Policy Financing (P173232) was prepared by a World Bank Group
team led by Francesco Strobbe and comprising of Katia D’Hulster, Ketut Ariadi Kusuma, Ralph Van Doorn, I Gede Putra Arsana,
Dara Lengkong, Owen Nie, Marco Nicoli, Neni Lestari, Siti Budi Wardhani, Cynthia Clarita Kusharto, Fajar Pane, Putri Monicha
Sari, Erly Sapulete-Tatontos, Evilia Nusi, Novira Kusdarti, Benedikt Lukas Signer, Ade Kuswoyo, Alief Aulia Rezza, Abdoulaye Sy,
Alejandro Alcala Gerez, Vipasha Bansal, Theodore Manggala Amarendra, Chau-Ching Shen, Fernando Dancausa, Bertine
Kamphuis, Rahajeng Pratiwi, Rabia Ali, Ismael Ahmad Fontan, Michael J Fuchs, Tatiana Didier Brandao, Aly Salman Alibhai,
Budi Permana, Indira Hapsari, Fajar Argo Djati, Krisnan Isomartana, Ashlee Anne Schleger, Kate Anna Shanahan, Chatarina Ayu
Widiarti, Thomas Walton. The team gratefully acknowledges the excellent collaboration of the Government of Indonesia, and
the comments of peer reviewers: Fiona Stewart (Lead Financial Sector Specialist, GFCLT), Harish Natarajan (Lead Financial
Sector Specialist, GFCFI) and Cedric Mousset (Lead Financial Sector Specialist, GFCFS). The team benefitted from guidance
from Satu Kahkonen (Country Director, EACIF), Hassan Zaman (Regional Director, EEADR), Bolormaa Amgaabazar (Operations
Manager, EACIF), Cecile Thioro Niang (Practice Manager, EEAF2), Lars Moller (Practice Manager, EEAM2) and Habib Rab (Lead
Economist and EFI Program Leader, EACIF).
The World Bank
SUMMARY OF PROPOSED FINANCING AND PROGRAM
BASIC INFORMATION
Project ID Programmatic If programmatic, position in series

P173232 Yes 2nd in a series of 3
Proposed Development Objective(s)
The program development objective of this programmatic operation is to support financial sector reforms that will
assist the Government of Indonesia (GoI) in achieving a deep, efficient and resilient financial sector. The proposed
operation is the second in a series of three programmatic operations.
This programmatic DPL series is structured around the following three pillars and set of objectives:
• Pillar A: Increasing the Depth of the Financial Sector. Pillar objectives: to expand the size of the financial sector by
increasing outreach (including to youth and women), broadening financial market products and mobilizing long-term
savings.
• Pillar B: Improving the Efficiency of the Financial Sector. Pillar objectives: to lower the costs for individuals and
enterprises by strengthening the insolvency and creditor rights framework, protecting consumers and personal data
and strengthening payment systems.
• Pillar C: Strengthening the Resilience of the Financial Sector. Pillar objectives: to strengthen the capacity of the
sector to withstand financial and non-financial shocks by strengthening the resolution framework, implementing
sustainable finance practices, establishing disaster risk finance mechanisms and advancing the effectiveness of
financial sector oversight.
Organizations
Borrower: REPUBLIC OF INDONESIA
Implementing Agency: FISCAL POLICY AGENCY, MINISTRY OF FINANCE
PROJECT FINANCING DATA (US$, Millions)
SUMMARY
Total Financing 400.00
DETAILS
International Bank for Reconstruction and Development (IBRD) 400.00
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INSTITUTIONAL DATA
Climate Change and Disaster Screening
This operation has been screened for short and long-term climate change and disaster risks
Overall Risk Rating
Moderate
.
Results
Indicator Name Baseline Target1
1 - Adults with transactional accounts (%) 49 [2017] 88 [2023]
2 - Sex-disaggregated financial inclusion data regularly collected
No [2021] Yes [2023]
and made publicly available
3 - Outstanding IDR-denominated private debt securities (IDR
412 [2018] 711 [2023]
trillion)
4 - Portion of short-term investments (cash, bank deposits) in
19.3 [2017] 16 [2023]
pension fund portfolios (%)
5 - Number of insolvency cases opened by the court, evidencing
307 [2018] 430 [2023]
greater access by firms
6 - Number of Financial Services Providers (FSPs) undergoing
financial consumer protection examinations (offsite or onsite) per 10 [2019] 30 [2023]
year.
7 – Adults making and receiving digital payments (%) 34.6 [2017] 58 [2023]
8 - Number of days for LPS to pay out insured depositors in closed
90 [2018] 7 [2023]
commercial banks
9 - Number of bank resolution plans finalized by LPS 0 [2019] All systemic banks [2023]
10 – Commercial banks complying with sustainable finance
0 [2019] 75 [2023]
practices (%)
11 - Utilization of the pooling fund for disaster response financing. Pooling fund is
operational and ready to
Pooling Fund not be used in disaster
established [2019] response, including
climate-related events
[2023]
12 – Number of financial conglomerates receiving more intense
49 [2020] 14 [2023]
integrated supervision
.
1In consultation with OPCS, the target date has been shifted to end-2023 for all indicators to take into account the timeline of
DPO3 and give sufficient time to measure the impact of the agreed reforms.
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IBRD PROGRAM DOCUMENT FOR A PROPOSED

INDONESIA SECOND FINANCIAL SECTOR REFORM DEVELOPMENT POLICY FINANCING (DPF)
TO THE REPUBLIC OF INDONESIA
1. INTRODUCTION AND COUNTRY CONTEXT
1. This Program Document proposes a Second Financial Sector Reform Development Policy
Operation (DPO) for the Republic of Indonesia in the amount of US$ 400 million. The proposed operation
is the second in a multi-sectoral programmatic series of three IBRD loans and is intended to support a
reform program aimed at (i) increasing the depth, (ii) improving the efficiency and (iii) strengthening the
resilience of the financial sector.
2. The prior actions proposed under this second operation (DPO2) are largely consistent with the
triggers identified and approved under the first operation (DPO1). The Government has continued to
implement the program over the past year in line with the agreement signed for the first operation in
March 2020. 2 Three of the original prior actions have been modified by expanding their scope and
strengthening their impact (as summarized in Table 4), particularly the reform area on strengthening the
bank’s resolution framework under the financial resilience pillar. One additional reform area, on financial
sector oversight, has been added while significant progress has been made in the policy dialogue on
banking competition compared to the first operation. The timing of this second operation is meant to
make important advancements on key financial sector reforms, as the developmental challenges
identified under the first operation gain new urgency in the face of the Coronavirus Disease 2019 (COVID-
19) pandemic and its correlated impacts on the economy and the financial sector. At the same time, the
pandemic offers new opportunities to accelerate structural reforms in Indonesia’s financial sector and
boost economic growth in the decades ahead.3 As such, the DPO series is highly relevant both for tackling
structural issues and for supporting the Government’s response to the pandemic.
3. The COVID-19 pandemic has caused the worst recession in Indonesia since the 1997-98 Asian
Financial Crisis. The world's largest island country, Indonesia became an upper middle-income country in
2020 and aspires to become the 5th largest economy in the world by 2030. With approximately 265 million
people living in over 6,000 islands, the country has maintained macroeconomic and political stability over
the last two decades. However, Indonesia has been reeling under the impacts of the COVID-19 pandemic,
a twin supply and demand shock with serious and potentially long-lasting financial, fiscal, and social
ramifications. The economy contracted by 2.1 percent in 2020 and the crisis adversely impacted
employment and labor income. Unemployment rose from 5.3 to 7.1 percent and underemployment
increased from 6.4 to 10.2 percent in the third quarter of 2020 compared to the year before. As a result,
the national poverty rate increased from 9.8 to 10.2 percent between March and September 2020, its
highest level since 2017. Recent national surveys document the huge fallout of the crisis also for firms and
2 Following DPO1, a US$ 300 million Supplemental Financial Sector Reform DPF was approved in May 2020 by the World Bank
Board as part of the COVID-19 emergency response. The supplemental operation was entirely based on the policy matrix of DPO1.
3 The Government of Indonesia is currently preparing a Financial Sector Omnibus Law. While this is not reflected in the current
policy matrix, it is likely to be part of the third DPO of this series.
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households: 74 percent of firms experienced more than 20 percent year-on-year reduction in sales as of
October 2020; and 23 percent of households faced food shortages as of November 2020.4
4. The Indonesian authorities have responded with timely policy interventions to address the
socio-economic hardship inflicted by COVID 19 pandemic, but macro-financial risks need to be
managed. Bank Indonesia (BI) loosened monetary policy and deployed a large local currency government
bond purchase program to further stabilize the economy and finance the fiscal deficit. BI bond purchases
have helped maintain financial stability amid high capital flight to safety during the second quarter of 2020
and contributed to lowering long-term local currency government bond yields. But the program involves
macro-financial tradeoffs, and it would be important to ensure that BI bond purchases are temporary,
time-bound and well communicated. Together with the central bank, financial authorities forcefully
responded to the pandemic. As of end 2020, a total of 41 COVID-related financial sector policy measures
for banks, non-bank financial institutions, market liquidity and payment systems had been introduced5.
5. The financial sector remains overall sound and resilient although loan forbearance measures
may be deflating the level of NPLs. With a level of financial sector assets of 77 percent of GDP (as of
2020Q4), Indonesia’s financial system is still small relative to the economy and to other ASEAN countries.6
The banking sector continues to dominate the financial system, much more than capital markets, with an
asset share of about 78 percent of total financial system assets as of 2020Q4; thereby making the banking
sector critically important for the overall financial system stability. The system-wide non-performing loan
(NPL) ratio edged up slightly since the beginning of the pandemic but remain low overall (3.1 percent)
while the capital adequacy ratio remains well above the regulatory minimum. The loan-to-deposit ratio
was at to 82.5 percent while the short-term liquidity ratio was close to 24 percent as of end 2020 indicating
adequate liquidity in the banking system. However, loan forbearance measures, immediately deployed in
response to the pandemic and currently extended until March 2022, may be deflating the level of NPLs
and inflating real capital ratios. Moreover, the pace of credit growth turned negative (-2.4 percent) in
2020Q4 despite the significant policy support provided.
6. This operation builds on the achievements from previous DPOs and is informed by a Financial
Sector Assessment Program (FSAP) conducted in 2017. The 2012 Financial Sector and Investment Climate
Reform and Modernization (FIRM1) DPL focused on reinforcing financial sector stability (e.g. with the
establishment of the OJK Board of Commissioners), promoting financial sector diversification, enhancing
financial inclusion and supporting investment climate regulatory reform. This was followed by the (stand-
alone) Financial Sector Reform Modernization (FIRM2) DPL in 2014 that continued supporting the
previous FIRM1 DPL’s financial sector reform areas, e.g. by operationalizing the Financial System Stability
Coordinating Forum (KSSK) and by making further advances on consumer protection, basic saving
accounts and financial literacy following the issuance of the NFIS. The current DPO series builds on those
achievements by supporting reforms that further expand the role of key counterparts in the sector and
strengthen the coordination among the members of the KSSK (i.e. MoF, BI, OJK, LPS) in promoting a
4 World Bank and Bappenas. 2020. COVID-19 impact on firms in Indonesia: Results from the Covid-19 Business Pulse Survey:
Round 2: October 2020. http://pubdocs.worldbank.org/en/579271610012405014/COVID19-Impacts-on-Indonesia-Firms.pdf;
and World Bank 2021. Indonesia High-frequency Monitoring of Covid-19 Impacts, Round 4: November 2020.
http://pubdocs.worldbank.org/en/699911612171364251/Indonesia-HiFy-COVID-19-November-2020.pdf
5 World Bank FCI GP COVID-19 Financial Policy Response Compendium.
6 In 2017, Philippines was at 99.2%, Vietnam at 218%, Malaysia at 264%. Key financial sector statistics are reported in Annex 5.
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deeper, more efficient and resilient financial sector. The proposed policy actions under the DPO are
informed by the 2017 FSAP and the 2018 InfraSAP and by long standing World Bank analytical and
advisory services supporting a range of financial sector reforms.
7. The DPO programmatic series is highly relevant for supporting the Government’s response to
COVID-19. The package of supplemental and regular DPOs of the programmatic series complements the
Government’s efforts in cushioning the COVID-related crisis by supporting the real economy and
managing second round effects related to the deterioration of asset quality and banks’ balance sheets.
These reforms are particularly important as financial sector resilience – one of the key development
objectives of the DPO program – is being tested, with local banks facing pressures as volatile financial
markets weigh on funding to the real sector and the risk of SME bankruptcies is likely to impact banks’
balance sheets. Indonesia’s banking system is well capitalized, with a high profitability. However, the lack
of depth in the financial markets, with a high share of local-currency government bonds being held by
non-residents and a narrow domestic institutional investor base exposes Indonesia to external shocks.
The reforms supported by this DPO series aim to address financial sector vulnerabilities heightened by the
COVID crisis: reforms to develop new long-term instruments to broaden Indonesia’s investor base and
deepen its capital markets are critical in rendering Indonesia’s asset market less vulnerable to foreign
portfolio outflows; reforms to increase the number of payment channels are crucial for the
implementation of large-scale social assistance payments to protect livelihoods during the crisis; reforms
to strengthen the resolution framework for troubled banks and establish a clear funding mechanism, are
a key element of a recovery strategy; reforms to strengthen the efficiency of the sector by strengthening
the insolvency and creditor rights framework supports the readiness of the insolvency system to deal with
a surge in corporate default.
8. Improved resilience to natural disasters and climate change is also critical for achieving
Indonesia’s development goals. This DPL series supports the establishment of adequate disaster risk
finance mechanisms to address the growing financial impact to the government from climate risks.
Natural hazards that are projected to intensify with climate change, such as floods, landslides, and storms,
make up almost 70 percent of major disaster events since 2000. From 2014-2018 the central government
spent between US$ 90 million and US$ 500 million (0.012-0.05 percent of GDP) annually on disaster
response and recovery. In total, central and subnational government post-disaster spending was
equivalent to 0.11% to 0.38% of total government expenditure. This still severely underestimates
spending on reconstruction which is often integrated in future capital investment projects or reallocated
from budget items such as maintenance and not tracked. The cost of replacing or restoring public
infrastructure, most of which are uninsured, are likely to increase due to high risk of sea-level rise and
coastal inundation that may affect up to 42 million people living in low laying coastal zones.
9. The implementation risks associated with this DPO series are moderate. This DPO series
presents an opportunity to support Indonesia’s recovery from the devastating impact of COVID-19 by
building back better and the Government remains firmly committed to the reform program. However, the
implementation of the reforms supported by this DPO series is complex, requiring collaboration with and
among a large number of implementing agencies. The proposed reforms require intense technical work
to guarantee their completion and the sustainability of their results. Wherever possible, this operation
therefore seeks complementarities with ongoing technical assistance provided by the international
development partners.
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2. MACROECONOMIC POLICY FRAMEWORK
2.1. RECENT ECONOMIC DEVELOPMENTS
10. Hit by severe domestic and external shocks, the economy entered a recession in 2020 for the
first time in two decades. The economy shrank by 2.1 percent in 2020, compared to a pre-COVID
projection of 5.1 percent growth (Table 1). Mobility restrictions, social distancing and labor income losses
led to a sharp contraction in private consumption while heightened uncertainty depressed investment.
Net exports contributed positively to growth as imports contracted sharply due to weak domestic demand
while exports rebounded driven by stronger external demand and commodity prices. On the supply side,
more contact-intensive and labor-intensive sectors such as transport, hospitality, construction and
manufacturing were severely hit. Less contact-intensive sectors such as information and
telecommunication, finance, and social sectors such as education and health were more resilient.
11. The latest available data suggest an uneven recovery. Consumer confidence has improved in
March 2021 but remains low (BI consumer index survey below 100). Retail sales were subdued pointing
to weak private consumption growth. On the upside, the manufacturing Purchasing Manager Index
recovered gradually during Q4 2020 and reached a six-year high in January 2021, driven by stronger
external demand. The unemployment rate rose from 5.3 to 7.1 percent and the underemployment rate
increased from 6.4 to 10.2 percent in the third quarter of 2020. Informality increased slightly, particularly
in the form of unpaid family work. The government maintained a substantial fiscal package in 2021 (4.2
vs 3.6 percent of GDP implemented in 2020) to fight the pandemic, provide relief and support the
recovery.
12. External buffers improved as the current account deficit narrowed and global financial
conditions eased. This was driven by a growing trade surplus (2.6 percent of GDP in 2020 vs -0.5 percent
of GDP in 2019) despite a wider services trade deficit. Aggressive responses by central banks helped
stabilize capital inflows during the second half of 2020 but FDI inflows remained weak amid low
commodity prices and high uncertainty. International reserves reached 9 months of imports and external
debt repayment. The Rupiah strengthened in nominal terms during 2000 following a sharp depreciation
and volatility in March-April 2020. However, the real effective exchange rate depreciated by 1.5 percent
in 2020 and is broadly in line with historical trends.
13. The fiscal deficit and public debt rose sharply in 2020 due to the recession and the fiscal
response, including recent tax measures. The fiscal deficit widened from 2.1 percent of GDP in 2019 to
6.2 percent of GDP in 2020. The government implemented a significant fiscal package (3.6 percent of GDP)
to support the health response, and to provide relief and support the recovery. Government spending
increased from 14.6 to 16.8 percent of GDP between 2019 and 2020, driven by a significant expansion in
social spending, non-energy subsidies and interest payments (from 1.7 to 2.0 percent of GDP). Fiscal
revenues plunged from 12.4 percent of GDP in 2019 to 10.6 percent in 2020 as a result of the economic
slowdown, weaker commodity prices, tax relief measures, including a reduction of the corporate income
tax rate from 25 to 22 percent. Central government debt rose from 30.2 percent of GDP in 2019 to 39.4
percent in 2020.7
7 Based on unaudited fiscal statements for 2020 from the Ministry of Finance.
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Table 1. Key Macroeconomic Indicators 2019-2024

2019 2020 2021 2022 2020 2021 2022 2023 2024
Actual Pre-COVID projections Prelim. Projections
Real economy
Real GDP (% change) 5.0 5.1 5.2 5.2 -2.1 4.4 5.0 5.1 5.1
Demand side (contribution to
growth, in percentage points)
Private Consumption 2.9 2.8 2.9 2.9 -1.5 2.3 2.6 2.8 2.9
Government Consumption 0.3 0.3 0.4 0.4 0.2 0.3 0.3 0.3 0.2
Gross Fixed Investment 1.5 1.6 1.7 1.8 -1.6 1.2 1.5 1.7 1.8
Exports -0.2 0.3 0.5 0.7 -1.6 1.0 1.2 1.4 1.5
Imports -1.6 0.1 0.3 0.6 -2.7 0.6 0.7 1.2 1.3
Supply side (contribution to growth,
in percentage points)
Agriculture 0.5 … … … 0.2 0.5 0.5 0.5 0.5
Industry 1.5 … … … -1.1 2.1 1.7 1.7 1.7
Services 2.8 … … … -0.6 1.3 2.6 2.7 2.7
CPI (year-average, %) 2.8 3.5 3.5 3.0 2.0 2.3 2.8 3.2 3.4
Fiscal accounts of Central Government, percent of GDP
Revenues 12.4 12.8 13.2 13.3 10.6 10.9 10.6 11.3 12.3
of which tax revenue 9.8 10.4 10.8 11.0 8.3 8.5 8.3 9.0 10.0
Expenditures 14.6 14.8 15.2 15.4 16.8 16.3 14.7 14.4 15.3
Fiscal Balance -2.1 -2.1 -2.0 -2.0 -6.2 -5.4 -4.1 -3.0 -3.0
Central Government Debt(a) 30.1 30.2 30.1 30.2 39.4 41.2 42.6 43.0 43.5
Balance of Payments, percent of GDP unless indicated otherwise
Current Account Balance -2.7 -2.7 -2.6 -2.4 -0.4 -1.4 -1.6 -2.0 -2.3
Exports, Goods and Services 17.9 17.9 17.6 17.6 15.4 15.6 15.6 15.6 15.8
Imports, Goods and Services -18.3 -18.0 -18.0 -18.1 -12.8 -13.2 -13.5 -14.2 -14.7
Net Foreign Direct Investment 1.8 1.8 1.9 1.9 1.3 1.2 1.4 1.5 1.5
Gross Reserves (months of imports
9.7 6.4 6.3 6.3 9 8.0 7.1 6.2 5.6
of goods and services)
Memorandum items
GDP nominal in US$ (billions) 1,119 1,208 1,308 1,415 1,058 1,144 1,239 1,333 1,425
Note: Preliminary fiscal data for 2020 are based on unaudited fiscal statements. (a) The government borrowed more than its financing needs in
2020, leaving a 1.5 percent of GDP financing surplus, which will be available in 2021, reducing the borrowing need. Central government debt
net of those assets would be 37.9 percent of GDP
Source: Ministry of Finance, Bank Indonesia, World Bank staff projections.
14. Bank Indonesia (BI) eased monetary policy and contributed to deficit financing in 2020 amid
low inflation and stabilizing capital inflows. BI lowered the 7-day Reverse Repo Rate five times in 2020
for a cumulative 125 bps to reach 3.75 percent as the recession opened a substantial output gap. In
February 2021, BI cut the rate by an additional 25 bps to 3.5 percent citing downside risks to growth amid
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low inflation (1.4 percent year-on-year in February 2021). BI also implemented a substantial local currency
government bond purchase program (3.7 percent of GDP of which 3 percent of GDP in the primary market)
to stabilize markets and help finance the fiscal deficit. The program contributed to lowering local currency
bond yields, but it involves macro-fiscal risks that would need to be managed. The authorities have
signaled that they are committed to keeping the program time-bound (with BI acting as a standby buyer
until 2022 per government legal commitment), adequately sized, and implemented in a way that
safeguards the credibility of monetary policy.
15. Banking stability indicators suggest that the banking system is sound overall, but loans-at-risk
are elevated for several large banks. Non-performing loans (NPLs) increased slightly during the first half
of 2020 but remain low overall (3.1 percent). But restructured loans are currently classified as loans-at-
risk and could turn into NPLs in the event of worsening economic conditions and rising firm insolvencies
and bankruptcies. Hence the importance of strengthening NPL management within the financial sector.
In 2020, the loans-at-risk ratio stood above 20 percent for several large banks. Banks appear well
capitalized, but profitability and asset quality could suffer if the crisis deepens. System-wide liquidity
remains adequate, but credit growth has been weak (-2.4 percent in December 2020) driven by a
combination of depressed credit demand and supply factors. At this time, Indonesia's financial sector
capacity to weather shocks is still limited.
2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY
16. Growth is expected to rebound in 2021 helped by a partial recovery in private consumption, the
rollout of COVID-19 vaccines and a favorable external environment. The economy is projected to grow
by 4.4 percent in 2021 driven by a base effect and a gradual improvement in consumer spending, and
moderate positive spillovers from a stronger global economy. On the domestic front, this is predicated on
improvements to contain the pandemic and a gradual strengthening in labor market conditions. On the
external front, the US fiscal stimulus package would have positive spillovers on global growth and
Indonesia’s export commodity prices. Growth could accelerate to 5.0 percent in 2022 and 5.1 percent in
2023 driven by improved confidence and economic activity as the vaccine rollout reaches a critical mass
of the population starting in the last quarter of 2021. Growth in contact-intensive services sectors is
expected to remain muted in the near term while a stronger recovery in advanced countries and some
emerging market economies would support growth in mining and export-oriented manufacturing sectors.
17. Rapid mass COVID-19 vaccination is important to support strong near-term recovery while
mitigating the potential scarring from the crisis is critical for medium-term growth. The government
vaccine orders from various sources amount to 329.5 million doses to achieve herd immunity by
vaccinating 181.5 million people (70 percent of the population) by March 2022. The national vaccination
plan prioritizes health workers (17.4 million), public sector workers (21.5), and the elderly (21.5 million)
which would be followed by the general population using a cluster approach (by prevalence rate). As of
end-March 2021, 54 million vaccine doses were received, and 11.7 million doses were administered. Over
the medium term, the crisis could damage Indonesia’s growth potential through lower investment, weak
productivity growth, and loss in human capital. Potential growth is projected to drop by at least 0.7
percentage point below pre-COVID-19 levels to 4.5 percent on average in 2021-2023, driven largely by
depressed investment. Potential growth could drop further if the crisis were to deepen or to spill over to
the banking and financial sector. Growth would return to its pre-COVID-19 potential by 2024, assuming
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implementation of structural reforms, including to reduce barriers to investment.
18. External conditions are projected to improve. The current account deficit is expected to be
contained in the short term with weak import growth and strong rebound in goods exports. It would widen
as the recovery strengthens. The outlook assumes that global financial conditions remain
accommodative, which would support capital inflows, while stronger commodity prices, lower
uncertainty, and structural reforms could improve FDI inflows (Table 1 and 2). Low inflation and more
stable capital flows would provide BI room to maintain an accommodative monetary policy.
Table 2. Balance of Payment (BoP) Financing Requirements and Sources (US$, billions)
2019 2020 2021 2022 2020 2021 2022 2023 2024
Actual Pre-COVID Projections Prelim. Current baseline projections
Current account deficit 30.3 32.0 33.2 33.0 4.7 16.3 20.0 26.5 32.7
Scheduled government debt
10.5 9.4 10.9 10.9 12.3 9.4 10.7 11.4 11.1
amortization
Private sector debt repayment 27.5 30.3 32.6 34.3 23.3 25.3 27.4 29.5 31.4
Total financing needs 68.3 71.7 76.7 78.3 40.4 51.0 58.1 67.3 75.2
Total financing sources 68.3 71.7 76.7 78.3 40.4 51.0 58.1 67.3 75.2
FDI inflows (net) 20.5 22.0 24.1 26.0 14.1 13.9 17.0 20.0 21.7
Portfolio inflows (net)(a) 16.0 5.1 5.4 5.5 0.0 5.9 7.3 9.7 14.2
Other investment (net) (b) 23.7 33.7 36.2 38.1 10.9 11.8 12.8 13.7 14.6
Government borrowing (gross) 15.7 14.0 16.5 16.4 19.4 19.2 20.3 20.1 23.5
Loans (excl. WB DPOs) 4.2 6.0 5.8 5.8 8.5 6.7 7.2 7.1 8.3
Securities 10.5 7.4 10.7 10.6 10.3 11.2 13.2 13.0 15.2
WB Development Policy Loans 1.0 0.7 0.0 0.0 0.6 1.2 … … …
Other items (net) (c) -2.9 -0.4 -1.6 -1.4 -1.4 -0.5 -0.4 -0.3 -0.2
Use of reserves(d) -4.7 -2.7 -3.9 -6.3 -2.6 0.6 1.1 4.1 1.4
Note: (a) Including other equity, trade credits, loans etc. but excludes government and private borrowing and currency swaps. (b) The government
estimates funding from donors other than the WB (including from ADB, JICA, Australia, AFD, KfW etc.) in 2021 at USD 5.2 billion. (c) Comprising
capital account, derivatives, and errors and omissions components; for historical data also includes discrepancy between BoP and fiscal data on
government borrowing. (d) Use of reserves: ‘–’denotes an accumulation; ‘+’ denotes a reduction.
Source: Bank Indonesia, World Bank staff projections
19. The government is expected to gradually reduce the fiscal deficit in line with the legal limit of 3
percent of GDP by 2023. This would ease the fiscal financing needs and support a stabilization of public
debt by 2024 (Figure 1). The government is expected to deliver consolidation through a balanced approach
that combines unwinding of exceptional measures and fiscal reforms. Revenues will increase by 1.4
percentage point of GDP between 2021 and 2024, while spending will fall by 0.9 percentage point of GDP
over the same period. Initially, spending will decline more steeply in 2023 as the government reins in the
deficit within 3 percent of GDP, but it will rebound in the following year as revenues continue to improve.
Gross fiscal financing needs will remain elevated (averaging 8.1 percent of GDP over 2021-2022) and be
largely covered by domestic and global bond issuances. BI’s role as stand-by buyer of public debt is
expected to gradually decline as gross financing needs begin to ease (averaging 7.1 percent over 2023-
2024), non-resident investors gradually return, and FX bond issuances remain strong (Table 2). The
elevated deficits in 2021-2022 will translate into higher levels of public debt, but debt is expected to
eventually stabilize at around 44 percent of GDP by 2025 below the legal ceiling of 60 percent.
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20. Government revenues are expected to improve, underpinned by a recovery in economic growth
and commodity prices, and a tax reform agenda aimed at stabilizing debt and creating fiscal space.
Stronger growth and commodity prices are projected to boost revenues by 0.2 percentage point of GDP
from 2021 to 2024, while expected tax reforms are assumed to add a further 1.3 percentage points. This
includes the impact of reforms announced or already under way: i) tobacco excise tariff increase in 2021;
ii) expansion of the corporate income tax base, by migrating larger firms out of the Micro, Small and
Medium Enterprise (MSME) final tax regime, and the VAT base, by requiring more electronic platforms to
collect VAT; iii) introduction of an excise on plastic bags; iv) gradual improvement of tax compliance
through rollout of a recently-procured tax IT system. The baseline also includes the impact of reforms the
Ministry of Finance has committed to in its 2020-24 strategy:8 i) further tobacco excise tariff increase and
tariff structure simplification; ii) introduction of new excises, including on food with high risk to health;
and iii) further broadening of the VAT and income tax bases. Altogether, it is estimated that these reforms
could yield between 2.2 and 3.1 percent of GDP per year in new revenues. Excise measures are expected
to generate the largest of these gains, followed by expansion of the Corporate Income Tax base, expansion
of the Personal Income Tax base, and improvements in tax administration. Reforms are expected to
materially commence in 2023 but will take time to yield results. Corresponding revenue gains are
expected to peak in 2024.
21. Public spending will remain above pre-COVID-19 levels, with higher social assistance and
interest payments offset by reduced energy subsidies and capital spending. Some elements of the
COVID-19 fiscal response package, such as health and social assistance spending, will be phased out as
the recovery strengthens. Nonetheless, social assistance spending is expected to remain above pre-
COVID-19 levels, as the government retains program improvements implemented during the crisis (adding
+0.6 percentage point of GDP on average between 2018-2019 and 2023-2024). The higher public debt will
translate into higher interest payments (+0.7 percentage point of GDP, over the same period).
Consequently, as the recovery strengthens, the government is expected to partially offset these increases
through the introduction of cuts to fuel and electricity subsidies (-0.7 percentage point of GDP). These had
been planned for 2020 but were derailed by the pandemic. Slight reductions in capital spending are also
anticipated over the same timeframe (-0.4 percentage point of GDP).
8Ministry of Finance regulation No. 77/PMK.01/2020 Strategic Plan 2020-2024

(https://peraturan.bpk.go.id/Home/Download/131395/77_PMK.01_2020.pdf)
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Table 3. Baseline Medium-Term Fiscal Framework (Central Government), percentage of GDP

2018 2019 2020 2021 2022 2020 2021 2022 2023 2024
Actual Pre-COVID projections Prelim. Current baseline
Revenue 13.1 12.4 12.8 13.2 13.3 10.6 10.9 10.6 11.3 12.3
Tax revenue 10.2 9.8 10.4 10.8 11.0 8.3 8.5 8.3 9.0 10.0
Income tax 5.1 4.9 5.1 5.3 5.5 3.8 3.9 3.6 3.8 4.5
Sales tax (VAT) 3.6 3.4 3.6 3.8 3.8 2.9 3.0 3.0 3.2 3.5
Excises 1.1 1.1 1.3 1.3 1.3 1.1 1.2 1.3 1.5 1.6
International trade tax 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.3
Other taxes 0.2 0.2 0.0 0.0 0.0 0.2 0.2 0.2 0.2 0.2
Nontax receipts 2.8 2.6 2.4 2.4 2.3 2.2 2.3 2.3 2.3 2.2
Grants 0.1 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1
Total expenditure 14.9 14.6 14.8 15.2 15.4 16.8 16.3 14.7 14.4 15.3
Primary expenditure 13.2 12.8 13.1 13.4 13.5 14.7 14.0 12.5 12.0 12.9
Central Government 8.1 7.7 7.9 7.9 7.9 9.8 8.9 8.1 7.3 7.8
Personnel 2.3 2.4 2.4 2.4 2.4 2.5 2.5 2.5 2.5 2.5
Material 2.3 2.1 2.1 2.1 2.1 2.7 2.4 2.4 2.1 2.3
Capital 1.2 1.1 1.3 1.3 1.3 1.2 1.0 1.0 0.7 0.9
Subsidy 1.5 1.3 1.0 1.0 1.0 1.3 1.2 0.9 0.8 0.8
Energy 1.0 0.9 0.6 0.6 0.6 0.7 0.6 0.3 0.3 0.3
Non-energy 0.4 0.4 0.4 0.4 0.4 0.6 0.6 0.6 0.5 0.5
Grant expenditure 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Social assistance 0.6 0.7 0.8 0.8 0.8 1.3 0.9 1.2 1.2 1.2
Others 0.1 0.1 0.3 0.3 0.3 0.8 0.8 0.1 0.1 0.1
Transfers to
5.1 5.1 5.2 5.5 5.6 4.9 5.1 4.4 4.7 5.1
subnational
Interest 1.7 1.7 1.7 1.8 1.8 2.0 2.2 2.2 2.4 2.5
Primary fiscal balance -0.1 -0.5 -0.4 -0.2 -0.2 -4.2 -3.2 -1.9 -0.7 -0.6
Overall fiscal balance -1.8 -2.2 -2.1 -2.0 -2.0 -6.2 -5.4 -4.1 -3.0 -3.0
Net financing 1.8 2.2 2.1 2.0 2.0 6.2 5.4 4.1 3.0 3.0
Investment in financial
-0.7 -0.6 0.0 0.0 0.0 -1.8 0.7 -0.2 -0.2 -0.2
assets
Net borrowing 2.5 2.8 2.1 2.0 2.0 7.9 4.7 4.2 3.2 3.2
Net local currency 1.8 2.3 1.8 1.8 1.7 7.2 3.9 3.4 2.5 2.3
Net foreign currency 0.7 0.5 0.2 0.2 0.3 0.7 0.9 0.8 0.7 0.9
Central Government debt 29.8 30.2 30.2 30.1 30.2 39.4 41.2 42.6 43.0 43.5
Gross fiscal financing needs 5.5 5.9 4.5 4.6 4.9 9.8 8.9 7.3 6.8 7.4
Note: 2020 preliminary fiscal data based on unaudited fiscal statements. Source: Ministry of Finance, World Bank staff
projections.
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22. Central government debt is projected to remain elevated but manageable in the medium term
under negative shock scenarios (Figure 1). Years of prudent public debt management resulted in
relatively low and declining shares of foreign-currency denominated debt (down 6.7 percentage points
between 2015 and 2019 to 37.9 percent in 2019) and variable interest rate debt (down 4.0 percentage
points during the same period to 9.8 percent in 2019). Nevertheless, a permanent 30 percent exchange
rate depreciation shock in 2022 would increase the debt-to-GDP ratio by 3.4 percentage points relative to
the baseline, to 47.1 percent in 2025. A one-year delay in the implementation of each of the government’s
expected revenue and expenditure reforms would lead debt to peak at 44.7 percent of GDP in 2025. A
delayed economic recovery, lowering growth in 2021 to 2.4 percent from 4.4 percent in the baseline,
combined with a proportional revenue decline, would lead debt to peak at 45.6 percent of GDP in 2025.
An expenditure shock of 1 percent of GDP lasting through 2022 and 2023, to respond to a natural disaster
for instance, may increase debt levels to 45.7 percent of GDP in 2025. Similarly, the interest-to-revenue
ratio is projected to increase in all scenarios and stabilize at around 21-22 percent. External debt is
expected to return to pre-COVID-19 levels (Figure 2).
Figure 1. The central government debt-to-GDP ratio is Figure 2. … while external debt is expected to return to pre-
projected to increase significantly… COVID-19 levels
(Percentage of GDP) (Percentage of GDP)
50
45
40
35
Baseline
Baseline, w/ delayed reforms
30 30% exchange rate shock
-2.0 pp GDP grwth/revenue shock
1% of GDP expenditure shock
25
2017 2018 2019 2020 2021 2022 2023 2024 2025
Source: Ministry of Finance, World Bank staff projections Source: International Monetary Fund
23. Fiscal risks and contingent liabilities are generally manageable, although they warrant closer
monitoring as the COVID-19 crisis increased risks. Exposure to explicit contingent liabilities in the form
of loan guarantees to SOEs amounted to 1.6 percent of GDP in 2020, well below the guarantee ceiling of
6.0 percent of GDP. Non-financial SOE debt (guaranteed and non-guaranteed) increased from 6.3 percent
of GDP at end-2019 to 7.3 percent of GDP by Q3 2020. These trends warrant monitoring especially as the
COVID-19 response package has expanded the span of loan guarantees to MSMEs and corporates,
including SOEs. Guarantees to public-private partnership (PPP) projects on the other hand is mitigated by
the Indonesia Infrastructure Guarantee Fund (IGGF) for guarantee risks. Indonesia is also exposed to fiscal
risks from natural disasters as the country is one of the most disaster-prone countries in the world.
However, the risk is being mitigated through the National Disaster Risk Insurance strategy under
implementation.
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24. Risks to the outlook are skewed to the downside, given the high uncertainty associated with
the future path of the pandemic and its scars, fiscal reforms, and possible adverse developments in the
global economy. To illustrate these risks, two alternative scenarios assuming that the pandemic is not
fully contained, the global economy is weaker than expected and fiscal consolidation is delayed. Growth
is projected to drop to 2.1-3.3 percent per annum in 2021-2023. Consequently, the fiscal deficit would
increase to 3.3-4.4 percent of GDP and public debt would peak at 46.8 percent of GDP (Box 1).
Box 1. Growth and Fiscal Downside Scenarios

We illustrate the impact of two downside scenarios on the fiscal balance and public debt (i)
lower growth resulting for instance on a failure to contain the pandemic due for instance to slow
vaccine rollout and weaker global economy; (ii) lower growth and delayed fiscal consolidation.
GDP growth could drop to 2.1-3.3 percent in 2021-2023 under a downside scenario where the
pandemic is not contained, the vaccine rollout is slow, and the global economy weakens. This
scenario assumes weaker improvement in consumer and business sentiment due to a slower
vaccine rollout resulting in renewed mobility restrictions and social distancing.9 It also assumes that
external demand and export commodity prices are lower than in the baseline due to a weaker-
than-expected global economy.10 (Figure B.1).
Under this scenario, the fiscal balance is projected to remain slightly above 3 percent of GDP
and public debt is expected to peak at 45.4 percent of GDP in 2023. Weaker growth would lead
to lower fiscal revenues. In the absence of additional fiscal reforms beyond those assumed in the
baseline, (Figure B.2).
Under a more extreme scenario of slower economic growth and delayed fiscal consolidation,
public debt is projected to peak at 46.8 percent of GDP. Under the downside growth scenario
presented above and assuming that spending and tax reforms are delayed by one year, the fiscal
deficit is projected to reach 4.4 percent of GDP in 2023 resulting in higher public debt.
9 The vaccine rollout is modelled through its behavioral impact on sentiment. Under the baseline we assume that consumer
confidence would reach borderline optimistic in Q4 2021 (reaching an index of 100 compared to 90 currently) and strengthen
gradually thereafter. An econometric estimate of the relationship between confidence and growth is then used for the near-term
forecasts. This econometric analysis uses quarterly data at the province level and shows that a 10 percent increase in consumer
confidence increases growth by 2.3 percentage points year-on-year.
10 The assumptions for global growth in 2021 (2022; 2023) in the baseline and downside scenario are 5.1 (4.0; 3.0) and 3.1 (2.0;
1.5). They are subject to updates based on major developments and take into account of consensus forecasts.
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Figure B.1. GDP growth, Baseline versus Figure B.2. Fiscal balance, baseline versus
downside scenario downside scenarios
Percent growth Percent of GDP
6 2018 2019 2020 2021 2022 2023
0
4
2 -2
0 -4
-2 Baseline
-6 Baseline
Downside scenario
-4 Downside scenario
2018 2019 2020 2021 2022 2023 -8 Downside scenario with delayed reforms
Source: MoF, World Bank staff projections Source: MoF, World Bank staff projections
Note: “Baseline” is the baseline macro framework. “Downside scenario” assumes growth drops by 1.9-2.3pps in 2021-
2023. “Downside scenario with delayed reforms” includes the “downside scenario” and the assumption that fiscal
reforms are delayed by one year.
Figure B.1. GDP growth, Baseline versus Figure B.2. Fiscal balance, baseline versus
downside scenario downside scenarios
Percent growth Percent of GDP
6 2018 2019 2020 2021 2022 2023
0
4
2 -2
0 -4
-2 Baseline
-6 Baseline
Downside scenario
-4 Downside scenario
2018 2019 2020 2021 2022 2023 -8 Downside scenario with delayed reforms
Source: MoF, World Bank staff projections Source: MoF, World Bank staff projections
Note: “Baseline” is the baseline macro framework. “Downside scenario” assumes growth drops by 1.9-2.3pps in 2021-
2023. “Downside scenario with delayed reforms” includes the “downside scenario” and the assumption that fiscal
reforms are delayed by one year.
25. The macroeconomic policy framework is adequate for the purposes of the proposed operation.
Indonesia built a strong track record of prudent macroeconomic and fiscal management over the past
decade. The authorities’ strategy of lower policy interest rates, contingent on the inflation outlook, and
government bond purchases by Bank Indonesia as a last resort and using market mechanisms is
appropriate in the current exceptional circumstances. The authorities are committed to keeping the
financing of the fiscal deficit by the Central Bank time-bound (until 2022) and well calibrated to safeguard
the effectiveness and credibility of monetary and exchange rate policy. Public debt is sustainable under
the baseline scenario, but fiscal reforms would be critical to reduce financing needs and improve fiscal
space. While the banking sector remains overall stable, it is important to closely monitor the application
of loan forbearance measures, maintain adequate loan provisioning, support credit to viable firms and
prepare for potential stress by further strengthening the banking resolution framework, expanding
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financial safety nets and updating the crisis management framework. The government is committed to
advancing structural reforms to improve the investment climate and financial sector which if well
implemented could improve medium-term prospects.
2.3. IMF Relations
26. The IMF Executive Board concluded the 2020 Article IV consultations on March 2, 2021. The
Article IV staff report and Executive Board press release noted that a bold, comprehensive, and
coordinated policy response allowed Indonesia to cushion the impact of the COVID-19 crisis and support
the recovery. The IMF Executive Directors recognized the positive outlook supported by the COVID-19
vaccination plans and improved global economic and financial conditions. But they noted important
downside risks related to the pandemic control, vaccination plans and bank asset quality and profitability.
The Staff report stressed that exceptional central bank financing of the fiscal deficit should remain on last
resort basis and use market mechanism and remain time bound. Executive Directors commended the
government’s commitment to returning to the legal deficit ceiling by 2023 and highlighted the importance
of unwinding the exceptional measures in a balanced manner and improving the structurally low fiscal
revenues. They welcomed the government’s efforts to advance structural reforms on the business
environment though the Omnibus Law on Job Creation.
3. GOVERNMENT PROGRAM
27. Before COVID-19, national strategies in the areas of capital markets development, financial
inclusion, payment systems and disaster risk finance had been issued by GoI and represented key
elements of the financial sector development agenda pursued by GoI. The strategies elaborated by the
Indonesian financial sector authorities (including OJK, BI, LPS, MoF, Bappenas and CMEA) in a pre-COVID-
19 phase continue to be relevant also in a COVID-19 context and GoI remains firmly committed to their
implementation. The strategies can be conceptually mapped to the thematic drivers of financial
deepening, financial efficiency and financial resilience, in line with the DPO pillars:
• Financial deepening: the main GoI’s approach to capital markets development is elaborated in the
National Strategy for Financial Market Deepening (SN-PPPK) 2018-2024. This strategy contains a
detailed and comprehensive plan of action for developing seven financial markets.11 Moreover, a new
National Financial Inclusion Strategy (NFIS) underpinning the GoI’s efforts in further expanding access
to financial services has been launched on December 2020. This new NFIS builds on the previous one
launched in November 2016. Key areas of engagement identified by the strategy and benefitting from
the support of the development community consist of: (i) Financial Education.; (ii) Public Property
Rights; (iii) Financial Distribution Channels and Intermediary Facilities; (iv) Delivery of Government
financial services; (v) Consumer Protection. Cross-cutting foundations consist of (i) Favorable policies
and regulations to promote financial inclusion (ii) Supportive inter-operable financial information
technology and infrastructure; (iii) Effective implementation organization and mechanism.
11 The seven markets are: government bond, corporate bond, money market, foreign exchange, stock, structured products,
Islamic finance. The strategy focuses on (i) the sources of economic financing and risk management (which includes capital
providers, instruments and intermediaries); (ii) market infrastructure development (which includes capital users, financial market
infrastructure and benchmark rate and standardization); and (iii) policy coordination, regulatory harmonization and education
(which includes regulatory framework and coordination and education).
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• Financial efficiency: following the launch of the Bali Fintech Agenda in 2018, the authorities
approved a blueprint for payment system reform at the end of 2020 and launched a national
payment gateway to facilitate the interconnection and interoperability of the retail payment
systems. The so-called Indonesia’s Payment System (IPS) 2025 Visions is a major step towards a
modern payment system and is designed to ensure that the current trend of digitalization develops
within a conducive digital economic and financial ecosystem. The five IPS 2025 Visions will materialize
through five initiatives to be implemented directly by Bank Indonesia in pursuance of the central
bank’s duties and jurisdiction, as well as implemented through productive collaboration and
coordination with relevant government ministries and institutions and also the industry. The
initiatives are: 1) digital open banking and interlink bank-fintech; 2) development of retail payments;
3) development of wholesale payments and financial market infrastructure; 4) data; and 5) regulation,
supervision, and reporting.
• Financial resilience: Indonesia’s financial crisis management and safety nets have been underpinned
largely by the 2016 PPKSK Law that established the Financial System Stability Committee (KSSK) as the
coordination body for crisis management and the mechanisms for mitigating financial crisis situations.
GoI is also pursuing a comprehensive approach to better manage fiscal and financial risks due to
frequent and large climate shocks and natural disasters. The Ministry of Finance launched the National
Disaster Risk Financing and Insurance Strategy during the WB-IMF Annual Meetings in October 2018.
This strategy includes several complementary financial mechanisms and instruments, including
insurance of key public assets, including administrative buildings, hospitals, schools and bridges. In
December 2018, Indonesia, together with Cambodia, Japan, Lao PDR, Myanmar, and Singapore
agreed to establish the Southeast Asia Disaster Risk Insurance Facility (SEADRIF), a regional platform
to provide ASEAN countries with financial solutions and technical advice to increase their financial
resilience to climate and disaster risks.
28. During the COVID-19 emergency phase, the Indonesian authorities have responded promptly
to the potential impact of the pandemic on the financial sector by issuing a series of regulations and
policy directions aimed at preserving the stability of the financial sector while maintaining the
fundamental role of supporting the real economy. First and foremost, the Law No 1 was issued on March
31st, 2020. It authorizes the Government and banking and financial authorities to carry out extraordinary
measures towards mitigating any threats to the national economy and ensuring financial system stability.
Subsequently, various Government and agencies’ regulations were issued, to provide stimulus and
relaxation measures to the financial and private sectors, including the following: (i) Loan Restructuring
Policies for Banks and NBFIs; (ii) Liquidity Relief Policies for Banks; (iii) Interest Rate Subsidies and Credit
Guarantees Policies for MSMEs; (iv) capital markets policies to stabilize the primary and secondary
markets of government securities:
• Restructuring policies for banks and NBFIs: OJK regulations 12 issued in March 2020 defined the
method of credit/financing restructuring to be carried out regarding asset quality assessment, among
others by: reduction in interest rates; extension of the loan term; reduction of principal arrears;
reduction of interest arrears; addition of credit/financing facilities; conversion of credit/financing to
equity participation. These restructured loans are currently not yet classified as NPLs due to the
exceptional measure. The loan restructuring program was initially intended as a one-year program,
12OJK Regulations No. 11/POJK.03/2020 (“POJK 11”) and 14/POJK.05/2020 (“POJK 14”) on national economic stimulus as a
counter-cyclical policy against the spread of the coronavirus allow banks (POJK 11) and NBFIs (POJK 14) take certain measures to
relax the credit requirements or to restructure loans.
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yet given the ongoing crisis, it has been extended until mid-March 2022.
• Liquidity Relief Policy: in May 2020, the National Economic Recovery Program was issued13, consisting
of four main programs: (i) State Capital Participation (PMN); (ii) Fund Placement; (iii) Government
Investment; (iv) Guarantee. With regards to Fund Placement, the Government may place funds as
liquidity support to banks performing credit restructuring or giving additional loans or working capital.
Moreover, OJK introduced additional temporary relaxation measures to address prudential issues
faced by smaller banks, including: 1) temporary removal of capital conservation buffer (CCB)
requirement of 2.5% from risk-weighted asset for BUKU 3 banks (banks with minimum core capital of
Rp5tn - <Rp30tn) and BUKU 4 banks (banks with minimum core capital of >Rp30tn); hence minimum
CAR after the removal will be 11.5% from 14%; 2) lowering the Liquidity Coverage Ratio (LCR) and Net
Stable Funding Ratio (NSFR) for BUKU 3, BUKU 4 and foreign banks from 100% to 85%. These
measures, initially provided until March 31, 2021, have now been extended until March 31, 2022. In
addition to the extension, OJK has introduced new measures that require banks to implement a risk
management system that takes into account the COVID-19 impact on debtors and to report on a
monthly basis to OJK on the restructured loans’ position, while also exempting the restructured loans
from the calculation of low quality assets in assessment of bank soundness.
• Interest Subsidy Policy and Credit Guarantee: GoI has allocated IDR 34.15 trillion for interest rate
subsidies for 60.6 million MSMEs accounts with a total loan outstanding of IDR 1,602 trillion. Under
the scheme, the Government distributes the budget based on the various MSMEs funding channels
(i.e. banks, financing companies, online platforms). The subsidy is available not only for the
Government’s subsidized MSMEs loan program, but also for the non-subsidized products. The scheme
allows borrowers under subsidized programs (such as KUR and UMI) to have 6 months principal
and/or interest payment suspension starting in May 2020 or 6 months principal suspension and 2-6%
interest rate subsidy. Moreover, GoI has provided a credit guarantee on working capital loans
extended to SMEs through the government owned Jamkrindo and Askrindo. The government has
allocated IDR 6.0 trillion fiscal budget for fund reserves for credit guarantee and guarantee fees
(according to guarantee/risk-sharing portions). The purpose of the credit guarantee is to sustain and
support working capital loan disbursements to the economy.
• Financial markets policies: BI has issued measures to stabilize the Rupiah. BI has also conducted triple
interventions in the financial market: stabilizing the Rupiah in the domestic non-deliverable forward
(DNDF) and spot markets, as well as buying government bonds (SBN) on the secondary market.. In
this case BI has issued Blueprint for Money Market Development (BPPU) 2025, which constitutes an
effort of Bank Indonesia to navigate development of domestic money market to become a modern
and advanced money market in the digital era. The issuance is also part of BI commitment in
implementing the National Strategy for Financial Market Development (SN-PPPK) for 2018-2024
launched in 2018 by the Coordinating Forum for Development Financing through Financial Market14.
In parallel, OJK also focused on enhancing market integrity with a series of stricter policies and
supervisory measures. With better market integrity, the activity of raising funds through public
offerings was relatively large at IDR118.7 trillion with 53 new issuers. This growth on the number of
new issuers was the highest in ASEAN.
13
On May 11, 2020, Government Regulation No 23/2020 was issued as one implementing Law No. 2/2020.
14
The Coordinating Forum for Development Financing through Financial Market was established per MoU signed in 2016 by
MoF, BI, and OJK
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29. As part of the COVID-19 recovery phase, GoI is currently preparing a Financial Sector Omnibus
Law (FSOL). The FSOL has been included by the Parliament in the priority list (PROLEGNAS) for 2021. The
Financial Sector Policy Centre (PKSK) in the Ministry of Finance is leading the preparation of the draft law.
In line with the Government’s financial sector development agenda, the focus of the FSOL is on increasing
the depth and improving the efficiency of the financial sector. There are five pillars of the law proposed
by PKSK: (i) expanding access & broadening financial market products, (ii) promoting long term
investment, (iii) increasing competition & efficiency, (iv) strengthening risk mitigation, and (v) improving
consumer and investor protection. Each of these pillars finds a correspondence in the reforms supported
by the current DPO series and is closely aligned with the ongoing policy dialogue on depth, efficiency and
resilience of the financial sector. In parallel, the GOI is also developing a draft Law on the Handling of
Banking Issues, Reinforcement of Coordination and Reorganization of Financial Sector Institutional
Authority. The draft Law aims to foster coordination amongst the different financial sector institutional
authorities in Indonesia, to enhance supervision and stability of the banking system. Whilst the timeline
for issuance of this draft Law is not yet clear, the key elements for enhancing banking stability are likely
to be amongst the Government priority and may also be incorporated in the FSOL. Finally, in January
2021, OJK launched the OJK Master Plan for Indonesia Financial Sector (MPSJKI) 2021 – 2025, focusing on
the following five priorities: (i) National economic recovery program (PEN) stimulus policy; (ii)
Strengthening the resilience and competitiveness of the financial services sector; (iii) Development of the
financial services sector ecosystem; (iv) Accelerating digital transformation in the financial services sector;
and (v) Strengthening OJK's internal capacity.
4. PROPOSED OPERATION
4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION
30. The program development objective of this programmatic operation is to support financial
sector reforms that will assist the Government of Indonesia (GoI) in achieving a deep, efficient and
resilient financial sector. The proposed operation is the second in a series of three programmatic
operations and the development objective remains the same as in DPO1. The policy actions supported
under the DPO series are consistent with the WBG’s approach to Maximizing Finance for Development
(MFD).15
31. This programmatic DPO series is structured around the following three pillars and set of objectives:
• Pillar A: Increasing the Depth of the Financial Sector. Pillar objectives: to expand the size of the
financial sector by increasing outreach (including to youth and women), broadening financial
market products and mobilizing long-term savings.
• Pillar B: Improving the Efficiency of the Financial Sector. Pillar objectives: to lower the costs for
individuals and enterprises by strengthening the insolvency and creditor rights framework,
protecting consumers and strengthening payment systems.
15 The operation is classified as “MFD-enabling” as some of the reforms, primarily reform areas 2 and 3, would facilitate
mobilization of household savings and private sector capital into long-term investments through the financial markets. With
intermediate objectives of broadening the financial market products and mobilizing long-term capital, the reforms would enable
channeling of international and domestic capital to fund long-term investment needs such as in the infrastructure sector.
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• Pillar C: Strengthening the Resilience of the Financial Sector. Pillar objectives: to strengthen the
capacity of the sector to withstand financial and non-financial shocks by strengthening the
resolution framework, advancing the effectiveness of financial sector oversight, implementing
sustainable finance practices and establishing disaster risk finance mechanisms.
32. The first DPO of the series supported a total of 9 reforms to increase the depth, improve the
efficiency and strengthen the resilience of the financial sector. Reforms focused on: (i) adopting a joint
policy framework on agent networks between BI and OJK; (ii) establishing standard reporting and
improving monitoring of issuances of debt securities in the private placement market; (iii) expanding the
number of long-terms instruments eligible for investments by pension funds and insurance companies;
(iv) enhancing supervision of insolvency practitioners; (v) introducing a new legal framework on general
data protection and privacy; (vi) issuing Quick Response (QR) Indonesia Standards to advance
interoperability of digital payment instruments; (vii) developing a single customer view based data
reporting by banks to enhance timeliness and accuracy of the insured deposit payout function of the LPS;
(viii) strengthening the institutional capacity of banks and supervisors on sustainable finance practices;
(ix) and establishing the legal framework for a disaster mitigation pooling fund.
33. The DPO series includes a mix of reforms that are highly relevant for supporting the
Government’s response to COVID-19, both during the emergency and the recovery phase, and for
tackling structural issues. First, the implementation of large-scale social assistance payments to protect
livelihoods during the crisis needs to be facilitated through reforms that increase the number of payment
channels. These include new payment service providers, changes to regulation for agents, and e-KYC, so
that the number of access points can be maximized and crowds and travel minimized. Reforms supported
under reform areas 1, 5 and 6 of the DPO series can prove helpful in facilitating efficient social assistance
payments.16 Second, both the government and the private sector will require significant financing for fiscal
stimulus and the post-containment recovery. To help reduce the adverse impact of future outflows of
foreign portfolio investors, there is also a need to develop new long-term instruments to broaden
Indonesia’s investor base and deepen its capital markets, a long-standing structural issue in the
Indonesian financial sector. Reforms supported under reform areas 2 and 3 will create additional financial
instruments and broaden the investor base, potentially contributing to increasing the financing options
for critical private and public investments in the longer-term. Third, the speed and strength of the
economic recovery will depend on the ability of firms to start investing, and consumers to start buying
again. This will require policies to preserve and repair the balance sheets of banks and corporates, while
avoiding moral hazard. Reforms supported under reform areas 4 and 7 to strengthen the framework for
insolvency and for banking resolution will therefore be critical to a robust recovery. Finally establishing a
pooling fund that could provide targeted and timely financing to beneficiaries through dedicated channels
in case of a disaster, as stated under reform area 9, can be highly relevant in dealing with disaster risks
during the recovery phase17
16 Reform #6 from DPO1, on the issuance of QR standards, has already become effective as BI included the broadening of QR
acceptance as one of the key measures adopted at the onset of the crisis to promote digital transactions.
17 A US$ 500 million Investment Project Financing (IPF) operation on disaster risk finance has been approved in January 2020 by
the World Bank Board. The operation aims at building and strengthening institutions for effective financial response to natural
disasters and health-related shocks. The proposed reform under this DPO is critical to complete the necessary legal framework
for the implementation of the IPF.
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34. The prior actions in DPO2 are aligned with the triggers proposed in DPO1. Table 4 provides a
comparison of the original DPO 2 triggers and the actual (proposed) prior actions for DPO 2. Out of the 9
original triggers, 5 present only minor changes in the wording of the original trigger to improve clarity; 3
present a change in the substance of the action aimed at strengthening its impact and expanding its scope
compared to the original one; 1 has been dropped while the overall area of reform is maintained.
Moreover, an additional reform area, related to advancing the effectiveness of financial sector oversight
has been added, to reflect the progress made in terms of policy dialogue made in this area over the past
year and highlight its relevance for ensuring a solid COVID-19 recovery phase.
Table 4: Comparison of Triggers and Prior Actions for DPO2

Trigger identified in Proposed DPO2 prior Status & Evidence Comment
DPO1 for DPO2 action (as of Feb 2021)
Pillar A: Increasing the Depth of the Financial Sector
T1. BI and OJK have PA1. To strengthen the Achieved The action has been
harmonized Laku Pandai coordination of financial modified to adopt a
and LKD programs in line inclusion activities and [Required gender focus and
with policy framework increase outreach to evidence: encompass a broader
and as evidenced women and youth, the Presidential financial inclusion
through [revised Borrower has (a) Regulation] framework,
regulations no. and established the Financial underpinned by a
date]. Inclusion Council and (b) presidential regulation.
mandated a sex- This is a stronger action
disaggregated financial as the national strategy
inclusion data system lays out the foundation
under the National for the implementation
Financial Inclusion of all financial inclusion
Strategy as evidenced by initiatives and activities
Presidential Regulation for the next 4 years
No. 114/2020.
T2. MoF has simplified PA2. To minimize tax Achieved Minor changes in the
taxes of capital market discrepancies among wording of the original
instruments and investors, the MOF has [Required trigger to improve its
established a tax level- reduced withholding evidence: clarity.
playing field for those taxes on debt securities Government
instruments as held by non-resident Regulation]
evidenced through entities as evidenced by
[regulation no. and by Government
date]. Regulation No. 9/2021.
T3. OJK has: (a) PA3. To encourage Achieved Minor changes in the
amended risk appropriate long-term wording of the original
management investments by pension [Required trigger to improve its
[requirements/ rules] of funds and insurance evidence: clarity.
pension funds; and (b) companies OJK has: (a) Two OJK
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introduced age-relevant amended the risk Regulations]

default investment management framework
choice for defined for non-bank financial
contribution funds as institutions; and (b)
evidenced through introduced default, age-
[regulation no. and relevant investments for
date]. pension funds
administering defined
contribution programs, as
evidenced by OJK
Regulation No.
44/POJK.05/2020 and
OJK Regulation No.
60/POJK.05/2020.
Pillar B: Improving the Efficiency of the Financial Sector

T4. MOLHR has PA4. To reduce the costs Achieved Minor changes in the
improved the and encourage the wording of the original
remuneration system of successful restructuring of [Required trigger to improve its
receivers and distressed firms MOLHR evidence: clarity.
administrators as has amended the MOLHR
evidenced through remuneration system for Regulation]
[regulation no. and insolvency practitioners, as
date]. evidenced by MOLHR
Regulation No. 18/2021
T5. OJK has enabled PA5. To enforce a more Achieved Minor changes in the
specialized market effective consumer wording of the original
conduct supervision to protection regime, (a) BI [Required trigger to improve its
financial services has established the legal evidence: BI clarity.
institutions in basis for market conduct Regulation; OJK
accordance with OJK law supervision of financial Guidance Letter]
as evidenced through services as evidenced by
[PDK regulation of BI Regulation
enforcement of market No.22/20/PBI/2020 on
conduct supervision]. BI consumer protection; and
has enabled specialized (b) OJK has introduced
market conduct market conduct
supervision as evidenced supervision for financial
through [BI regulation institutions as evidenced
no. and date]. by the issuance of OJK
Financial Service
Advertising Guideline,
third revision.
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T6. Application The action has been

Programming Interface PA6. To facilitate strengthened with the
(API) standardization innovation in payments Achieved adoption of an umbrella
could be introduced, services, BI has adopted regulation on payment
subject to the an activity-based, risk- [Required systems that goes
implementation based and principle-based evidence: BI beyond interoperability
timeline of the National approach in the regulation Regulation] and aims at making the
Payment System of payment systems, as payment system
Blueprint to be defined evidenced through the regulatory framework
by dedicated working issuance of BI Regulation more structured,
groups. No.22/23/PBI/2020. forward looking, and
agile.
Pillar C: Strengthening the Resilience of the Financial Sector
T7. The Borrower has PA7. To strengthen the The original trigger had
established the mechanisms for dealing Achieved two parts: the first one,
resolution fund and LPS with troubled banks, concerning the
has established the (a) the Borrower has [Required establishment of a
regulatory framework expanded the mandate of evidence: (i) Law resolution fund has been
for resolution planning LPS as a resolution No 2/20; replaced with an action
and resolvability authority and its Government aimed at strengthening
assessments as collaboration with OJK, as Regulation the mandate of LPS for
evidenced through [GR evidenced by Law No. 33/20; LPS mitigating the impact of
No. and LPS Regulation 2/2020 and its Regulation 3/20 COVID-19 on financial
No. ]. implementing regulations (ii) LPS stability. The second part
Government Regulation Regulation] of the original trigger,
No 33/2020; and LPS concerning the
Regulation No. 3/2020; resolution planning and
and (b) LPS has resolvability
established the regulatory assessments, has been
framework for resolution maintained.
planning and resolvability
assessments for dealing
with potential bank
failures, as evidenced by
LPS Regulation No.
1/2021.
T8. OJK has monitored PA8. To ensure Minor changes in the

the implementation of compliance with the policy Achieved wording of the original
sustainable finance on sustainable finance trigger to improve its
principles in (BUKU III under OJK Regulation No. [Required clarity.
and IV) banks, as 51/POJK.03/2017, OJK has evidence: OJK’s
evidenced through monitored the monitoring
[banks’ Sustainability implementation of assessment of
Reports to OJK]. sustainable finance banks’
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principles by major banks sustainability

(BUKU III and IV) as report]
evidenced by OJK
monitoring assessment on
banks’ sustainability
reports.
T9. The Borrower has Dropped The PA has been

established a pooling dropped but the overall
fund and adopted reform area is
appropriate operating maintained
procedures for its
management as
evidenced through
[PerPres no. and Date
and MoF Decree PMK
no. and date].
NEW. Proposed reform PA9. To ensure a more This is a new line of

area on advancing the effective and risk-based Achieved reforms. It reflects the
effectiveness of use of supervisory positive development of
financial sector resources, OJK has [Required the policy dialogue in a
oversight narrowed the definition evidence: OJK critical area like
of financial Regulation] supervision of financial
conglomerates, as conglomerates.
evidenced by OJK
Regulation No.
45/POJK.03/2020
regarding financial
conglomeration.
35. The proposed reforms are deeply interlinked as they simultaneously tackle important cross-
cutting issues related to the depth, efficiency and resilience and require coordination among key
financial sector’s government agencies. Deeper capital markets can impose competitive pressure on the
banking sector to innovate, become more efficient, and sustainably reach out to new segments. The
expansion of distribution channels of government payments beyond State-owned banks (currently
planned under reform areas #1 for DPO3) supports increased access and usage of financial services and
ultimately helps to foster banking competition. At the same time, financial deepening and inclusion would
help mobilize domestic resources to finance the economy, lessen the reliance on volatile external
financing and strengthen the capacity of the system to absorb shocks. Similarly, interventions aimed at
increasing the efficiency of the system (such as the one on insolvency and creditor rights) also have an
impact on financial stability by improving NPL management and lowering the risk of corporate distress
and disorderly corporate failures. This is even more relevant in a COVID-impacted context. The newly
proposed area of reform on increasing the effectiveness of financial sector oversight helps to keep the
focus on the importance of effective integrated supervision and asset quality.
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36. The proposed operation has allowed the Bank to make good progress in the policy dialogue on
the sensitive area of banking competition. While not yet part of the policy matrix of this operation,
banking competition is a rising area of engagement being addressed through both analytics and DPO-
related policy dialogue. Net interest margins (NIMs) and lending and deposit rate spreads have been
consistently higher in Indonesia than those seen in peer countries and other emerging markets, indicating
that the country had relatively high intermediation costs.18 Moreover, these intermediation costs are high
across different types of institutions such as SOBs, large banks, and small banks, even after controlling for
differences in the size and riskiness of their lending portfolios. Rather than being associated with
difficulties encountered by small banks in achieving economies of scale, high costs of intermediation in
Indonesia stem in large part from: (i) segmentation in the banking sector, with the largest-4 banks playing
a dominant role in funding and lending markets; and (ii) limited incentives and capacity to price risks
among banks of all sizes, including the largest banks. These two factors are inter-connected: state-owned
banks play a particularly dominant role in the banking system. Not only do they have access to funding at
relatively low rates, but they also benefit from servicing (low risk) government business as well as certain
under-served segments, such as MSMEs.19 In addition, credit information systems in Indonesia are at their
nascent stage, thus constraining the capacity of banks to price risks appropriately.
37. The design and preparation of the program considers the lessons learned from previous DPOs.
The Implementation Completion Reports for the Indonesia Financial Sector and Investment Climate
Reform and Modernization DPL (P130150) of 2012 and for the Financial Sector Reform and Modernization
DPL (P145550) of 2014 suggest that (i) a sectoral , as opposed to multisectoral, DPL approach bears more
focus and significant results; (ii) having extensive analytical work completed prior to the DPL is critical for
building consensus among technocrats and policymakers on specific reforms well in advance of the DPL;
(iii) the presence of a strong government counterpart to serve as coordinator is an important success
factor in a loan involving multiple institutions; and (iv) a programmatic series with a multi-year results
framework entails a longer-term mapping of reforms and can deliver more meaningful outcomes that are
in better alignment with the GoI’s own strategic plan. The design of the proposed DPO takes these
important lessons into account.
4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS
38. The first pillar of the DPO focuses on increasing the depth of the financial sector. The pillar has
the objective to expand the size of the financial sector by increasing outreach (including to youth and
women), broadening financial market products and mobilizing long-term savings. It includes the following
reforms:
18 For example, banks in Indonesia had an average NIM of 5 percent over the period 2015-2018. While the worldwide average for
NIMs was 3.9 percent in 2018, given its level of financial and economic development as well as its size, the benchmark NIM for
Indonesia should have been much lower, but was actually close to the world average at 3.5 percent in 2018.
19 Importantly, SOBs have a universal pricing policy within the country, with limited price differentiation across clients, which in
turn discourage the pricing of risks by all other banks because of their system-wide dominance.
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Reform Area 1: Increasing outreach of financial services
• Prior Action: To strengthen the coordination of financial inclusion activities and increase outreach to women
and youth, the Borrower has (a) established the Financial Inclusion Council and (b) mandated a sex-
disaggregated financial inclusion data system under the National Financial Inclusion Strategy as evidenced by
Presidential Regulation No. 114/2020.
• Trigger DPO3: Distribution of social assistance has been expanded through digital channels as evidenced
through [revised regulation no. and date].
• Result Indicator: Adults with transactional accounts (%). Baseline (2017): 49; Target (2023): 88; Sex-
disaggregated financial inclusion data regularly collected and made publicly available: Baseline (2020): No;
Target (2023): Yes.
39. Rationale of the PA: With over 95 million adults with no access to a bank, Indonesia has one of
the largest unbanked population in the world.20 This means limited scope for households to invest in their
future and to protect themselves from unexpected shocks. Expanding access to financial services is
therefore a key priority for the country. One challenge in advancing financial inclusion is the lack of
effective high-level coordination between ministries and agencies with complementary mandates. The
establishment of a National Financial Inclusion Council would provide a binding, legal basis for
collaboration and coordination and a joint shared focus on key financial inclusion outcomes. There are
also critical gaps in access to finance between men and women. Although Global Findex data does not
show disparities in account ownership between men and women, data on gender differentials in other
areas such as loan sizes and access to mobile money is scarce. To address gender disparities, a critical first
step is understanding where these disparities exist by integrating the relevant reporting into national-
scale financial inclusion data. The National Women’s Financial Inclusion Strategy (NWFIS)21 has indicated
that a lack of national sex-disaggregated data is a key gap within the financial sector, which undermines
the government’s financial inclusion efforts particularly in addressing gender gap in access to finance.22
40. Substance of the PA: With the support of DPO1, BI and OJK have adopted a joint policy framework
on agent networks to support the implementation of their respective agent network programs. DPO2
encompasses the compelling framework of the National Financial Inclusion Strategy (NFIS). The
Presidential Regulation underpinning the NFIS provides the legal basis for an effective coordination
structure, with binding reporting requirements and budget allocations for financial inclusion programs.
The NFIS establishes the Financial Inclusion Council, chaired by the President, and responsible for
monitoring and evaluating the implementation of the NFIS to achieve a 90% financial inclusion target by
2024. 23 The NFIS also acknowledges the importance of improving access to finance for women by
institutionalizing a sex-disaggregated data system, overseen by the Financial Inclusion Council. The system
will process and distribute supply-side sex-disaggregated data from government-executed MSMEs and
20 Based on the 2017 Findex data, the unbanked adults are 51.1% of the population, or about 96.5 million. Of these, females are
48.6% or 46.9 million and males are 51.4% or 49.6 million.
21 The NWFIS was officially launched in June 2020 by the Ministry of Women Empowerment (KPPA) and is cross-referenced under
the National Financial Inclusion Strategy launched in December 2020 through Presidential Regulation 114/2020.
22 National Council for Financial Inclusion and ADB (DNKI). (2020). National Women’s Financial Inclusion Strategy (Strategi
Nasional Keuangan Inklusif Perempuan). DNKI.

23 Main key roles of the Council are to coordinate, set up targets, and monitor the implementation of NFIS. The council enforces
coordination by requiring every member to submit annual action plans to ensure collaboration, avoid overlaps and lock the
commitment of each institution. The council is also responsible to ensure smooth collaboration between national and regional
implementing agencies..
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social protection programs,24 including data on differential access to and usage of transaction accounts,
and differences in the type and size of credit received by women and men.
The indicative trigger for DPO3 aims to improve efficiency, transparency, and accountability of G2P
payments while at the same time promoting financial inclusion. DPO 3 will support the revision of G2P
regulations with the aim to (i) expand the distribution channels of digital social assistance beyond state-
owned banks thus providing a fundamental input to tackling one of the structural issues currently
impeding an effective competition in the banking sector; (ii) enable beneficiary choice on type of account
(bank or mobile money) and payment system provider; and (iii) link separate infrastructures (ID, social
assistance program, payments) to bring up efficiency. The data system reform under DPO2 will enable the
government to assess the effectiveness of these reforms, as well as the need to revise them, by tracking
the progress of accounts usage (frequency of transactions).
41. Expected impact: Institutionalizing a sex-disaggregated data system, under the leadership of the
Financial Inclusion Council, will enable more evidence-based policymaking and set the stage for deeper
reforms and government commitments to addressing gender disparities in accessing and utilizing financial
services. Specifically, it will allow the NFIS and relevant line ministries to reveal more granular gender
disparities in access and usage of particular financial services (e.g., mobile money and credit), assess the
performance of government interventions in closing financial inclusion gender gaps in these areas, and to
formulate (or reformulate) targeted interventions to increase access and usage of financial services based
on data and evidence. See Annex 6 for a further detailed gender analysis.
42. Ongoing technical support & related FSAP recommendation: The proposed reforms are supported
by an ongoing TA project in promoting financial access and inclusion (P166791) funded by the Swiss State
Secretariat for Economic Affairs (SECO)’ Indonesia Financial Sector Strengthening Program (IFSSP) Trust
Fund that promotes the ownership and usage of transaction accounts either through physical or digital
channels, the Bill and Melinda Gates Foundation (BMGF) that supports the enhancement of digital
financial services by agent networks and for G2P payments, as well as a Social Assistance Strengthening
TA (P160590) in the area of strengthening social program delivery mechanisms. The FSAP
recommendation related to Financial Inclusion and Digital Financial Services requires stronger BI-OJK
coordination and collaboration over the digital financial services (DFS) oversight.
Reform Area 2: Broadening financial market products
• Prior action: To minimize tax discrepancies among investors, the MOF has reduced withholding taxes on debt
securities held by non-resident entities as evidenced by Government Regulation No. 9/2021.
• Trigger DPO3: In compliance with G20 commitments, BI and OJK have enabled the development of derivatives
market as evidenced through [regulation no. and date].
• Result Indicator: Outstanding IDR-denominated private debt securities to GDP (IDR trillion); Baseline (2018):
412; Target (2023): 711.
24For example, Kredit Usaha Rakyat (KUR), Ultra-Micro Financing (UMi), LPDB KUMKM, Program Keluarga Harapan, Kartu
Prakerja, etc.
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43. Rationale of the PA: Developing a deeper financial system while preserving financial stability is a key
priority for Indonesia. Indonesia’s capital markets are thin and fragmented, despite efforts to introduce
new financial instruments (e.g. securitization, infrastructure funds) to mobilize financing for development.
An inefficient taxation regime for certain capital markets instruments and the lack of liquid market for risk
hedging (derivatives) inhibits a flow of foreign investment into local currency financing. While the portion
of non-resident investors in the IDR government securities is relatively high (holding 24.5 percent of local
currency government bonds as of end-January 2021 from 37.1 percent as of end-February 2020 before
the onset of COVID), their interest for long-term, local currency, and non-sovereign credit has been very
limited given the combined risks. Other than the equity and the local currency government bond markets,
both of which attract all types of investors including non-residents, the rest of the market is relatively
underdeveloped. This presents challenges in funding certain strategic sectors, such as infrastructure,
which require a wide variety of fixed income instruments and structured products.
44. Currently, there are different withholding taxes for different financial instruments and investors,
leading to distortions in investment choices and segregation of market which inhibits liquidity. Moreover,
issuers of local-currency offshore corporate (or Komodo) bond market face effective double taxation of
the bond interest rate and the WHT, which cannot be passed on to the end-investor. This double taxation
increases the cost of funding by about 20 percent and is considered a binding constraint on the
development of this market, which is important for long-term local currency financing, especially for
infrastructure (there have been only two corporate issuers of Komodo bonds).
45. Substance of the PA: With the support of DPO1, a more cost-effective issuance of financial
instruments, particularly debt securities, has been facilitated with strong disclosure and monitoring
framework enabling the authorities to manage systemic risk. The DPO 2 reform intends to establish a tax
level playing field among capital market products – especially for debt instruments – and investors, which
in turn would provide fungibility across different segments of the financial market, thus improving liquidity
and increasing market attractiveness. This will happen through the issuance of Government Regulation
No.9 of 2021, which will harmonize and reduce the WHT rate to 10 percent on government and corporate
securities held by non-resident investors.
The third reform (DPO3) is aimed at the development the development of centrally cleared derivatives
transactions for risk hedging to facilitate long-term IDR financing for corporate and non-sovereign credit,
crowding in more investors who may otherwise have been hindered by a variety of risks – such as foreign
exchange risk and interest rate risk – into the IDR debt market.
46. Expected impact: The ultimate result intended from these reforms is to have broader and deeper
financial markets, represented by the size of IDR-denominated debt securities. The intended immediate
result is to mitigate the adverse impact of the pandemic on investor demand. The net fiscal impact of
reducing the WHT rate is likely to be net negative but relatively small in the short term and net positive in
the medium- to long-term. The negative effect is due to the lowering of the WHT on government
securities. While MoF expects that this will be partly offset by a concurrent reduction in the yield and
savings on interest cost, this depends on the grossing up behavior of investors, which is difficult to predict.
On the other hand, the reduction of the WHT is expected to relax a key binding constraint on bond
issuance. The increased supply of Komodo bonds will have a positive revenue impact, but the size depends
on the supply response. Foreign-currency corporate bonds may also see a supply increase, but since the
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WHT appears to be a less important obstacle to the development of this market, the impact may be more
muted.
47. Ongoing technical support & related FSAP/InfraSAP recommendations: The proposed reforms
are supported by an ongoing TA project on long-term finance (P166792) funded by the SECO Global Capital
Market Strengthening Facility (CMSF) and the Indonesia Infrastructure Finance Development – Financing
Support Pillar funded by GAC Canada. Among others, the related FSAP recommendations on Capital
Markets included: (i) Review the overall tax framework for financial products; and (ii) Develop interest
rate swaps and FX derivatives market. Similarly, the related InfraSAP recommendations included: MOF,
BI, and OJK to issue a joint strategy for development of risk management instruments, to include interest
rate swap and derivatives markets.
Reform Area 3: Mobilizing long-term savings
• Prior action DPO2: To encourage appropriate long-term investments by pension funds and insurance
companies OJK has: (a) amended the risk management framework for non-bank financial institutions; and (b)
introduced default, age-relevant investments for pension funds administering defined contribution programs,
as evidenced by OJK Regulation No. 44/POJK.05/2020 and OJK Regulation No. 60/POJK.05/2020.
• Trigger DPO3: MOF has incentivized contributions to and disincentivized withdrawal from pension and old-age
savings as evidenced through [revised tax policies and procedures no. and date].
• Result Indicator: Reduced portion of short-term investments (cash, bank deposits) in pension fund portfolios
(%); Baseline (2017): 19.3; Target (2023): 16.
48. Rationale of the PA: Indonesian pension funds and insurance companies are smaller than peer
countries and contributing less to growth than what they should be capable of.25 The pool of savings in
domestic institutional investors is not only small, but also featured by a relatively large portion of short-
term investments. The short-term nature of current investments is driven by the institutions’ risk aversion,
stemming from conservative legal and regulatory regime that needs updating. These institutions currently
put more emphasis on short-term investment performance instead of their long-term viability to honor
their obligations. Regulatory amendments are needed to motivate a behavioral change towards
investment. Besides, eligible long-term investment options that are attractive and meet the
characteristics of these investors need to be widened. Meanwhile, the small size of the saving pool is
influenced by the lack of proper incentives to long-term savings, such as tax exemptions on contributions
and penalty on early withdrawal.
49. Substance of the PA: With the support of DPO1, additional instruments for pension funds and
insurance companies’ (both conventional and Islamic-focused) long-term investment have been
facilitated through the introduction of new regulations that provide more alternatives for long-term
investments.26 The DPO2 reform intends to strengthen the regulatory framework in order to drive more
appropriate long-term investments by the pension funds and insurance companies. It specifically looks at
25 An OECD report (Pension Markets in Focus, OECD (2019) indicated that funded pension plans held assets of 1.8 percent of GDP,
well below the non-OECD average of 23.7 percent of GDP, let alone the OECD average of 54.2 percent. The report showed that
Indonesian pension funds held one of the highest allocations to “cash and deposits” (30 percent) among the non-OECD countries
surveyed.
26 These instruments include infrastructure funds, subnational bonds and debt securities issued in private placement with
certain criteria.
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the risk management framework for insurance companies and defined benefit pension funds to include a
long-term funding risk, inducing these institutions to focus on the ability to fund their long-term liability
instead of short-term returns. For defined contribution pension funds, the reform will introduce default
age-relevant investment options to encourage longer term investment for younger participants. Finally,
the third reform (DPO3) proposes a combination of improved tax policies and procedures to incentivize
pension and social security participants to contribute and to disincentivize withdrawals from pension and
old age savings.
50. Expected impact: These reforms will fundamentally change the current regulatory stance to be
more open to broader investment options in the pursuit of long-term return. The most immediate results
envisioned include an increase of longer-term investments and an accompanying decrease in the
proportion of short-term investment (cash and equivalent) held by pension funds and insurance
companies. The shift between cash/deposits to longer-term instruments would not be too sudden or
immediate or large to create a shock in the banking system. The policies require gradual implementation
within the institutional investors – i.e. through risk management policies of the institutional investors,
thus avoiding unintended consequences on the short-term funding cost of the banking sector. Ultimately,
it is expected that the policy changes will lead to an increased pool of savings in the pension and insurance
industries, and eventually an increase in their contribution to long-term investments.
51. Ongoing support & related InfraSAP recommendations: The ongoing reforms in the sector are
supported by a TA project on long-term finance (P166792) funded by the SECO Global Capital Market
Strengthening Facility (CMSF). The project leverages on previous work and engagement undertaken under
the Indonesia Infrastructure Finance Development – Financing Support Pillar (P158784) funded by GAC
Canada. The related FSAP recommendations on Capital Markets included: “Eliminate distortions in
institutional investors’ regulations to enhance their potential role in capital markets”. The related InfraSAP
recommendations included: (i) an amendment of policies on long-term investment by institutional
investors, including with respect to asset liability management, performance measurement, and risk
management; and, (ii) an action plan to increase the incentives for long-term savings by amending policies
associated with early withdrawals through tax penalties and/or phased withdrawal policies, and
introducing age-relevant default investment choice in defined contribution schemes.
52. The second pillar of the DPO focuses on improving the efficiency of the financial sector. The
pillar has the objective to lower the costs for individuals and enterprises by strengthening the insolvency
and creditor rights framework, protecting consumers and strengthening payment systems. The pillar
includes the following reforms:
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Reform Area 4: Strengthening insolvency and creditor rights
• Prior action DPO2: To reduce the costs and encourage the successful restructuring of distressed firms MOLHR
has amended the remuneration system for insolvency practitioners, as evidenced by MOLHR Regulation No.
18/2021.
• Trigger DPO3: To enhance creditor rights, the Borrower has submitted to Parliament the Amendment to the
Bankruptcy Law as evidenced by [submission letter no. & date].
• Result Indicator: Number of insolvency cases opened by the court, evidencing greater access by firms. Baseline
(2018): 30727; Target (2023) 430 (40% increase).
53. Rationale of the PA: The legal framework of Indonesia’s insolvency system is largely adequate, but
its implementation remains a challenge. Limited uptake by firms and lack of access by smaller firms have
been identified as the most salient shortcomings of the insolvency system.28 The high complexity of the
Bankruptcy Law, which was designed to address the needs of largest firms during the East Asian Crisis, is
one of the reasons explaining these shortcomings. In addition, the costs associated with insolvency
proceedings are excessively high, with the remuneration of insolvency practitioners (IPs) representing one
of the largest costs for distressed firms. The 2020 Doing Business report estimates the cost of insolvency
proceedings for Indonesia at 22% of the value of the estate, one of the highest in the region. Almost half
of such cost is explained by the remuneration of the IPs. In addition to the high remunerations currently
received by IPs, the system also allows IPs to receive a higher remuneration in a liquidation case than in a
reorganization case, effectively encouraging IPs to pursue the liquidation route even if this is not the most
economically efficient option. These shortcomings become more acute in the COVID-19 context, where
distressed but viable firms will need to restructure their debt and adjust to the challenges posed by the
pandemic.29 As currently designed, Indonesia’s insolvency system may be a key obstacle to complete such
adjustment, which may lead to the liquidation of viable firms and exacerbate the negative impact of the
COVID-19 crisis.30
54. Substance of the PA. DPO 1 supported the establishment of a clearer and more effective supervision
regime for insolvency administrators. DPO 2 deepens the reform by amending Regulation no. 11/2016
(amended by Regulation no. 2/2017) to improve the existing system of remuneration of IPs to (i) include
a maximum cap on their fees, (ii) lower the fees to be accrued in restructuring cases, and (iii) base the
accrual of IPs remuneration in liquidation cases on the value of the estate instead of the debts payable.
The Revision of the Bankruptcy Law, the proposed trigger for DPO 3, is expected to include (i) the
requirement that the plan protects the interests of dissenting creditors and ensures that they are treated
fairly; (ii) the improvement of the current system of appointment and supervision of Administrators; (iii)
the simplification of the conditions for debtors to obtain a cancellation of their remaining debts after the
27 The original baseline figure in DPO1 was 304. This has been adjusted to 307 based on update information collected by the Bank
during the DPO1 implementation support mission conducted in February 2021.
28 In a country with more than 60 million firms only around 300 insolvency cases are reported per year, and these cases are largely
limited to larger firms only.

29 A recent survey (October 2020) found that 3 in 10 firms in Indonesia need loan adjustment and 37% of these firms will be in
arrears in the next 6 months unless they can successfully reschedule their debts. See World Bank and Bappenas. 2020. COVID-19
impact on firms in Indonesia: Results from the Covid-19 Business Pulse Survey: Round 2: October 2020.
http://pubdocs.worldbank.org/en/579271610012405014/COVID19-Impacts-on-Indonesia-Firms.pdf
30 Strengthen insolvency frameworks to save firms and boost economic recovery, by Ceyla Pazarbasioglu and Alfonso Garcia
Mora, World Bank Blog, May 2020. https://blogs.worldbank.org/voices/strengthen-insolvency-frameworks-save-firms-and-

boost-economic-recovery.
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liquidation of their assets; and (iv) a clear list of priorities that determines which creditors enjoy
preferential treatment in case the assets of the debtor are not sufficient to receive payment.31 There is
also a possibility to establish a legal framework that would allow firms, in particular SMEs, to access the
insolvency system more efficiently, as well as an emergency mechanism to recognize and confirm informal
restructurings reached during crisis, such as the COVID-19 crisis, in the amendment of the Bankruptcy
Law.
55. Expected impact: By lowering the costs of insolvency procedures, approval of the new regulation is
expected to increase the number of insolvency cases (both restructuring (PKPU) and liquidation cases)
that are opened by the court every year. Considering there were 307 insolvency cases registered in 2018
in Central Jakarta and Surabaya, it is expected that the new regulations, together with the other actions
envisaged in DPO 1, would bring up the number of cases registered in these two courts from 307 in 2018
to 384 in 2022, which would imply 77 additional insolvency cases , or a 25% increase. These results would
be further complemented and supported by the enactment of the amendments to the bankruptcy law
foreseen under DPO 3. It is expected that the combined impact of the reforms under the three DPOs series
will bring up the number of cases registered in these two courts in 2023 to 430, which represents a 40%
increase.
56. Ongoing support & related FSAP recommendation: The WBG—through the IFC Advisory Program
(Investment Climate, Competition and Competitive Sectors, 602983)—supports the Ministry of Law and
Human Rights (MOLHR) on this resolving insolvency reform agenda. It is funded through the SECO’s Multi-
Country Investment Climate Program (MCICP). In the context of COVID-19, IFC plans to expand its support
to establish (i) a legal framework that would allow firms, in particular SMEs, to access the insolvency
system more efficiently, and (ii) an emergency mechanism for resolving widespread financial distress
generated by the COVID-19 crisis (including out-of-court workouts). These actions are aligned with the
2017 FSAP recommendations on insolvency and creditor rights, which included: (i) Provide clearer and
more effective regulation for the monitoring of insolvency practitioners. (ii) Re-design insolvency
practitioner remuneration framework; (iii) Reform the Bankruptcy Law to enhance creditor rights and
transparency.
Reform Area 5: Protecting consumers and personal data, and enhancing transparency
• Prior action DPO2: To enforce a more effective consumer protection regime, (a) BI has established the legal
basis for market conduct supervision of financial services as evidenced by BI Regulation No.22/20/PBI/2020 on
consumer protection; and (b) OJK has introduced market conduct supervision for financial institutions as
evidenced by the issuance of the OJK Financial Services Advertising Guideline, third revision.
• Trigger DPO3: OJK and BI have formally introduced specialized market conduct supervision tools for financial
services institutions as evidenced by [OJK regulation no. and date] and [BI regulation no. and date], respectively.
• Result Indicator: Number of Financial Services Providers (FSPs) undergoing financial consumer protection
examinations (offsite or onsite) per year. Baseline (2019): 10; Target (2023): 30.
31The amendment of the Bankruptcy Law has been included in the long-term National Legislation Program (Prolegnas) 2020 –
2024. The submission to Parliament is on track for 2021.
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57. Rationale of the PA: Only 29 percent of the population in Indonesia has sufficient financial capability
to make effective financial decisions.32 The rapid development in financial innovation and digital financial
product and services, particularly after COVID, has also brought further challenges to consumers. The
current consumer protection regime is slightly behind market development, especially in the area of
supervision. Regulations to implement market conduct supervision are still underway and there is
currently a lack of supervisory manuals and tools for market conduct supervision. Except for the capital
markets sector, the current oversight regime for financial service providers is focused primarily on
prudential aspects, with little attention paid to the business conduct of providers. This results in financial
markets that pose potential risks to consumers, while also diminishing the benefits of financial inclusion.
58. Substance of the PA: DPO 1 supported key reforms to promote a more robust consumer protection
practice in Indonesia through the submission to parliament of a bill on general data protection and privacy
of personal data.33 DPO 2 focuses on providing the legal basis for market conduct supervision to ensure
that providers treat consumers fairly by the issuance of regulations establishing specialized market
conduct supervision. At the end of 2020, BI updated its consumer protection regulation by virtue of BI
Regulation No 22/20/PBI/2020 to revise the 2014 regulation on consumer protection. The new regulation
aims to strengthen four areas of consumer protection regime in BI which include regulatory and policy
framework, (market conduct) supervision, complain handling mechanism, and financial literacy. This
regulation will create a more effective consumer protection regime and help maintain a healthier
relationship between consumer and service providers. As part of OJK efforts to bolster consumer trust in
financial service providers, market conduct inspections have started to be implemented. While awaiting
the OJK wide legal basis for market conduct supervision, a guideline on financial products and services
advertisements was issued in early 2021 and widely shared with financial service providers through the
Education and Consumer Protection Commission (EPK) Guidance Letter S-5/EP.12/2021. This has enabled
OJK to identify and enforce rules on misconduct related to misinformation in advertisements. Following a
gradual sequencing approach adopted in this line of reform, DPO 3 will ensure that the market conduct
supervision is implemented by the authorities through the development of supervision tools that, among
others, might include initial risk assessment processes and procedures.
59. Expected impact: The consumer protection reforms supported by this DPO are expected to contribute
to the quality dimension of financial inclusion while also enforcing market discipline through an increased
number of offsite and onsite supervisory activities to financial services providers undertaken by dedicated
market conduct supervisors. This will lead to a higher number of provider misconduct cases, such as
standard agreement violations, being detected. To this aim the original indicator under DPO 1, focusing
on financial product marketing misconduct, has been replaced with an indicator to measure broader
progress on market conduct supervision by focusing on the number of Financial Services Providers (FSPs)
undergoing financial consumer protection examinations (offsite or onsite) each year. BI and OJK’s progress
on consumer protection supported under this DPO will become the foundation for the development of
other regulations and procedures to strengthen the implementation of market conduct supervision. This
is even more relevant in a COVID context, where the amount of digital financial transactions has increased
exponentially and is exposing consumers to additional risks.
32Based on OJK’s National Survey on Financial Literacy and Inclusion (2017).

33The law was submitted to Parliament in February 2020. However, owing to the significant deliberations over the Omnibus Law
on Job Creation and the disruption caused by COVID-19, the Parliament has not yet been able to complete the deliberation
process on time, and the completion target has now been moved to 2021.
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60. Ongoing Support: The consumer protection reforms are supported by an ongoing TA project in
promoting financial access and inclusion (P166791) funded by the SECO IFFSP Trust Fund especially in the
quality of financial services reform area that focuses on supporting the development of robust consumer
protection practices in Indonesia. The data protection reforms are partly supported by the new TA
program on Digital Technologies for Inclusive Development in Indonesia (P171927) and, considering the
strong links between data protection and digital ID, the ongoing TA program with the Ministry of Home
Affairs and Ministry of Communications and Information Technology on identification for development
(ID4D) in Indonesia (P166294).
Reform Area 6: Strengthening Payment Systems
• Prior action DPO2: To facilitate innovation in payments services, BI has adopted an activity-based, risk-based
and principle-based approach in the regulation of payment systems, as evidenced through the issuance of BI
Regulation No.22/23/PBI/2020.
• Trigger DPO3: BI has regulated the activities of payment systems operators and payment service providers, as
evidenced through [regulation No.].
• Result Indicators: Adults making and receiving digital payments (%). Baseline: 34.6 (2017); Target: 58 (2023).
61. Rationale of the PA: Promoting innovation in the provision of payment services is essential to achieve
increased adoption of digital payments in Indonesia. Only 35% of Indonesian adults (71% of account
owners) made or received digital payments in 2017, a 12-percentage point increase over 2014. While the
increase was significant, there are still ample margins for further improvements. Among other factors, the
regulatory environment plays a key role in promoting such innovation. The payment system regulatory
framework in Indonesia is very fragmented, due to the adoption of an institutional and technology-based
approach. For instance, e-money is classified as chip-based and server-based instead of being regulated
as a single payment instrument as it is general practice in most jurisdictions. This approach, which is based
on technology and form factor, has impact on interoperability of e-money products. Similarly, the
institutional-based approach prevents alignment with the principle that same rules are adopted for the
same business, same risks and/or risk profile: the lack of this approach is often detrimental to innovative
emerging players.
62. Substance of the PA: with the support of DPO1, Quick Response (QR) Codes used for payments have
been standardized under the QRIS (QR Indonesia) scheme. This development has positively contributed
to broaden acceptance and advance interoperability of digital payment instruments in Indonesia. DPO2
goes beyond interoperability by supporting the issuance of a BI Regulation on Payments System, which
shifts from an approach to regulation based on the technology used to a risk-based approach more in line
with international guidance. The new approach consists of regulating each activity based on the level of
risk, setting the same requirements for activities bearing the same degree of risk. The Regulation will
streamline the licensing categories into two main types, payment service providers and payment system
operators. This will allow existing players to introduce new and better-tailored products in the market
more easily, while also facilitating entrance of new players and development of new business models. The
Regulation is also expected to increase interoperability by covering national standards for payment
system operators and payment service providers, including QRIS and Open API standard. The BI Regulation
on Payments System is intended to become the foundation for the development of other regulations
covering licensing, oversight and supervisory, and operations and provision of payment systems and
services.
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DPO3 will ensure that the strategic direction set in the general umbrella Regulation is effectively
implemented. Aligned with the foundation laid by BI Regulation on Payment System, DPO3 will support
the issuance of a comprehensive and risk-based regulation on licensing of payment system operators and
providers of payment instruments and services.
63. Expected Impact: In line with the rationale presented above, the reforms supported by this DPO are
expected to contribute to the development of a wider range of retail payment instruments and services,
increase competition in the market and, as a result, increased usage of digital payments. To reflect the
expanded scope of the reform compared to DPO1, the original indicator focused on payment service
providers adopting QR Indonesia Standards, have been replaced with an indicator on the percentage of
adults making and receiving digital payments.
64. Ongoing support & related FSAP recommendation: The reforms are supported by an ongoing TA
project on promoting financial access and inclusion (P166791) funded by the SECO IFSSP Trust Fund. The
related FSAP recommendation referred to the need to intensify “ongoing efforts to establish a National
Payment Gateway (NPG) to bring full interoperability for e-money and payment cards”.
65. The third pillar of the DPO focuses on strengthening the resilience of the financial sector. The pillar
has the objective to strengthen the resilience of the financial sector against financial and non-financial
shocks through strengthening the resolution framework, implementing sustainable finance practices and
establishing disaster risk finance mechanisms. A new reform area on advancing the effectiveness of
financial sector oversight has been added. The pillar includes the following reforms:
Reform Area 7: Strengthening the framework for resolution of troubled, non-viable banks
Prior action DPO2: To strengthen the mechanisms for dealing with troubled banks, (a) the Borrower has
expanded the mandate of LPS as a resolution authority and its collaboration with OJK, as evidenced by Law No
2/2020 and its implementing regulations Government Regulation No. 33/2020; and LPS Regulation No. 3/2020;
and (b) LPS has established the regulatory framework for resolution planning and resolvability assessments for
dealing with potential bank failures, as evidenced by LPS Regulation No. 1/2021.
Trigger DPO3: (a) LPS has adjusted its operational structure to implement the revised deposit insurance and
resolution frameworks and (b) Reporting on Single Customer View has been implemented by all commercial
banks.
Result Indicator: Number of days for LPS to pay out insured depositors in closed commercial banks. Baseline
(2019):90 days; Target (2022): minimum 90% of eligible depositors to be repaid within 7 working days; Number
of bank resolution plans finalized by LPS. Baseline (2019): 0; Target (2023): all systemic banks.
66. Rationale of the PA: As the deposit insurance agency and resolution authority, LPS plays a key
role towards pursuing financial stability, protecting depositors and ensuring the continuity of systemically
important financial services. LPS’ statutory mandates have been set out in the LPS and PPKSK Laws. Yet
the legal framework has not yet facilitated an effective resolution regime, in particular with regards to
assigning LPS with clear roles and responsibilities of a resolution authority and this has become critical to
effectively contain the possible COVID-19 impact on the financial sector and promote resilience
thereafter.
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67. Substance of the PA: DPO1 supported the issuance of an LPS regulation on the Single Customer
View (SCV) that helps LPS to enhance the timeliness and accuracy of its deposit payout function by gaining
access to banks’ records. DPO2 deepens the DPO1 reforms by strengthening LPS role in banking
resolution. The original trigger included the establishment of a resolution fund, which has been held off
due to the ongoing pandemic, as the establishment of the fund required the charging of levies to banks,
contrary to the spirit of pandemic-related forbearance measures34. The ongoing COVID-19 pandemic has
elevated the critical need and Government’s priority to maintain stability of the financial system, as
demonstrated through the issuance of Law no 2/2020 in March 2020 (which provides legal basis for the
financial authorities to take proactive measures towards mitigating threats to financial stability) and its
implementing regulations: Government Regulation 33/2020 and LPS Regulation 3/2020, issued in July
2020, which further clarify LPS’ mandate, roles and responsibilities in banking resolution. These law and
regulations authorize LPS specifically to (i) collaborate more closely with OJK in the handling of
problematic banks35; (ii) temporarily place funds in banks when needed36; (iii) play more active role in
liquidity management37; and (iv) handle non-systemic banks.38 Furthermore, DPO2 supports the issuance
of an LPS regulation on resolution planning, which entails annual preparation of resolution plans and
resolvability assessments, with assignment of resolution powers to LPS. Altogether, these regulatory
measures represent a significant, incremental measure that strengthens LPS’ role and responsibilities
towards resolution of troubled banks, thereby strengthening the financial sector’s resilience.
68. Expected impact: All actions supported by this DPO are expected to contribute to financial stability
by helping enhance the mechanisms for insured deposit payouts and resolution of any troubled, non-
viable banks. The abovementioned law and regulations will create a more effective and balanced regime
for dealing with failed banks by empowering LPS to intervene early, when the bank is still viable and before
equity is completely wiped out. This reform, together with the new regulations in resolution planning,
seeks to ensure that the LPS is better prepared for dealing with bank failures, especially those involving
systemic banks. As a result, the status, powers and capacities of the LPS will be enhanced, and the
Indonesian resolution framework for banks will be in line with the FSB´s Key Attributes for Effective
Resolution Regimes.
69. Ongoing support & related FSAP recommendation: The reforms are supported by ongoing TA project
on Strengthening LPS, funded by the SECO IFSSP Trust Fund. The related FSAP recommendations on crisis
management and resolution included: (i) Clarify the statutory objectives of each agency with respect to
crisis management and ensure robust accountability for the performance of these functions; (ii) Introduce
34 Nonetheless, the establishment of such ex-ante fund remains crucial in the longer run and continues to be part of the ongoing
policy dialogue (including the one on the FSOL) with the plan of resuming it when the pandemic subsides, and the economy begins
to recover.
35 LPS is now legally authorized to collaborate with OJK once a bank is classified by OJK as under ‘intensive’ supervision. This is an
earlier phase than the prior arrangement whereby classification for such collaboration is defined as under ‘special’ supervision.
Such collaboration with OJK includes the exchange of bank data and information, joint examinations and other activities in
preparation for resolution.
36 This is intended as a lender of last resort function, providing a temporary solution to help banks experiencing liquidity pressures
in the current absence of an emergency liquidity assistance framework. This function may need to be assessed carefully given
that it is usually undertaken by the central bank in other countries.
37 Whereby LPS may now undertake repo or sell securities to BI, issue debt securities, obtain loan from other parties and/or
obtain loan from the Government.

38 Whereby LPS may choose a method other than just Least Cost Test (LCT), taking into account five criteria: economic conditions,
complexity of bank problems, time need for handling, availability of investors and/or effectiveness of handling bank problems.
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regulations to require banks to calculate complete and accurate SCV balances for all insured deposits; (iii)
Establish a funding mechanism via the LPS to facilitate the resolution of systemically important banks
under the PPKSK Law; and (iv) Develop resolution options and implementation guidelines for banks, and
resolvability assessment and resolution planning frameworks for D-SIBs.
Reform Area 8: Implementing sustainable finance practices
• Prior action DPO2: To ensure compliance with the policy on sustainable finance under OJK Regulation No.
51/POJK.03/2017, OJK has monitored the implementation of sustainable finance principles by major banks
(BUKU III and IV) as evidenced by OJK monitoring assessment on banks’ sustainability reports.
• Trigger DPO3: OJK has issued a guidance on green taxonomy, as evidenced through OJK statement letter on the
taxonomy issuance and its dissemination among all banks.
• Result Indicator: Commercial banks complying with sustainable finance practices (%). Baseline (2018): 0; Target
(2023): 75.
70. Rationale of the PA: Sustainable finance practices refer to practices that integrate environmental,
social, and governance (ESG) risks and criteria in business and financing (lending or investment) decisions.
Indonesia’s demographics and geographic location significantly shape its environmental and social (E&S)
risk profile. Efforts to mitigate and adapt to climate change are critical for Indonesia, being the world’s
largest archipelagic country, as it is extremely vulnerable to climate change. Sustainable finance practices
include the mitigation of environmental issues such as air and water pollution, waste management, and
natural resources degradation.
71. The financial services industry plays an integral role in all market sectors and therefore it is inherently
susceptible to climate change related risks, including physical risks related to economic costs and financial
losses from climate-related events and transition risks related to the economic adjustment costs during
the transition towards a greener, carbon-neutral economy. On the physical risks front, for example, the
insurance sector could suffer significant losses from climate-related events; the banking sector is
inherently exposed to losses by clients and borrowers; and so are capital market investors exposed to
losses by their investments due to climate change-related events. In particular, sustainable finance
practices need an environmental, social, and governance framework that allows for identifying and
mitigating the risk of stranded assets, that are assets that may suffer from unanticipated or premature
write-downs, devaluations or conversion to liabilities in the context of climate change.
72. Substance of the PA: The sequencing of reform actions over the three DPOs reflect the step-by-step
strengthening of the policy dialogue in this reform area. DPO1 focused on introducing supervisory tools
required to monitor the implementation of sustainable finance practices as mandated by OJK Regulation
(POJK) 51/2017 on Implementation of Sustainable Finance Practices for Financial Services Institutions,
Issuers, and Public Companies. In the supervisor’s technical guidelines, it is requested for OJK supervisors
to assess the reports according to the following criteria: (i) Punctuality in submission of the Sustainability
Report; (ii) Quality and completeness of the items reported in those reports as mandated in POJK 51/2017;
(iii) Financing portfolio to green projects (green financing portfolio). Therefore DPO 2 focuses on ensuring
the implementation of sustainable finance principles through the OJK monitoring assessment of
sustainability reports issued by the largest banks (i.e. Buku III and IV categories according to the
Indonesian classification).
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As a stronger alternative to the original trigger for DPO 3 that required the monitoring of implementation
of sustainable finance principles for all banks, OJK has proposed the issuance of guidance on green
taxonomy. The latter is crucial in measuring and labelling of green and sustainable financial products as
well as in mobilizing financial flows into green sectors and ensuring the quality of investment/projects to
be satisfied to meet the ESG standards. The triggers are necessary to ensure the gradual implementation
and related monitoring of sustainable finance practices by all banks according to international best
practices, in parallel with an ongoing technical assistance dialogue.
73. Expected impact: The result intended from these reforms is that a substantial majority of entities
supervised by OJK are in compliance with the requirements for sustainable finance practices. The
proposed reforms would allow OJK to supervise the financial institutions and other entities on their
sustainable finance practices to enable such compliance. In turn, this would lower supervised entities’
exposure to losses arising from climate change-related events. Systemically, compliance to sustainable
finance practices will ultimately encourage broader compliance of ESG standards in the real sector. By
complying, the financial sector is also helping the Government to avoid risks related to its long-term
economic and infrastructure development by avoiding, for instance, technology lock-in which prevents
the Government to fulfill its international commitments and/or benefit from green growth export
opportunities.
74. Ongoing support: The reforms are supported by TA performed through the IFC Sustainable Finance
Program, as a continuation of the support from the Sustainable Banking Network. The broader green
finance agenda is then also supported under the SECO Global Capital Market Strengthening Facility
(CMSF).
Reform Area 9: Establishing disaster risk finance mechanisms
• Trigger DPO3: MOF has set up pre-arranged disbursement channels linked directly to the pooling fund
management for more effective disaster response as evidenced through [MoF Decree PMK no. and date].
• Result Indicator: Utilization of the pooling fund for disaster response financing. Baseline (2019): Pooling Fund
not established; Target (2023): Pooling fund is operational and ready to be used in disaster response, including
climate-related events.
75. Rationale of the reform area: Improved fiscal resilience to natural disasters, in particular climate-
induced disasters, and health-related shocks has become critical for Indonesia to achieve its development
goals. Risk in Indonesia is expected to further intensify with climate change, including from flooding, sea-
level rise, and coastal inundation. The current set up does not efficiently finance the uncertain cost from
such disasters and climate shocks, leading to significant fiscal uncertainty and disruptions in public
spending. To address delays in budget allocation, execution, and institutional coordination, the
Government is implementing its Disaster Risk Financing and Insurance Strategy, adopted in October 2018.
The central government (CG) from 2014-2018 spent between US$ 90 million and US$ 500 million (0.012-
0.05 percent of GDP) annually on disaster response and recovery while the SNGs spent an estimated
additional US$250 million over the same period. In total, CG and SNG post-disaster spending was
equivalent to 0.11% to 0.38% of total government expenditure. This still underestimates spending on
reconstruction which is often integrated in future capital investment projects or reallocated in the budget
and not tracked. These costs can be much higher in severe disasters years such as 2018 when the country
was struck by severe earthquakes and a tsunami.
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76. Substance of the reform area: Under DPO 1, the Government established the legal framework for a
disaster pooling fund by including it as a priority topic in the 2020 fiscal planning document submitted to
Parliament (KEM PPKF 2020) and reflecting it in Article 45 of the Law No 19 of 2020 regarding the State
Budget for 2020. The next steps under this reform area include the following: the actual mandate to
establish a new institution for the pooling fund through a Presidential Decree and the adoption of
appropriate regulations and procedures by MOF for its governance and management. The pooling fund
will be hosted in an existing BLU (Badan Layanan Umum/General Service Bureau) for the launch but may
move to a dedicated BLU in the future.
77. Expected impact: The pooling fund is expected to improve pre-arranged financing for the response to
climate shocks and disasters to support (i) more efficient use of funds from the state budget for post-
disaster expenditures; (ii) leveraging additional financial instruments through the pooling funds (e.g.
development partner contingent financing and market based risk transfer); (iii) linking funding to clear
pre-arranged disbursement channels and rules; and (iv) linking risk financing to all phases of disaster risk
management, including preparedness and prevention. The establishment of the pooling fund is the key
reform anchoring the implementation of the Government’s financial protection policy in broader fiscal
management and financial planning. The related result indicator focuses on making the pooling fund
operational and ready to be used in disaster response (including climate-related events).
78. Ongoing support: An ongoing TA program funded by SECO, the Global Risk Financing Facility (GRiF)
and UK FCDO supports MOF in the implementation of the DRFI strategy. The Indonesia Disaster Risk
Financing and Insurance (P173249) IPF with Performance Based Conditions (PBCs) approved in January
2021 is supporting the government in the operational set up of the Pooling Fund in line with good practice
public financial management and governance rules. This includes PBCs on the establishment of
appropriate frameworks for fund governance, resource allocations, fiduciary management through a risk
financing strategy as well as strengthening the funds operational performance and transparency. 39 The
IPF and this reform area complement each other but they are separate and distinct programs: the IPF
builds on this DPO series by supporting the operational implementation of the policy reforms. The TA also
supports additional areas under the DRF strategy as requested by MOF, including the public asset
insurance program, data innovation and risk analytics, exploring household and agricultural insurance, as
well as capacity building and insurance training.
Reform Area 10: Advancing the effectiveness of financial sector oversight

• Prior action DPO2: To ensure a more effective and risk-based use of supervisory resources, OJK has narrowed
the definition of financial conglomerates, as evidenced by OJK Regulation No. 45/POJK.03/2020 regarding
financial conglomeration.
• Trigger DPO3: The Borrower has submitted to Parliament the Draft Law on the Handling of Banking Problems,
Strengthening Coordination and Reorganization of Financial Sector Authorities that further strengthens the legal
protection of authorities involved in financial sector oversight and resolution.
• Result Indicator: Number of financial conglomerates receiving more intense integrated supervision. Baseline:
49 (2020); Target: 14 (2023)
39 Additional PBCs will support MOF to build the disbursement channels for resources from the pooling fund to flow efficiently,
effectively, and transparently. This will be achieved through actions that streamline processes and set up programs to quickly
allocate and disburse funds to relevant ministries and agencies to be used through existing government systems for enhanced
preparedness, response, and rehabilitation. All spending from the pooling fund will be subject to compliance with World Bank
Environmental and Social Safeguard Standards which will be supervised through the IPF implementation.
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79. Rationale of the PA: The institutional architecture of financial supervision and regulation has been a
focus area for policy makers in recent years and COVID-19 has flagged the urgency of strengthening it.
The establishment of OJK as the single supervisory agency in 201140 was driven largely by the complexity
of the financial system in Indonesia and the increasing presence of financial conglomerates (FCs), with
activities across several financial sectors. FCs pose risks to financial stability and require adequate
oversight, which motivated Indonesia to adopt an integrated model of supervision by OJK. All FCs in
Indonesia have been subject to three risk ratings: solo level, consolidated level and conglomerate level,
even though many had only one predominant activity (i.e. banking, insurance or capital markets) that
constituted the bulk of the conglomerate assets. From a supervisory perspective, this was a burdensome
and administrative process that required a disproportionate amount of resources. Moreover, the lack of
legal protection has raised the risk for these authorities involved in financial sector oversight, as well as
resolution, having to justify their actions in potential lawsuits, despite performance of their duties in good
faith, thereby undermining the effectiveness of financial sector oversight overall.
80. Substance of the PA: The DPO2 supports the issuance of OJK regulation 45/2020 that has clarified and
introduced thresholds for the identification of financial conglomerates. The criteria for a financial
conglomerate are that the total group assets are greater than one hundred trillion rupiah and the business
activities of the conglomerate cover more than one sector. Moreover, the OJK has the power to deem
two or more financial institutions that are in one group as the relationship of ownership and/or control
does not meet the threshold criteria referred to above. This deeming provision is important to avoid
regulatory arbitrage and to ensure there are no cliff effects for financial conglomerates that are close to
the minimum threshold. The OJK regulation reduces the number of financial conglomerates from 49 to
14, as the 35 conglomerates that fall outside of 45/2020 are medium and small conglomerates. These
clear definitions are expected to enhance OJK’s supervision of financial conglomeration as a financial
group with similar activities, thereby facilitating consolidated supervision instead of conglomerate
supervision.
81. At the same time, Article 27 of Law 1/2020 on mitigating COVID-19 threat to financial stability has
introduced a provision on the legal protection of the authorities and officials exercising their duties in
good faith. The DPO3 will seek to deepen the legal protection of financial authorities through the financial
Draft Law on the Handling of Banking Problems, Strengthening Coordination and Reorganization of
Financial Sector Authorities, which is currently being developed by the Government and expected to be
submitted to Parliament within CY2021.
82. Expected impact: The reform will allow more risk based and effective supervision of financial
conglomerates as only the 14 conglomerates with systemic impact are subject to the three-level rating
process. The remaining 35 conglomerates will be supervised in a more proportionate manner. 41
Furthermore, adequate legal protection is expected to ensure supervisory and resolution actions are
40Before, the micro prudential bank supervisory function was part of BI and NBFI supervision was performed by Bapepam-LK.
41This is in line with Core Principle #8 “Supervisory Approach” of the Basel Core Principles for Effective Supervision requiring
supervisors to develop and maintain a forward-looking assessment of the risk profile of individual banks and banking groups
proportionate to their systemic importance.
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taken without undue influence or threat of potentially significant legal consequences such as fines or
imprisonment.42
83. Ongoing support & related FSAP recommendation: The reforms are supported by the ongoing TA
project on strengthening financial sector supervision, funded by the SECO IFSSP Trust Fund. The related
FSAP recommendations on integrated supervision, and supervision and regulation of mixed and financial
conglomerates, include: (i) Strengthen the banking supervisory approach and continue enhancing
practices for the supervision of FCs; and (ii) enhance conditions for timely supervisory action by improving
legal protection against lawsuits for actions taken or omissions made in good faith.
Table 5: DPO Prior Actions and Analytical Underpinnings
Prior Actions Analytical Underpinnings
Pillar A: Increasing the depth of the financial sector

PA1 (Access & Usage). To strengthen
Developing and operationalizing a National Financial Inclusion Strategy
the coordination of financial inclusion
report (World Bank, 2018): the report provides practical guidance on
activities and increase outreach to
developing and operationalizing a national financial inclusion strategy with
women and youth, the Borrower has (a)
detailed operational tips coming from over 20 countries, including
established the Financial Inclusion
Indonesia. The report highlights several good practices coming from
Council and (b) mandated a sex-
Indonesia example: the importance of legal backing (presidential
disaggregated financial inclusion data
regulation) to ensure the effectiveness of financial inclusion program
system under the National Financial
implementation and the legal establishment of financial inclusion
Inclusion Strategy as evidenced by
secretariat through ministerial regulation.
The Capital Market Technical Note of the Indonesia Financial Sector

Assessment Program (FSAP; 2017) notes the limited demand for longer-
term corporate debt (especially if issued by non-SOE firms), as the
framework for financial instruments is ineffective to attract investment and
PA2 (Financial Market Products): To distorts investor allocations. It recommends an overhaul of the tax
minimize tax discrepancies among framework to enhance harmonization of tax rates across instruments and
investors, the MOF has reduced investors.
withholding taxes on debt securities held
by non-resident entities as evidenced by World Bank comments on the proposal to lower the withholding tax on
by Government Regulation No. 9/2021. local-currency bonds (2020) reviewed the Ministry of Finance’s proposal to
lower the WHT. Lowering the WHT may remove a key binding constraint
on the development of the local-currency offshore corporate (or Komodo)
bond market, as it will remove its effective double taxation. Reducing the
burden will make these bonds more attractive to issuers as a funding
option. The expected increase in bond issuance will lead to a revenue gain.
42 This is in line with Core Principle #2, Essential Criterion #9 of the Basel Core Principles for Effective Supervision: “Laws provide
protection to the supervisor and its staff against lawsuits for actions taken and/or omissions made while discharging their duties
in good faith.”
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PA3 (Long-term savings): To encourage The Capital Market Technical Note of the Indonesia Financial Sector
appropriate long-term investments by Assessment Program (FSAP; 2017) stated that policies to stimulate growth
pension funds and insurance companies of the institutional investor base are critical to improve conditions for long-
OJK has: (a) amended the risk term financing and the development of capital markets. Among others, the
management framework for non-bank regulatory features that drive pension investments to short-term products
financial institutions; and (b) introduced or that restrict their ability to use certain products to manage their
default age-relevant investment for portfolio.
pension funds administering defined The Infrastructure Sector Assessment Program (InfraSAP; 2018) – Finance
contribution programs, as evidenced by Chapter also identified that regulations governing institutional investor
OJK Regulation No. 44/POJK.05/2020 investment should be aligned in order to allow them to invest in new types
and OJK Regulation No. of instruments aimed at facilitating long-term investment especially in
60/POJK.05/2020. infrastructure (e.g. DINFRA/infrastructure funds).
Pillar B: Improving the efficiency of the financial sector
World Bank. 2016. Improvement of the Investment Climate of Indonesia:

Report on Insolvency & Debt Resolution, May 2016 (updated September
PA4 (Insolvency & Creditor Rights): To 2016 to include Annex II on selected issues related to the regulation of
reduce the costs and encourage the curators). Unpublished Confidential Report. The Report finds that the
successful restructuring of distressed remuneration system for insolvency practitioners (IPs) is perceived as
firms MOLHR has amended the excessive and does not promote successful reorganizations. Remuneration
remuneration system for insolvency of IPs is based on a percentage of either the amount of debt restructured,
practitioners, as evidenced by MOLHR or the proceeds obtained in liquidation proceedings, and is not constrained
Regulation No. 18/2021. by a maximum cap. The trigger responds to this need through regulatory
reform that would lower the cost of insolvency proceedings and encourage
the insolvency practitioners to achieve the reorganization of the debtor’s
business instead of his liquidation.
Diagnostic review on consumer protection and financial literacy (2014).

The assessment highlighted several challenges faced by OJK and BI in
PA5 (Consumer and Data Protection):
implementing the current consumer protection framework which includes:
To enforce a more effective consumer
(i) the absence of separation of its prudential and consumer protection
protection regime, (a) BI has
arrangements; (ii) the need to enhance consumer protection regulatory
established the legal basis for market
regime for innovative products and distribution; and (iii) the need to
conduct supervision of financial services
improve internal complaint resolution process and procedures.
as evidenced by BI Regulation PBI
No.22/20/PBI/2020 on consumer
Analysis on relevant data sources, current organizational structure, type
protection; and (b) OJK has introduced
and source of data, and risks related to consumer protection and market
market conduct supervision for financial
conduct for OJK and BI (2019): the assessment highlighted the need (i) to
institutions as evidenced by the
develop market conduct supervision gradually; (ii) to develop supervisory
issuance of the OJK Financial Service
framework based on risk identification and assessment; (iii) to produce
Advertising Guideline, third revision.
supervision manuals for supervision to ensure consistency and efficiency.
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Assessment of the Indonesia Legal and Regulatory Framework for

Payments (2021): This report is aimed at providing an overall assessment
of existing legislation in the field of payments to facilitate the identification
of regulatory gap that could be address at the omnibus law level and to the
extent that the National Payment System is concerned. Over the years,
within different technical assistance projects, the World Bank has delivered
PA6 (Payment Systems): To facilitate
some legal and regulatory assessment reports which also addressing the
innovation in payments services, BI has
payment sector. This assessment takes into consideration also analysis
adopted an activity-based, risk-based
undertaken, and recommendations provided under such reports, which are
and principle-based approach in the
still relevant for the present exercise.
regulation of payment systems, as
evidenced through the issuance of BI
The NPG and the Digital Economy (2020): the study aims (i) to assess the
Regulation No.22/23/PBI/2020.
National Payment Gateway (NPG), focusing on its current capabilities and
surrounding digital payments ecosystem, in the context of Indonesia
National Payment System (NPS), and determine if the NPG is able to
support the development of the digital economy in Indonesia; and, (ii) to
identify areas of improvement to support a larger and more mature digital
economy in Indonesia in the near future.
Pillar C: Strengthening the resilience of the financial sector

PA7 (Resolution Framework):
To strengthen the mechanisms for Under the Financial Safety Net (“PPKSK”) Law there is provision for
dealing with troubled banks, government regulation to be made to enable LPS to levy the banking
(a) the Borrower has expanded the industry for the purpose of establishing and maintaining a resolution fund
mandate of LPS as a resolution for systemic bank resolution situations. The 2017 FSAP highlighted that the
authority and its collaboration with OJK, design of such resolution fund needs to take into account the following
as evidenced by Law No 2/2020 and its considerations: purposes for which funding may be applied, preconditions
implementing regulations Government for use of resolution funding, potential scale of funding required, target size
Regulation No. 33/2020; and LPS and balance between the pre-funding by levy to banking industry and post-
Regulation No. 3/2020; and funding by Government initial funding and ex-post banking industry levy.
(b) LPS has established the regulatory At the same time, the 2017 FSAP also pointed out the importance of SCV in
framework for resolution planning and ensuring accurate information of depositors and timely payouts to insured
resolvability assessments for dealing depositors; thereby necessitating the issuance of a regulation requiring
with potential bank failures, as banks to calculate complete and accurate SCV deposits and depositors
evidenced by LPS Regulation No. data.
1/2021.
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PA8 (Sustainable Finance): To ensure

compliance with the policy on Indonesia – Sustainable Banking Network Country Progress Report
sustainable finance under OJK (Addendum; 2018) identified that while significant progress was made on
Regulation No. 51/POJK.03/2017, OJK the umbrella policy in 2017, more specific and practical guidance is
has monitored the implementation of required to assist financial institutions with managing specific
sustainable finance principles by major environmental, social, and governance (ESG) risks of their activities. OJK
banks (BUKU III and IV) as evidenced by should also develop further internal capabilities and define appropriate
OJK monitoring assessment on banks’ metrics to properly measure the level of implementation.
sustainability reports.
The 2018 TA provided to the OJK on the integrated supervisory and
PA9 (Financial Sector Oversight): To
regulatory framework observed that the OJK performed Level 3
ensure a more effective and risk-based
(conglomerate) integrated supervision of a large number of groups that are
use of supervisory resources, OJK has
dominated by banking activities. Level 2 consolidated supervision of such
narrowed the definition of financial
banking groups is a more appropriate approach and would also allow to
conglomerates, as evidenced by OJK
release resources allowing for more intense focus on the harmonization of
Regulation No. 45/POJK.03/2020
the supervisory framework and quality assurance within the OJK. It was
regarding financial conglomeration.
recommended the OJK streamline conglomerate supervision.
4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY
84. The proposed DPO is fully aligned with the WBG FY 21-25 Country Partnership Framework
(CPF)43 for Indonesia. In line with the four pathways to overcome the constraints to poverty reduction
and shared prosperity identified in the Systemic Country Diagnostic (SCD) Update, the new CPF is
structured according to four proposed engagement areas: (i) strengthening economic competitiveness
and resilience, (ii) improving supply of and access to sustainable infrastructure services, (iii) nurturing
human capital and (iv) strengthening management of natural assets, natural resource-based livelihoods
and disaster resilience, as well as one supporting beam: collecting more; spending and governing better.
The proposed operation directly contributes to the first CPF engagement area on strengthening economic
resilience and competitiveness that contains a specific objective focused on increasing the depth,
improving the efficiency and strengthening the resilience of the financial sector. Moreover, through the
reforms on the taxation of capital markets instrument and on disaster risk finance, it also contributes to
the key objective of collecting more and spending better under the same engagement area as well as to
the engagement area on the natural assets and disaster resilience. The proposed operation is also aligned
with the WBG GRID (green, resilient, inclusive development) approach.
85. Each of the proposed actions and reforms under this DPO are supported by technical assistance
projects that are ongoing or under preparation. The current SECO-funded Indonesia Financial Sector
Strengthening Program Phase II (IFSSP II – P166790, P166791) is supporting DPO reforms in the areas of
access and usage of financial services (Reform Area #1); protecting consumers and enhancing
transparency (Reform Area #5); strengthening payment systems (Reform Area #6)44, strengthening the
framework for resolution of troubled banks (Reform Area #7) and enhancing the effectiveness of financial
sector oversight (Reform Area #10). The SECO Global Capital Market Strengthening Facility (CMSF –
43 Report No. 157221-ID. Planned Board date: May 11, 2021.

44 Reform areas #1 and #6 are also support by a parallel TF from the Gates Foundation managed by the World Bank.
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P166792) and the Indonesia Infrastructure Finance Development – Financing Support Pillar funded by GAC
Canada (P158784) are jointly supporting the reforms on broadening financial market products (Reform
Area #2) and on mobilizing long-term savings (Reform Area #3). An IFC Advisory Program (Investment
Climate, Competition and Competitive Sectors, 602983) funded by SECO’s Multi-Country Investment
Climate Program (MCICP) supports the MOLHR on the resolving insolvency reform agenda (Reform Area
#4). The sustainable finance reforms (Reform Area #8) is supported by TA performed through the IFC
Sustainable Finance Program, as a continuation of the support from the Sustainable Banking Network.
Finally, the reform area on disaster risk finance (Reform Area #9) is supported by a Global Risk Financing
Facility (GRiF) and by a new investment lending operation on disaster risk finance and insurance approved
by the World Bank Board in January 2021.
4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS
86. The Government has conducted consultations with internal and external stakeholders on the
reform program. Given the number of government’s agencies involved in the proposed reform program
and the related coordination challenges, the Government, through the Ministry of Finance, has conducted
several rounds of consultations on the proposed matrix of reforms. The consultations involved technical
level officials of the Ministry of Finance, Bank Indonesia, OJK, Deposit Insurance (LPS),Ministry of Law and
Human Rights (MoLHR), Bappenas and Kominfo and were based on the ongoing analytical and capacity
building program on financial sector development led by the World Bank.
87. Consultations with the relevant industry’s stakeholders have also been conducted for selected
reforms. On agent banking, consultations with agent service providers have been conducted by GoI
through workshops and capacity building events that included established players such the largest banks
as well as fintech players and potential new entrants. Similarly, for the G2P digitization, informal
consultation workshops have been conducted as the process is still at an infant stage. The QRIS standards
were developed together with the payment system providers (QR service providers) and piloted together
(in two waves), before issuing the regulation. On the resolution framework, extensive consultations have
been conducted by LPS with the banking industry for the SCV regulation as well as for the establishment
of resolution fund. The ongoing resolution planning pilot exercise also entails intensive consultations with
the three participating banks, concerning the overall objective and approach of resolution planning and
resolvability assessment. For the reforms related to capital markets and institutional investors, the OJK
requires a consultation period where draft regulations are published for industry/public comment 45
(minimum 30 days). Oftentimes, focus group discussions are organized before the drafts are published.
Finally, the reforms related to disaster risk finance have been subject to ad-hoc civil society consultations46
organized by MOF, with a special focus on environmental and social safeguards, as part of the parallel
Indonesia Disaster Risk Financing and Insurance (P173249) IPF. All consultations have confirmed a broad
support towards the objectives of the different lines of reform.
88. The World Bank has also conducted consultations with the private sector and relevant
development partners. The Bank is regularly consulting with private sector counterparts as part of the
implementation of the financial sector TA program that underpins the DPO series. Moreover, the same
45 OJK organizes focus group discussions by invitation and publishes consultative draft regulations in the OJK website for public
comment within a set period which is at least 30 days since the publication.
46 These are dedicated CSO consultation on the ESS framework of Disaster Risk Finance and Insurance operation (P173249).
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objective of the DPO series has now become a key objective of engagement area on strengthening
economic resilience and competitiveness in the new Indonesia CPF and, as such, has undergone several
consultation rounds with different stakeholder groups. The support to reforms underpinned by ongoing
technical assistance has also been discussed and coordinate with SECO and with the Bill & Melinda Gates
Foundation, who are among the key development partners supporting financial sector development in
Indonesia. The Asian Development Bank (ADB) has completed its first Policy Based Loan (PBL) on
Promoting Innovative Financial Inclusion Program for Indonesia. This $500 mill PBL (plus $227 mill of co-
financing from KfW) was approved in December 2020 and supported complementary reforms focused on
(i) improving the government’s capabilities to better target and track financial inclusion efforts and
enhance supporting infrastructure; (ii) directly increase access to finance for micro, small, and medium-
sized enterprises (MSMEs) and underserved segments using innovative technology; and (iii) strengthen
the regulatory framework for digital financial services, data privacy, and consumer protection. Moreover,
the French Development Agency (AFD) is considering supporting this operation, after financing a separate
budget support operation in 2020 based on the same policy matrix.
5. OTHER DESIGN AND APPRAISAL ISSUES
5.1. POVERTY AND SOCIAL IMPACT
89. The results from the PSIA for DPO1 still apply in the context of the coronavirus pandemic, with
no immediate adverse impacts for the poor and vulnerable and benefits likely to emerge in the long
run. The link between financial sector stability and poverty in crises is well-established in Indonesia. During
the 1997-1998 Asian Financial Crisis, steep declines in employment, negative economic growth and rising
food prices caused the poverty rate to increase from 17.5 percent in 1996 to 24.2 percent in 1998. While
the ongoing pandemic is fast-evolving and much remains uncertain about its duration and depth of impact
in Indonesia, as described in section 1, many of the same adverse impacts in terms of lost earnings,
declines in employment and a small increase in poverty were felt in 2020 across the country. The DPO
series aims to increase the depth of the financial sector and improve its efficiency and resilience, which
contributes to a more favorable economic environment for growth and sustained poverty reduction in
the long run. As such, the program’s objectives promote financial stability and gain in significance in the
context of the ongoing pandemic.
90. Expanded access to financial sector services, including digitization of social assistance
payments, is expected to benefit the poor in the medium term, as well as women and small
entrepreneurs. The proposed DPO builds on reforms undertaken with support of DPO1 to continue
support to deepen the financial sector through increased availability of funds and access opportunities
through outreach, financial market products and long-term saving, improved financial inclusion by
supporting access to and usage of transaction accounts, and an increased pool of savings in the pension
and insurance industries that eventually contributes to long-term investments, will benefit all
Indonesians. The poor and vulnerable, and women in particular, would benefit from improvements in
efficiency of social assistance payments through digitization and ultimately integration of programs.
Overall, the policy reform is expected to expand access to financial services among the poor and
vulnerable, strengthening their ability to manage risks. The policy actions in this area will also support
Indonesia’s large aspiring middle class, especially women and small entrepreneurs, to benefit from an
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expanded set of economic opportunities. There is convincing evidence in the literature (e.g. Suri and Jack
(2016), Buri et al. (2018), Bharadwaj, Suri and Jack (2019), Aggarwal, Brailovskaya and Robinson (2020)
among others) that expanding financial access and outreach can have a number of significant positive
impacts, such as increased financial inclusion, lower transaction costs, better saving and labor supply
decisions, increased consumption or reduced poverty, and there could be outsized positive impact on
women.
91. Efficiency gains expected under the program lower costs for consumers and enterprises,
creating in the long run an environment conducive to growing businesses and reducing vulnerability.
Efficiency gains are expected under the reform that supports channeling of savings into the most
productive investment opportunities in a less costly, faster, safer and more transparent way through
consumer protection, a reliable insolvency framework, improved creditor rights, and adequate financial
infrastructure. The deepening of reforms around strengthening insolvency and creditor rights under the
proposed DPO may help support distressed firms, including those adversely impacted during the
pandemic, by preventing liquidation of viable firms. Promoting interoperability and regulation for agents
would provide a supporting environment for financial inclusion, which in turn will be fundamental to
opening up pathways to the middle class for one in two Indonesians who have escaped poverty and
vulnerability but still lack full economic security. This should ultimately lower costs for individuals and
enterprises, supporting business growth and job creation, especially in an era when enterprises are
increasing resort to digitalization in coping with new business needs 47 . The DPO’s policy actions will
therefore help in poverty reduction by promoting job creation through business growth.
92. The DPO contributes to building resilience at the system and household levels, protecting in the
long run vulnerable Indonesians against shocks such as those associated with the ongoing pandemic. In
November 2020, nearly 15 percent of Indonesian households had sold assets in the previous three months
to meet daily needs during the COVID-19 pandemic, just under 30 percent relied on savings to cope and
just over 35 percent borrowed from friends or family. Only 20 percent took a loan from a financial
institution. Female-headed households and those in the bottom 40 percent were more likely to rely on
social capital to cope with the crisis. A deeper financial sector and the improved access to formal banking
supported by the DPO would help households cope with unexpected shocks such as those they are now
facing. At the system level, the DPO’s policy actions build resilience of the financial sector and contribute
to financial stability by helping ensure effective resolution of troubled, non-viable banks, without severe
disruption and taxpayer losses, and establishment of disaster risk finance mechanisms. Gine and Love
(2010) shows that bankruptcy reforms which lower the overall time of resolution leads to success in
selecting healthy or viable firms for reorganization, improved prospects of recovery for viable firms and
decrease in the cost of resolution. The policy actions therefore contribute to creating a robust and stable
financial system, which is a pre-requisite for economic growth, job creation, and ultimately poverty
reduction and upward economic mobility for all Indonesians.
93. Introducing sustainable finance practices, by integrating Environmental, Social and Governance
(ESG) in business and financing decisions is expected promote a green finance agenda in Indonesia.
Endowed with rich natural resources, Indonesia is still facing challenges in implementing sustainable
47According to the COVID-19 Business Pulse Survey, as of October 2020, 66% of firms already used, started use or increased
their usage of the internet, social media, specialized apps or digital platforms in response to COVID-19.
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environmental and social management based on Good International Industry Practices (GIIPs), particularly
across sectors with large footprints and impacts (i.e. mining, palm oil). These challenges often stem from
threading the balance between economic growths, cost efficiency and impact management. The DPO
seeks to support the introduction of supervisory tools to monitor implementation of sustainable finance
practices, a fundamental first step to promote a green finance agenda in Indonesia. Such reform will foster
transparency and accountability in decision making and business practices by incentivizing adoption of
designs and business decisions with least impacts and harm to people and the environment and rewarding
those that comply with ESG standards.
94. Establishment of a disaster pooling fund is expected to improve Indonesia’s resilience to natural
disasters, health pandemic, and climate change, by enabling stable allocation and fast mobilization of
financing for disaster prevention, preparedness as well as emergency response. Such improved
resilience is expected to minimize further impacts and harms on disaster affected communities that may
otherwise be inadequately mitigated in the absence of a mechanism to mobilize quick financing in the
event of disasters. Evidence from a body of literature (e.g. Cai et al. (2015), Groh and McKenzie (2016),
Cai (2016), Cole, Gine and Vickery (2017) among others) using randomized controlled trials are on-balance
supportive of reasonably high take-up of such disaster risk insurance by individuals and firms, and positive
effect on their livelihoods through increased production and investment. Implementation of the recently
Board-approved Indonesia Disaster Risk Finance and Insurance (P173249) project will complement
Reform Area 9. Further, the introduction and establishment of an Environmental and Social Management
System (ESMS), which is an inherent element of the pooling fund, is expected to enhance the country’s
capacity to mainstream environmental and social management in pre- and post-disaster response thus
contributing to strengthening the green finance agenda.
5.2. ENVIRONMENTAL, FORESTS, AND OTHER NATURAL RESOURCE ASPECTS
95. As indicated in the Environment and Poverty/Social Analysis Table in Annex 4, one prior action
will have positive effects on the environment. Embedding sustainability in the practices of the financial
services industry via Reform Area #8, with emphasis on climate change, will contribute to disaster
prevention, disaster risk mitigation, climate change adaptation, and environmental management in
Indonesia. In addition, Reform Area #9 has the potential to lead to significant positive effects on the
natural and human/built environment. This is because the DRFI Strategy recognizes that disaster
management financing is needed for three periods – non-disaster, emergency response, and
rehabilitation/reconstruction. Within the non-disaster period, pre-disaster financing is to be used, inter
alia, for disaster risk mitigation activities or programs, disaster prevention programs, and education on
disasters. None of the other prior actions will have positive or negative effects on environment, forest, or
other natural resources.
96. Since the enactment of Law No. 24 of 2007 concerning Disaster Management, the Government
has substantially strengthened Indonesia’s capacity to manage disasters. The National Disaster
Management Authority (BNPB) was established in 2008, with a goal to coordinate the activities of relevant
line ministries and agencies in all stages of disaster management – pre-disaster, during disaster, and post-
disaster. Subnational local disaster management agencies (BPBDs) have been set up in all 34 provinces
and in 90 percent of the 480 cities and regencies, in keeping with the principle of placing ownership of
disaster management at the local level. Since 2004, Indonesia has made substantial investments in
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hydrometeorological and geophysical monitoring stations and early warning systems. Indonesia has
developed good building codes and standards to mitigate risk of seismic damage. The Government is
embarking on an Indonesia Resilience and Reconstruction (IDRAR) Program to further strengthen disaster
preparedness and emergency response systems and enhance post-disaster rehabilitation and
reconstruction programs. BNPB has developed substantial capacity to perform its coordinating functions
and currently has a staff of more than 500 persons. Capacity of the BPBDs varies, from substantial in large
cities such as Medan to weak in small jurisdictions. IBRD is supporting capacity-building with the loan of
$160 million for the Indonesia Disaster Resilience Initiatives Project (IDRIP) that became effective in
October 2020, with BNPB as the executing agency and the Indonesia Meteorological, Climatology and
Geophysics Agency (BMKG) as the PIU. IDRIP aims to strengthen the GoI, BNPB and communities to better
prepare for, and respond to future natural hazards by scaling up disaster awareness activities and
strengthen emergency management for faster and more effective disaster response. IDRIP will also
support GoI and BMKG by strengthening its monitoring capacity for geophysical hazards, developing
impact-based forecast and warning products, and institutional strengthening and capacity development.
The aim is to improve service delivery systems to support DRM operations and strengthen future planning
for disaster resilience. Other development partners have been providing capacity-building and technical
advice in this sector, including JICA, USAID, Germany, and France.
5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS
97. As noted in the latest (2017) Public Expenditure and Financial Accountability (PEFA) report,
many components of Public Financial Management (PFM) systems and processes employed in
Indonesia are considered reasonably well settled. These reflect strengths in its basic financial compliance
deliverables, though some residual areas there need further strengthening. The central fiscal budget
formulation and execution rely on a robust framework of rules and structures, based on a clear legislative
framework and transparency, which support a high degree of compliance with rules and approved
procedures. Overall, fiscal management has been prudent, delivering a measure of macro-fiscal stability
and fiscal sustainability. However, significant challenges remain in revenue generation and in ensuring
that public expenditures are allocated and spent more effectively and efficiently to realize government
development targets. Although procedures for performance budgeting and developing a multi-year
orientation in fiscal management have been in place for some years, mainstreaming these effectively
continues to be a challenge and is a hurdle to delivering PFM deliverables. These challenges have in one
way or another affected fiscal discipline and outturn, strategic allocation of resources and efficient service
delivery.
98. Weaknesses also happen related to the strategic allocation of resources, the accountability of
budget implementation and the efficient delivery of public services. These are areas where reform
efforts are taking place, but where these efforts have yet to realize full performance. Among the most
important of these ongoing efforts are: (i) improving budget credibility by strengthening the budget
forecast, establishing consistent budgeting framework, and increasing revenue mobilization and
compliance of tax and non-tax collection; (ii) improving the system capacity to deliver infrastructure
outcomes by harmonizing the selection, implementation and monitoring of capital expenditure with
formal guidelines and oversight, efficient management of public assets, as well as consolidation and
monitoring of public procurement operations; (iii) the inclusion in the budget of performance information,
linking resource planning in the most appropriate manner for better service delivery; (iv) promoting
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effective reporting of subnational budget execution; and (iv) strengthening internal audit and external
audit, and control measures.
99. The Badan Pemeriksa Keuangan (BPK), as Indonesia’s Supreme Audit Institution (SAI), has a
mandate to conduct financial audits of all central government entities, as well as local government
agencies. BPK expressed an unqualified opinion in the last two years to central government financial
reports. The audit reports include audit reviews on: (i) the internal control system; (ii) compliance with
laws and regulations; and (iii) the status of follow-up audit findings and recommendations. Besides
government entities, BPK conducts audits on Bank Indonesia (Central Bank), State Own Enterprises (SOE)
and other entities that manage state finances. BPK audits include financial audits, performance audits and
audits for special purposes.
100. BPK audit reports on the central government’s financial statements are submitted to parliament
within two months after the issuance of the unaudited financial statements. Audit reports on line
ministries are submitted semi-annually, three months after the end of the semester, together with a
summary (IHPS). Article 21 in Law No. 15/2004 on State Financial Oversight requires parliament to review
the follow-up of BPK’s audit reports through hearings with the relevant ministries. The role of reviewing
the follow-up of BPK’s audit reports is distributed among the relevant parliamentary commissions, which
conduct scrutiny and discussions on the audit reports as part of their regular hearings scheduled with the
counterpart ministries. The depth of each hearing may differ depending on the urgency of the issues
raised in the audit report and the capacity of each commission.
101. The PEFA assessment also demonstrates that Indonesia shows good performance on indicators
about comprehensiveness and transparency of PFM. The “A” score for PI-9 on Public Access to Fiscal
Information shows that the fiscal transparency is at the highest standard, as information on government
budget made available to the public in printed form through press releases, advertorials for media or
through MoF website.48 However, one element of public access to fiscal information needs to improve to
ensure full and timely access to the BPK’s audit reports, including publication of full reports on the BPK’s
website. Good step already taken in 2015 with the establishment of the Information and Communication
Center (PIK) where public can obtain audit reports upon request. Summaries of audit reports also included
in the BPK’s biannual semester reports. This is still part of ongoing reform in BPK to fulfill the requirement
for the SAIs to have their reports easily accessible and publicly available.
102. BI’s financial statements have received a clean audit opinion. Bank Indonesia is consistently able
to maintain its duties and function in establishing, implementing monetary policy, regulating and
maintaining payment system in Indonesia. As a result, BPK has expressed an unqualified (clean) opinion
on the latest financial statements of BI for FY 2019, which means BI has maintained clean opinion for 17
consecutive years. Several DPL/DPF, including the Third Fiscal Reform DPL and the First Financial Sector
Reform DPF, were disbursed successfully in 2019 and 2020.
48The Government makes available to the public eight elements, including all five basic elements, in accordance with the specified
time frames. Basic elements include: (i) Annual executive budget proposal documentation; (ii) Enacted budget; (iii) In-year budget
execution reports; (iv) Annual budget execution report; (v) Audited annual financial report, incorporating or accompanied by the
external auditor’s report. Additional elements include: (i) Prebudget statement and other external audit reports; (ii) Summary of
the budget proposal; (iii) Macroeconomic forecasts.
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103. The loan disbursement will follow the standard Bank procedures for DPOs. The loan amount,
once becomes effective and subject to i) successful completion of the Program and ii) adequacy of the
macroeconomic framework, will be disbursed into a foreign currency account of the borrower at Bank
Indonesia that forms part of Indonesia’s official foreign exchange reserves. The equivalent rupiah amount
will immediately be transferred to the General Operational Treasury account of the borrower that is used
to finance budget expenditures, as the loan is intended to be used to support the general Government
budget. This arrangement has been followed for the previous DPOs. The borrower, within 30 days, will
provide to the Bank a written confirmation that this transfer has been completed, and provide to the Bank
any other relevant information relating to these matters, including the exchange rate of the conversion
from US dollars to rupiah, that the Bank may reasonably request. Disbursements of the loan will not be
linked to any specific purchases and no procurement requirements have to be satisfied, except that the
borrower is required to comply with the standard negative list of excluded items that may not be financed
with Bank loan proceeds, as defined in the General Conditions for IBRD Financing: Development Policy
Financing (dated December 14, 2018, revised on August 1, 2020, December 21, 2020 and April 1, 2021). If
any portion of the loan is used to finance ineligible expenditures as so defined in the General Conditions,
the Bank has the right to require the Government to promptly, upon notice from IBRD, refund the amount
equal to such payment to the Bank. Amounts refunded to the Bank will be cancelled from the loan. The
closing date of this operation will be June 30, 2022.
104. The GoI continued its efforts to reform the country’s public procurement system by issuance
the new Government Procurement Regulation No.16/2018 through Presidential Regulation (Perpres
16/2018). The Perpres 16/2018 introduced some improvement in the following areas: (i) increasing
quality of procurement planning; (ii) promoting transparent, open and competitive procurement; (iii)
strengthening the institution and human resource capacity; (iv) developing procurement e-marketplace;
(v) using ITC technology and electronic transaction; (vi) promoting use of local content and national
standards; (vii) increasing the opportunities for the Micro and SMEs; (viii) promoting use of research and
creative industries; and (ix) implementation of sustainable procurement. All procurement activities
carried out by ministries/institution/local government are required to mandatory use e-procurement
system (Sistem Pengadaan Secara Elektronik, SPSE) to ensure more transparency and efficiency of the
public procurement process. New version of SPSE ver 4.3 was launched by National Public Procurement
Agency (LKPP) in early 2019 with some additional improvements in the system. However, the measure of
the performance of the procurement system is currently limited to few indicators as shown in Table 7
in Annex 6, and requires a well-developed mechanism to adequately monitor and evaluate the success
of the reform initiatives in improving the quality and the performance. Comprehensive assessment of the
Indonesia public procurement system using the revised Methodology for Assessing Procurement Systems
(MAPS) which is being jointly conducted by the National Public Procurement Agency (LKPP), the Word
Bank, and ADB. The assessment recommendations and action plan are expected to help the Government
prioritize the reform activities needed to enhance the effectiveness of the public procurement system in
supporting Government policy objectives, improve the efficiency in public services delivery particularly
in emergency situations like the COVID-19 pandemic, and increase the public trust while achieving value
for money with high transparency and good governance.
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5.4. MONITORING, EVALUATION AND ACCOUNTABILITY
105. Progress on the results indicators will be monitored and evaluated by the Borrower. The Fiscal
Policy Agency (BKF) under the MoF is the executing agency for the DPO series while BI, OJK, LPS, Ministry
of Law and Human Rights (MoLHR) and Ministry of National Development Planning (Bappenas) act as
implementing agencies. The BKF team is well-coordinated and given their experience in implementing
DPOs with the World Bank, they are increasingly well prepared to obtain and share data to monitor
implementation against the agreed results indicators.
106. The World Bank closely follows this progress through supervision activities: an implementation
support mission for DPO1 was completed in February 2021. The mission rated the M&E and program
management as Satisfactory in light of the continued policy dialogue that has led to the preparation of
DPO2 and has allowed the Bank to closely monitor the implementation of the reforms initiated under
DPO1. Two of the original indicators (e.g. Number of financial product marketing violations detected per
year, under reform area #5 and number of payment services providers facilitating QR payments for reform
area #6;) have already bypassed their 2022 target ahead of time49. Other six indicators are on track for
achieving the target on time, while for the remaining three indicators (i.e. two related to reform area #1
and one related to reform area #4) no updated information could be collected during the mission. Of
these three indicators, the two under reform area #1 have now been replaced to better align them to
their respective reforms. The target timeline for all indicators has been moved to end-2023 to allow
sufficient time for measuring the impact of the supported reforms after the completion of DPO3.
107. Grievance Redress. Communities and individuals who believe that they are adversely affected by
specific country policies supported as prior actions or tranche release conditions under a World Bank DPO
may submit complaints to the responsible country authorities, appropriate local/national grievance
redress mechanisms, or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints
received are promptly reviewed in order to address pertinent concerns. Affected communities and
individuals may submit their complaint to the WB’s independent Inspection Panel which determines
whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures.
Complaints may be submitted at any time after concerns have been brought directly to the World Bank's
attention, and Bank Management has been given an opportunity to respond. For information on how to
submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit
http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank
Inspection Panel, please visit www.inspectionpanel.org.”
6. SUMMARY OF RISKS AND MITIGATION
108. The overall risk level is moderate, with three sources of risk rated as “substantial”. The
pandemic has elevated macroeconomic risks compared to the first operation. Moreover, the risks on the
technical design of the program and on institutional capacity remain rated as substantial. Measures to
mitigate these risks are outlined below. The potential benefits of the proposed operation outweigh the
49The first indicator had a baseline of 200 (2018) violations detected per year and a target of 400 (2022). As of March 2021 the
indicator had reached 483. The second indicator had a baseline of 8 (2018) payment service providers and a target of 40 (2022).
As of March 2021, it had reached 48 providers. Both indicators have now been replaced with new ones.
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residual risks and warrant IBRD’s assistance.
109. Macroeconomic risks are substantial due to the potential negative impacts of the COVID-19
crisis on the PDO. The ongoing crisis poses risks to the resilience (PDO C) and depth (PDO A) of the financial
sector. A marked deterioration of corporate liquidity and solvency conditions could negatively affect the
banking sector through lower profitability and deterioration of asset quality. This risk is mitigated by the
banks’ overall high capital adequacy and adequate loss provisioning. Moreover, the observed decline in
bank credit growth at the end of 2020, in an environment with existing low private sector credit to GDP,
might hamper the recovery from the COVID economic crisis. This operation is contributing to mitigating
these risks by supporting improvements in the insolvency regime (reform area #4) and in strengthening
the resolution framework (reform area #7) and financial sector oversight (reform area #10). A shift in
global financial conditions as advanced economies recover and US sovereign yield curve steepens could
lower capital flows and increase liquidity pressures in domestic financial markets. In the short-term, this
risk is mitigated by Indonesia’s strong external buffers. BI also has room to stabilize debt markets and
maintain exchange rate flexibility amid low inflation. This operation is mitigating this risk in the medium
term by supporting the mobilization of long-term savings and expansion of the investor base (reform area
#3). With an array of technical assistance and analytical works, the World Bank remains strongly engaged
in policy dialogue with the government and financial authorities to address critical reforms and policy
actions.
110. The risks around technical design of the program and institutional capacity remain rated as
substantial. The implementation of the reforms supported by this DPO series requires strong
collaboration among a large number of implementing agencies, including regulators, and close
coordination by the MoF as executing agency.50 This requires a solid policy dialogue with each counterpart
to make sure there is full alignment on the achievement of the program. Moreover, the proposed reforms
require intense technical work to guarantee their completion and the sustainability of their results. The
DPO mitigates this risk by providing strong technical support to each implementing agency under a parallel
advisory service and analytical program in close coordination with the international development
partners. The technical assistance program will be flexibly adapted to new emerging priorities related to
the impact of COVID-19 and the policy dialogue on key reform areas will be shaped accordingly.
111. The stakeholders risk is considered as moderate. This risk is mostly related to the preparation of
an Omnibus Law on financial sector. The Omnibus Law is expected to cover all major sectoral (i.e. banking,
capital markets, insurance, pension funds etc.) and institutional (i.e. OJK, BI, LPS, KSSK) laws related to the
financial sector. While the preliminary structure of the Omnibus Law is consistent with the reforms
supported through this DPO, there is a risk that the significant amount of time and resources required by
this engagement might divert attention from the implementation of the ongoing reforms. To date, the
World Bank has been actively involved through MOF in supporting the preparation of the FSOL with
knowledge sharing sessions bringing international expertise and technical advice on the different subjects
covered by the law. Such involvement helps to mitigate possible risks related to stakeholders while also
transforming this into an opportunity to further align the reforms undertaken in the Omnibus Law with
those supported under this DPO series.
50 Annex 5 provides an overview of all the implementing agencies involved in this operation.
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Table 6: Summary Risk Ratings
Risk Categories Rating

1. Political and Governance ⚫ Moderate
2. Macroeconomic ⚫ Substantial
3. Sector Strategies and Policies ⚫ Moderate
4. Technical Design of Project or Program ⚫ Substantial
5. Institutional Capacity for Implementation and Sustainability ⚫ Substantial
6. Fiduciary ⚫ Moderate
7. Environment and Social ⚫ Low

8. Stakeholders ⚫ Moderate
9. Other
Overall ⚫ Moderate
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ANNEX 1: POLICY AND RESULTS MATRIX
Prior actions and Triggers Results

Reform Area and Prior Actions under DPO 1 Prior Actions under DPO 2 Triggers for DPO 3 Baseli
Lead Counterpart (March 2022) Indicator Name Target
(November 2019) (March 2021) ne

Reform area #1: PA DPO2 #1. To strengthen
Increasing access the coordination of
and usage financial inclusion activities
T#1. Distribution of social
and increase outreach to 49
assistance has been 88 [2023]
women and youth, the #1: Adults with transactional [2017]
Counterparts: BI, PA DPO1 #1. BI and OJK expanded through digital
Borrower has (a) accounts (%)
OJK, Min of have adopted a joint policy channels as evidenced
established the Financial
Women framework on agent through [revised regulation
Inclusion Council and (b)
Empowerment networks to support the no. and date]. #2: Sex-disaggregated
mandated a sex-
(KPPA), Bappenas implementation of agent financial inclusion data
disaggregated financial
network programs (namely regularly collected and made
inclusion data system Yes
Laku Pandai and LKD). publicly available No
under the National [2023]
Financial Inclusion Strategy [2020]
as evidenced by
Presidential Regulation No.
114/2020.
Reform area #2: PA DPO1 #2. OJK has PA DPO2 #2. To minimize T#2. BI and OJK have enabled
Broadening established standard tax discrepancies among the development of
financial markets reporting and improved investors, the MOF has derivatives market in
products monitoring of issuances of reduced withholding taxes compliance with G20 #3: Outstanding IDR- 412 711
debt securities in the private on debt securities held by commitments as evidenced denominated private debt [2018] [2023]
placement market, as non-resident entities as through [regulation no. and securities (IDR trillion)
Counterparts:
evidenced by Regulation No. evidenced by Government date].
OJK, MOF, BI
30/POJK.04/2019. Regulation No. 9/2021.
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Reform area #3: PA DPO2 #3. To encourage T#3. MOF has incentivized
Mobilizing long- appropriate long-term contributions to and
term savings investments by pension disincentivized withdrawals
funds and insurance from pension and old-age
companies OJK has: (a) savings as evidenced through
Counterparts:
PA DPO1 #3. OJK has amended the risk [revised tax policies and
OJK, MOF
expanded the number of management framework procedures no. and date].
long-term instruments to be for non-bank financial
eligible for investments by institutions; and (b) #4: Portion of short-term
pension funds and insurance introduced default age- investments (cash, bank 19.3
relevant investment for 16 [2023]
companies, as evidenced by deposits) in pension fund [2017]
OJK Regulations Nos. pension funds portfolios (%)
27/POJK.05/2018, administering defined
28/POJK.05/2018 and contribution programs, as
29/POJK.05/2018. evidenced by OJK
Regulation No.
44/POJK.05/2020 and OJK
Regulation No.
60/POJK.05/2020.

Reform area #4: PA DPO2 #4. To reduce the T#4. The Borrower has
Strengthening costs and encourage the submitted to Parliament the
insolvency and PA DPO1 #4. MOLHR has successful restructuring of Amendment to the
creditor rights enhanced supervision of distressed firms MOLHR Bankruptcy Law to enhance #5: Number of insolvency
framework insolvency practitioners as has amended the creditor rights as evidenced cases opened by the court, 307 430
evidenced by MOLHR remuneration system for through [submission letter evidencing greater access by [2018] [2023]
Regulation No. 37/2018 and insolvency practitioners, as no. & date].
Counterpart: firms
Decree No. M.HH- evidenced by MOLHR
MOLHR 03.AH.06.06/2019. regulation No. 18/2021.
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Reform area #5: PA DPO2 #5. To promote a T#5. OJK and BI have
Protecting more effective consumer operationalized market
consumers and protection regime, (a) BI conduct supervision as
PA DPO1 #5. KOMINFO has
personal data and has established the legal evidenced through the
introduced a new legal
enhancing basis for market conduct development of initial risk
framework on general data
transparency supervision of financial assessment processes and
protection and privacy #6: Number of Financial
services as evidenced by BI procedures for market
through the submission of Services Providers (FSPs)
Regulation conduct supervision. 30
Counterparts: the draft law on Protection undergoing financial 10
No.22/20/PBI/2020 on
OJK, BI, Kominfo of Personal Data to the consumer protection [2019] [2023]
consumer protection; and
Parliament, as confirmed by examinations (offsite or
(b) OJK has introduced
Nota Dinas No. ND- onsite) per year.
market conduct supervision
61/KF/2020 from the Fiscal
for financial institutions as
Policy Agency, Ministry of
evidenced by the issuance
Finance.
of the OJK Financial Service
Advertising Guideline, third
revision.
Reform area #6: PA DPO2 #6. To facilitate T#6. BI has regulated the
PA DPO1 #6. In order to
Strengthening innovation in payments activities of payment systems
advance interoperability of
payment systems services, BI has adopted an operators and payment
digital payment instruments, #7: Adults making and
activity-based, risk-based service providers, as 34.6 58
BI has issued QR Indonesia receiving digital payments
and principle-based evidenced through [2017]
Counterpart: BI Standard (QRIS) for adoption (%) [2023]
approach in the regulation [regulation No.].
by financial service providers
of payment systems, as
as evidenced by BI
evidenced through the
Regulation No.
issuance of BI Regulation
21/18/PADG/2019.
No.22/23/PBI/2020.

Reform area #7: PA DPO1 #7. LPS has PA DPO2 #7. To strengthen T#7. (i) LPS has adjusted its #8: Number of days for LPS to 90 7 [2023]
Strengthening the enhanced the timeliness and the mechanisms for dealing operational structure to pay out insured depositors in [2018]
framework for accuracy of its insured with troubled banks, implement the revised closed commercial banks
resolution of deposit payout function deposit insurance and
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troubled, non- through the development of (a) the Borrower has resolution frameworks; (ii) All
viable banks the single customer view expanded the mandate of LPS has completed the #9: Number of bank 0 systemic
(SCV) based data reporting LPS as a resolution adoption of Single Customer resolution plans finalized by banks
[2019]
by member banks, as authority and its View (SCV) by ensuring LPS [2023]
Counterparts: LPS
evidenced through issuance collaboration with OJK, as reporting on SCV by all
and MOF
of LPS Regulation No. evidenced by Law No commercial banks
5/2019. 2/2020 and its
implementing regulations
Government Regulation
No. 33/2020; and LPS
Regulation No. 3/2020; and
(b) LPS has established the
regulatory framework for
resolution planning and
resolvability assessments
for dealing with potential
bank failures, as evidenced
by LPS Regulation No.
1/2021.
Reform area #8: PA DPO2 #8. To ensure T#8. OJK has issued a
Implementing compliance with the policy guidance on green
sustainable PA DPO1 #8. OJK has on sustainable finance taxonomy, as evidenced
finance practices strengthened the under OJK Regulation No. through OJK statement letter
institutional capacity of 51/POJK.03/2017, OJK has on the taxonomy issuance
banks and supervisors in monitored the and its dissemination among
Counterpart: OJK #10: Commercial banks 0
implementing OJK implementation of all banks.
complying with sustainable 75 [2023]
Regulation No. sustainable finance [2019]
finance practices (%)
51/POJK.03/2017 on principles by major banks
sustainable finance practices (BUKU III and IV) as
by issuing internal guidelines evidenced by OJK
for banking supervisors. monitoring assessment on
banks’ sustainability
reports.
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Reform area #9: T#9. MOF has set up pre- Pooling
Establishing arranged disbursement fund is
Disaster Risk PA DPO1 #9. The Borrower channels linked directly to operation
Finance has taken steps to establish the pooling fund al and
Mechanisms the legal framework for a management for more Poolin ready to
disaster mitigation pooling effective disaster response as g Fund be used in
fund by including it in the evidenced through [MoF #11: Utilization of the pooling not disaster
Counterpart: MOF 2020 Budget Law as fund for disaster response
Decree PMK no. and date]. establi response,
evidenced by Article 45, Law financing shed including
of the Republic of Indonesia climate-
No 20 of 2019 regarding the [2019]
related
State Budget Fiscal Year events[20
2020. 23]
Reform area #10: T#10. The Borrower has

Advancing the PA DPO2 #9. To ensure a submitted to Parliament the
effectiveness of more effective and risk- Draft Law on the Handling of
financial sector based use of supervisory Banking Problems,
oversight resources, OJK has Strengthening Coordination
narrowed the definition of and Reorganization of #12: Number of financial 49 14
NA conglomerates receiving more
financial conglomerates, as Financial Sector Authorities [2020] [2023]
Counterpart: OJK intense integrated supervision
evidenced by OJK that further strengthens the
Regulation No. legal protection of
45/POJK.03/2020 regarding authorities involved in
financial conglomeration. financial sector oversight and
resolution.
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Indonesia Investment and Trade DPL (P172439)
ANNEX 2: FUND RELATIONS ANNEX
Press Release: IMF Executive Board Concludes 2020 Article IV Consultation with Indonesia
March 2, 2021
Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the 2020
Article IV consultation51 with Indonesia.
The Indonesian economy is gradually recovering, owing in part to a bold, comprehensive, and coordinated
policy response to address the socio-economic hardship inflicted by the COVID-19 pandemic in the first
half of 2020. Real GDP increased by 3.2 percent in 2020:Q3 (q/q, s.a.) and is expected to have contracted
by a modest 1.9 percent in 2020 as a whole. Headline inflation reached 1.7 percent (y/y) at end-2020,
below the Bank Indonesia’s target band (3±1 percent), partly due to a strong harvest leading to lower food
prices. The current account deficit is expected to have narrowed to 0.5 percent of GDP in 2020, mostly
due to a relatively sharper contraction of imports.
The outlook is positive. Real GDP is projected to expand by 4.8 percent in 2021 and 6 percent in 2022, led
by strong policy support measures, including increased public investment and COVID-19 vaccine
distribution plans, as well as improved global economic and financial conditions. Inflation is projected to
rise gradually to 3 percent (y/y) at end-2021. The current account deficit is projected to widen to 1.5
percent of GDP in 2021, reflecting higher imports driven by economic recovery. Credit growth is expected
to pick up in 2021 with stronger activity, albeit remaining below nominal GDP growth due to increased
risks to asset quality and bank profitability. The uncertainty surrounding the growth outlook is
nevertheless larger than usual. Early widespread vaccination is an upside risk, while delays could lead to
a more protracted pandemic, a downside risk. The macro-financial fallout of the pandemic and economic
downturn could be larger-than-expected, and credit conditions could be slow to improve.
Executive Board Assessment52
Executive Directors commended the authorities’ containment measures and supportive macroeconomic
policies, which have been instrumental in cushioning the economic impact of the pandemic. They noted
that Indonesia’s strong fundamentals and prudent macroeconomic policy track record have contributed
to its economy’s resilience.
Directors noted that supportive monetary and fiscal policies along with the envisaged increase in public
investment should help foster economic recovery. They observed that risks to the outlook are tilted to
the downside, mainly due to domestic and global uncertainties associated with the pandemic. Early
51 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A
staff team visits the country, collects economic and financial information, and discusses with officials the country's economic
developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the
Executive Board.
52 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A
staff team visits the country, collects economic and financial information, and discusses with officials the country's economic
developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the
Executive Board.
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completion of a widespread vaccination program, however, is an upside risk, and Directors were
encouraged by the recent increase in the funding for the health policy response to the pandemic. They
observed that Indonesia has the macroeconomic policy space to provide additional support if downside
risks materialize. They welcomed the measures to foster transparency and ensure the effectiveness of
pandemic-related spending.
Directors commended the authorities’ commitment to return to the statutory budget deficit ceiling by
2023, noting the importance of unwinding the exceptional measures in a balanced manner. They stressed
the need to underpin the fiscal rules with a medium-term fiscal strategy that includes revenue measures.
Higher government revenues would help create space to boost development spending and support
sustainable and inclusive growth. Capacity building support will be crucial.
Directors agreed that maintaining an accommodative monetary policy stance, contingent on the inflation
outlook, is appropriate. They noted the authorities’ strategy of pursuing monetary accommodation
through a combination of lower policy interest rates and government bond purchases by Bank Indonesia
in the current exceptional circumstances. To balance the benefits and risks of temporary monetary budget
financing, they welcomed Bank Indonesia’s plan to conduct bond purchases in 2021 only as a last resort
under the market mechanism. They suggested that clarifying the last-resort criteria would help enhance
the monetary policy framework and safeguard Bank Indonesia’s operational independence. Directors also
noted the role of exchange rate flexibility in absorbing shocks.
Directors noted that the banking system remains stable, but continued monitoring on bank asset quality
is warranted. They emphasized that proactive loan loss provisioning will be critical for banks’ ability to
weather any deterioration in asset quality. They noted that additional targeted policy steps to revive credit
might be necessary if bank lending to the private sector does not rebound. Directors also highlighted the
importance to continue upgrading crisis management and resolution frameworks.
Directors welcomed the authorities’ push for structural reforms with the omnibus bill on job creation, as
well as their plans to close infrastructure gaps. They encouraged the authorities to sustain the reform
momentum, with a focus on developing a medium-term government revenue strategy, financial
deepening and digitalization, and fostering a greener economy and tackling challenges related to climate
change.
Indonesia: Selected Economic Indicators

2016 2017 2018 2019 2020 1/ 2021
Est. Proj.
Real GDP (percent change) 5 5.1 5.2 5 -1.9 4.8
Domestic demand 4.6 5 6.1 4 -2.8 5.1
Of which:
Private consumption 2/ 5 5 5 5.2 -2.5 5
Government consumption -0.1 2.1 4.8 3.2 6 5
Gross fixed investment 4.5 6.2 7.9 4.4 -4.7 4.5
Change in stocks 3/ 0.2 -0.1 0.4 -0.6 -0.3 0.3
Net exports 3/ 0.1 0.3 -1.2 1.4 0.8 -0.1
Saving and investment (in percent of GDP)
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Gross investment 4/ 33.9 33.7 34.6 33.8 32.5 32.7

Gross national saving 32 32.1 31.6 31.1 32 31.2
Prices (12-month percent change)
Consumer prices (end period) 3 3.6 3.2 2.6 1.7 3
Consumer prices (period average) 3.5 3.8 3.3 2.8 2 2
Public finances (in percent of GDP)
General government revenue 14.3 14.1 14.9 14.2 12.1 12.1
General government expenditure 16.8 16.6 16.6 16.4 17.8 18
Of which: Energy subsidies 0.9 0.7 1 0.9 0.7 0.6
General government balance -2.5 -2.5 -1.8 -2.2 -5.7 -5.9
Primary balance -1 -0.9 0 -0.5 -3.7 -4
General government debt 28 29.4 30.4 30.6 35.7 40.1
Money and credit (12-month percent change; end of period)
Rupiah M2 10 8.3 6.3 6.5 11.5 7
Base money 3.9 8.9 0.2 2.9 -6.5 7
Claims on private sector 7.7 7.2 10.3 5.8 -0.5 5.6
One-month interbank rate (period average) 6.5 5.6 6.2 6.4 4.5 …
Balance of payments (in billions of U.S. dollars, unless otherwise indicated)
Current account balance -17 -16.2 -30.6 -30.4 -5.5 -17.4
In percent of GDP -1.8 -1.6 -2.9 -2.7 -0.5 -1.5
Trade balance 15.3 18.8 -0.2 3.5 23.4 20.3
Of which: Oil and gas (net) -4.8 -7.3 -11.4 -10.3 -9.2 -8.7
Inward direct investment 3.9 20.6 20.6 23.5 13.6 18.8
Overall balance 12.1 11.6 -7.1 4.7 6.7 16.4
Terms of trade, percent change (excluding oil) 0.4 1.3 0.4 -2.7 -5.4 1.7
Gross reserves
In billions of U.S. dollars (end period) 116.4 130.2 120.7 129.2 135.9 152.3
In months of prospective imports of goods and
7.6 7.1 7.1 9.9 7.9 8.1
services
As a percent of short-term debt 5/ 213 237 201 204 207 217
Total external debt 6/
In billions of U.S. dollars 320 352.5 375.4 403.5 416.6 446.9
In percent of GDP 34.3 34.7 36 36.1 38.3 38.5
Exchange rate
Rupiah per U.S. dollar (period average) 13,306 13,383 14,231 14,140 14,541 …
Rupiah per U.S. dollar (end of period) 13,473 13,568 14,390 13,866 14,050 …
Memorandum items:
Jakarta Stock Exchange (12-month percentage
15.3 20 -2.5 1.7 -5.1 …
change, composite index)
Oil production (thousands of barrels per day) 820 815 810 805 710 707
Nominal GDP (in trillions of rupiah) 12,402 13,590 14,838 15,834 15,841 16,939
Sources: Data provided by the Indonesian authorities; and IMF staff estimates and projections.
1/ Based on data as of January 29, 2021 and does not include the national accounts data for 2020:Q4 released on February
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5, 2021. The actual real GDP growth rate in 2020 was -2.1 percent.
2/ Includes NPISH consumption.
3/ Contribution to GDP growth (percentage points).
4/ Includes changes in stocks.
5/ Short-term debt on a remaining maturity basis.
6/ Public and private external debt.
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ANNEX 3: LETTER OF DEVELOPMENT POLICY
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ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE
Significant poverty, social or

Significant positive or negative
Prior Actions distributional effects positive or
environment effects
negative

PA1 (Access & Usage): To strengthen
the coordination of financial inclusion
activities and increase outreach to
women and youth, the Borrower has
(a) established the Financial Inclusion
Council and (b) mandated a sex- No Yes, positive
disaggregated financial inclusion data
system under the National Financial
Inclusion Strategy as evidenced by
PA2 (Financial Market Products): To

minimize tax discrepancies among
investors, the Borrower has reduced
withholding taxes on debt securities
No No
held by non-resident entities as
evidenced by Government Regulation
No. 9/2021.
PA3 (Long-term savings): To

encourage appropriate long-term
investments by pension funds and
insurance companies OJK has: (a)
strengthened the risk management
framework for non-bank financial
institutions; and (b) introduced
default age-relevant investment for No No
pension funds administering defined
contribution programs, as evidenced
by OJK Regulation No.
44/POJK.05/2020 and OJK Regulation
No. 60/POJK.05/2020.
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PA4 (Insolvency): To reduce the
costs and encourage the successful
restructuring of distressed firms
MOLHR has amended the
No No
remuneration system for insolvency
practitioners, as evidenced by
MOLHR regulation no. 18/2021.
PA5 (Consumer Protection): To

promote a more effective consumer
protection regime, (a) BI has
established the legal basis for
market conduct supervision of
financial services as evidenced by BI
Regulation No.22/20/PBI/2020 on
consumer protection; and (b) OJK No Yes, positive
has introduced market conduct
supervision for financial institutions
as evidenced by the issuance of the
OJK Financial Service Advertising
Guideline, third revision.
PA6 (Payment Systems): To facilitate

innovation in payments services, BI
has adopted an activity-based, risk-
based and principle-based approach
in the regulation of payment No Yes, positive
systems, as evidenced through the
issuance of BI Regulation
No.22/23/PBI/2020.

PA7 (Resolution framework): To
strengthen the mechanisms for
dealing with troubled banks,
(a) the Borrower has expanded the
mandate of LPS as a resolution No No
authority and its collaboration with
OJK, as evidenced by Law No 2/2020
and its implementing regulations
Government Regulation No. 33/2020;
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and LPS Regulation No. 3/2020; and

(b) LPS has established the regulatory
framework for resolution planning
and resolvability assessments for
dealing with potential bank failures, as
evidenced by LPS Regulation No.
1/2021.
PA8 (Sustainable finance): To ensure

compliance with the policy on
sustainable finance under OJK
Regulation No. 51/POJK.03/2017, OJK
has monitored the implementation of
sustainable finance principles by Yes, positive No
major banks (BUKU III and IV) as
evidenced by OJK monitoring
assessment on banks’ sustainability
reports.
PA9 (Financial Sector Oversight). To

ensure a more effective and risk
based use of supervisory resources,
OJK has narrowed the definition of
financial conglomerates, as No No
evidenced by OJK Regulation No.
45/POJK.03/2020 regarding financial
conglomeration.
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ANNEX 5: ROLE OF KEY COUNTERPARTS, FINANCIAL SECTOR BACKGROUND AND KEY FINANCIAL SECTOR
STATISTICS
Role of Key Counterparts
The DPO series sees involves 9 different counterparts, whose main function and relevant reform under
DPO 2 (unless differently specified) are summarized in the table below:
Counterpart Function Relevant reforms under DPO2

1. Ministry of Finance (MOF) Central Ministry (executing Coordination of all reforms and
agency) direct involvement in reforms
#2 and #9
2. Otoritas Jasa Keuangan (OJK) Financial Services Authority. In Reforms #3, 5, 8, 10
charge of supervising banks,
NBFIs and capital markets
3. Bank Indonesia (BI) Central Bank. In charge of Reforms #5, 6
monetary policy and regulation
and supervision of payment
systems.
4. Deposit Insurance Deposit insurance agency and Reform # 7
Corporation (LPS) resolution authority
5. Ministry of Law and Human Line ministry. In charge of the Reform #4
Rights (MOLHR) insolvency reform.
6. Ministry of Communications Line ministry. In charge of the Reform #5 (under DPO1)
and Informatics (KOMINFO) data protection law.
7. National Development Line Ministry. In charge of the Reform #1 (under DPO3)
Planning Agency (BAPPENAS) G2P digitization agenda.
8. Ministry of Women Line Ministry. In charge of Reform #1
Empowerment (KPPA) gender-disaggregated data
9. Coordinating Ministry of Coordinating Ministry. In charge Reform #1
Economic Affairs (CMEA) of the National Financial
Inclusion Strategy
Financial Sector Background
I. Financial Stability
Despite the economic and financial disruption caused by the COVID-19 pandemic, the banking system
in Indonesia remains well-capitalized and resilient so far, although profitability has decreased
somewhat. As of 2020Q4, the Capital Adequacy Ratio (CAR) stood at 23.89 percent and the Regulatory
Tier-1 Capital to risk -weighted asset ratio stood at 22.24 percent, well above the regulatory minimum.
Liquidity ratios have edged down slightly since the beginning of the pandemic but remains broadly
adequate: in 2020Q4, liquid assets stood at 24.24 percent of short-term liabilities and at 18.91 percent of
total assets. At 82.54 percent in 2020Q4, loan to deposit ratio is lower than its level prior to the pandemic,
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as private credit growth grind to a halt. Profitability ratios experienced a decline from pre-pandemic levels,
with return on assets (ROA), return on equity (ROE) and interest margin to gross income at 1.59 percent,
8.73 percent and 66.08 percent in 2020Q4 respectively, compared to 2.47 percent, 13.16 percent and
72.24 percent from a year ago. This weakening in profit could intensify due to reduced appetite for
lending, increased holdings of (low return) liquid assets, and increasing loan losses resulting from the
lingering effects of the pandemic.
NPLs appear to have remained at manageable levels in Indonesia so far, but asset quality in the financial
sector still warrant close monitoring. NPL usually reflects deterioration in asset quality with a lag, which
will be more protracted during the pandemic given the various forbearance measures currently in place.
Hence, other measures (such as loan-at-risk, defined as the sum of NPLs, restructured loans and special
mention loans) will need to be closely monitored in the meantime. Indonesia’s latest NPL reading is a
mere 3.06 percent in 2020Q4. However, bank-level data suggests that loan-at-risk for several major
Indonesian banks were well above 20 percent as of December 2020. In the event of worsening economic
conditions and rising firm insolvencies and bankruptcies, a large portion of loan-at-risk could turn into
NPLs, which would negatively impact banks’ provisioning and capital levels, adding significant stress to
the banking sector.
Capital markets are shallow compared to peers and foreign participation in the bond market was high
prior to the pandemic. The combination of shallow markets and high foreign participation can act as an
amplifier of financial market volatility, as evident in the recent capital outflow episode in 2020Q1, when
Indonesia, like most emerging market economies, experienced unprecedented portfolio outflows as
international investors responded to the global spread of the pandemic with increased risk aversion and
flight to safety.
Indonesia’s financial sector is exposed to physical risks related to climate change and natural disasters.
A significant portion of the Indonesian population is prone to highly variable climate and natural disasters.
Indonesian agricultural production is highly dependent upon rainfall, which can be severely undermined
by weather changes, particularly during ENSO (El Nino Southern Oscillation). Due to its geographical,
geological and demographic condition, with the potential cost of a major disaster in Indonesia exceeding
3 percent of GDP Indonesia is also prone to a variety of natural disasters. The poor and vulnerable,
particularly in rural areas, are highly exposed to weather and natural disaster risks, as their livelihoods can
deteriorate quickly in such events. Physical risks can affect credit, operational, market and liquidity risks,
threatening the profitability and solvency of banks and potentially the stability of the financial system.
II. Financial depth and efficiency
The financial system overall is highly fragmented, with many banks, microfinance institutions,
cooperatives and non-bank financial institutions (NBFIs) spread across a very large and diverse
geography, with numerous natural disaster-prone areas. As of 2020Q4, commercial banks’ assets
represented 60.57 percent of GDP (or 78.44 percent of total financial sector assets), and the dominance
of the banking sector has remained unchanged in recent years. The institutional investors, including
mutual funds, insurance companies and pension funds, are relatively small (14.89 percent of GDP in
December 2020) especially in comparison to Indonesia’s peer countries. Capital markets are also shallow
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and somewhat illiquid. Foreign participation in the bond market was high prior to the pandemic and has
decreased during the pandemic-induced capital outflow in 2020Q1.
Banking is focused on traditional deposit taking and consumer lending activity and albeit stable, the
Indonesian banking system is relatively shallow. Although credit to the private sector has been growing
since 1999 (when Indonesia faced the consequences of the 1997 Asian financial crisis), it is still relatively
low at about 35.52 percent of GDP as of December 2020. This is one of the lowest levels among peer EAP
countries, which exhibit as a group a median of over 100 percent of GDP. Growth rates of private credit
were negative between 2016 and 2018, picked up slightly before the pandemic and is grinding to a halt
again as of 2020Q3.
While the banking sector is not very concentrated by international standards, a long tail of small,
relatively weakly performing banks implies that the sector is overcrowded. The 3-bank asset
concentration index indicates that Indonesia’s banking sector is not too concentrated, with an index of
40.38 percent (Dec 2020) versus a regional median of around 52 percent. However, out of close to 1,800
banks (including commercial and rural banks), the top 10 banks hold around 63.05% of the total banks’
assets. Among these, the four state-owned banks (Mandiri, BNI, BRI, BTN) hold 40.73% of assets.
Elevated operating cost and interest rate margins in the banking sector suggests scope for improving
efficiency. Bank overhead cost has edged down slightly in recent years to 5.36 percent of total asset (Dec
2020), but remain relatively high both in comparison with other countries in the region and in G20. This
reflects the geographic challenges of providing financial services across the Indonesian archipelago, and
perhaps the low levels of financial inclusion. Interest rate margins, at an average of 4.97 percent between
2014 and Dec 2020, are higher and more stable in Indonesia than in other countries in the region and
peers within the G20, which points to the possibility of numerous structural issues within the banking
sector, such as the small size of Indonesian banks, understated NPLs, a weak insolvency and creditor rights
framework, legal and regulatory issues such as costly collection rules, high operating costs, poor credit
information and shallow capital markets. High interest margins may also reflect limited competition,
especially among state-owned banks.
Competition in the delivery of banking services is core to containing costs and thereby to harnessing
the role of the financial sector in allocating scarce resources to their optimal uses and to enhancing
outreach to marginal users. Net interest margins (NIMs) and lending and deposit rate spreads have been
consistently higher in Indonesia than those seen in peer countries and other emerging markets. For
example, banks in Indonesia had an average NIM of 5 percent over the period 2015-2018. While the
worldwide average for NIMs was 3.9 percent in 2018, given its level of financial and economic
development as well as its size, the benchmark NIM for Indonesia was 3.5 percent in 2018, indicating that
Indonesia had in effect, relatively high intermediation costs. Moreover, these intermediation costs are
high across the board, being of similar magnitude for SOBs, large, and small banks, even after controlling
for differences in their lending portfolio. In fact, there is remarkably little differentiation in lending rates
within and across banks and client segments. Hence, the homogeneity in high intermediation costs can
be interpreted as evidence of lack of competitive forces and inefficiencies, such as the lack of risk pricing,
in the banking sector.
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Capital markets do not provide an alternative source of funding nor do they represent a competitive
alternative to banks. As of 2020, stock exchange market capitalization is 45.15 percent of GDP and private
debt securities outstanding are about 2.8 percent of GDP, both much smaller than G-20 and ASEAN peers
(the government securities market is also shallow at 25.08 percent of GDP). Despite recent growth in the
number of listed companies and listed shares, the overall size of the Indonesian equity market is still low
by international comparison. The market for fixed-income securities is also relatively shallow. In the
absence of a well-developed domestic investor base willing and able to provide longer-term financing, the
role of foreign funding is important, with around 66.49% of corporate debt and 25.16% of government
debt holders from abroad. As of September 2020, non-financial corporate debt in foreign currencies
represents about 40 percent of total corporate borrowings. These features may expose Indonesia’s capital
market to risks related to capital flow reversals and currency mismatch. Except for the local currency
government bond market, other segments of the capital market (the stock market and corporate bond
market) in Indonesia are small and somewhat illiquid with low turnover ratios (for instance, turnover ratio
of the stocks market is low at 19 percent (2020)).
Other non-bank institutions have not kept pace with economic growth and NBFIs remain small. Asset
holdings by institutional investors remains low, with outstanding assets under management of pension
funds at just 2.04 percent of GDP (December 2020), 3.72 percent of GDP for mutual funds and 9.13
percent of GDP for insurance companies (December 2020). The domestic insurance sector has grown but
remains relatively small, and its contribution to the provision of finance is modest. The share of insurance
assets to total financial assets has grown from 9 percent in 2007 to 11.83 percent in December 2020, the
largest industry within the NBFI sector. However, insurance penetration rate (contribution of gross
premium to GDP) is low at 3.06 percent in December 2020, compared to ASEAN peers. Indonesia has both
public and private pension funds, but significant changes have been underway. The total size of
occupational pension funds is approximately IDR 206.4 trillion (US$14.6 billion as of December 2020),
mostly in the employer-sponsored segment.
III. Financial access
Financial inclusion in Indonesia is a multidimensional problem, involving lack of physical access,

transaction costs, income level, education, lack of identification documents, and socio-economic
factors. The fragmentation challenge of the financial sector is further compounded by low levels of
financial awareness and literacy. Moreover, the breadth and types of financial product and services
available to investors, customers or to the public are limited and do not appear to be fully aligned with
their needs. There are not many financial products offered beyond the traditional banking products and
basic capital market products such as mutual funds.
Household access to the formal financial sector as measured by the percentage of adults holding a
transactional account has increased from 36% in 2014 to 49% in 2017 (Global Findex survey 2017). While
this is the largest account ownership increase of any developing economy in the EAP region, Indonesia
still has the 4th largest unbanked population in the world: 95 million adults in Indonesia (and two thirds
of the poorest adults) do not have an account at a financial institution. This means limited possibility to
invest in their future and to protect themselves from unexpected shocks.
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Among the reasons for financial exclusions, lack of money, distance and costs are on top. According to
the 2017 Global Findex, 72% of Indonesian adults cited not having enough money as a barrier, but only
18% cited this as their only barrier, similar to the developing world average of 20%. A third of Indonesian
unbanked adults said distance was a barrier—even though 69% of these adults have a mobile phone. 1-
in-4 Indonesian adults cited lack of documentation as a barrier but 80% of these adults have a National
ID. 32% reported the cost to open and maintain an account. Only 2% of unbanked Indonesian adults report
not needing an account.
While globally women are less likely than men to have a bank account, Indonesia is one of the few
countries with a reverse gender gap: i.e. account ownership of women are 5 percentage point higher
than that of men, but men and women are equally likely to have an inactive account. Between 2016 and
2018, women saw faster growth in account ownership than men, and now equal proportions of women
(55.6%) and men (55.7%) are account owners. Government assistance received by women digitally has
helped close the gender gaps in account ownership. Users of mobile money have grown from 0.4% in
2014 to 3% in 2017 according to Findex and 5% in 2018 according to FII. However, gender gaps between
mobile phone ownership exists with GSMA (2020) indicating 72% of females versus 80% of males own
mobiles. 53 Further, a JPAL (2020) paper notes that 45% of men are digitally ready—that is, own
smartphone and can use it to download apps and surf the web—compared to 38% of women.54
Many Indonesian firms, especially micro and small- to medium enterprises (MSMEs), lack access to a
line of credit and are suffering from financial difficulties during the pandemic despite policy support
and bank lending. At 27.4 percent (Enterprise survey, 2015), the fraction of firms with a line of credit is
rather low compared to the actual needs. A vast majority of firms that do not have access to a line of
credit are MSMEs. As of December 2020, only 18.64 percent of bank credit was extended to MSMEs.
Results from the recent World Bank COVID-19 business pulse survey conducted in October 2020 shows
that 75 percent of Indonesian firms experienced difficulties in repaying loans, paying wages, rents or
utilities and some filed for insolvency or bankruptcy. 3 in 10 firms need loan adjustments and 37 percent
of these firms will be in arrears in the next 6 months. MSMEs account for the lion’s share of firms having
financial difficulties, and most of them make limited use of financial markets to cope with the situation.
Nonetheless, the share of firms receiving government support increased sharply from 7 percent in June
2020 to 49 percent in October 2020.
In Indonesia, women own about 60 percent of Indonesia’s micro, small and medium enterprises
(MSMEs). However, this is skewed towards micro enterprises, with fewer women than men owning small
and medium enterprises. World Bank 2016 study estimated three to four million women entrepreneurs
are capable of expanding their business, but face a series of nonfinancial and financial constraints, such
as access to credit or collateral. In 2016, IFC estimated that Indonesian female entrepreneurs’ financing
needs, to build and expand their businesses, total US$6 billion.
53 GSMA (2020). The Mobile Gender Gap Report 2020. https://www.gsma.com/mobilefordevelopment/wp-

content/uploads/2020/05/GSMA-The-Mobile-Gender-Gap-Report-2020.pdf
54 JPAL (2020). Improving women’s digital literacy as an avenue for financial inclusion.
https://www.povertyactionlab.org/blog/11-23-20/improving-womens-digital-literacy-avenue-financial-
inclusion#:~:text=Indonesia%20is%20a%20standout%20country,such%20gap%20exists%20in%20Indonesia
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Two key credit reporting system regulations which are OJK’s regulation on Dual Credit Reporting and
SLIK (credit registry)55 have been issued. SLIK as a new system for public credit registry has been launched
in 2017 and fully operated in 2018. More than 60 million debtors have been recorded in SLIK as of 2019.
The number of reporting companies has reached 2,057 by April, 2020, from 1,672 in 2017. There are two
companies that already started their operations as private credit bureau (PCB) while another one is still
holding a principle license. The main challenges for achieving optimal outcomes are the limited coverage
and low usage of SLIK and PCB’s services.
Digital financial services in Indonesia have progressed tremendously during the last years. Both banks
and non-banks payment system service providers, particularly payment fintech players, have invested
significantly to introduce various digital financial service products (i.e. digital savings, mobile money,
mobile banking) while gradually developing digital economy ecosystem through merchant acquisitions
and ecommerce platform. Agent services provided by bank (Laku Pandai) and e-money institutions (LKD)
are rapidly growing totalling to more than 1 million agents combined in 2020 covering all provinces in
Indonesia. Government has also introduced digital mechanism in distributing social benefit by leveraging
the agent channels and basic savings account. The digitized social assistance program has reached and
provided access to transaction accounts for 20 million beneficiaries. Standardised QR based payments
channel has been introduced and promoted aggressively to enable an interoperable retail payment
transaction experience. However, many challenges remain, including limited technical capacity, rigid and
overlapping regulatory framework, low customer awareness and inadequate ICT infrastructure. According
to findex 2017, 35% adults are using digital payments in 2017, a 12-percentage point increase since 2014,
however cash is still predominantly used for domestic remittances, government payments, and private
sector wages. Hence Indonesia is still below the developing economy average for digital payments use.
The Indonesian authorities have prioritized financial awareness and literacy, particularly with regards
to new financial service delivery mechanisms and newly banked customers. Both BI and OJK have issued
specific financial consumer protection regulation. Consumer complain handling centre are also
established by both BI and OJK. OJK has gone further with introducing out of court settlement option in
the form of alternative dispute resolution bodies for 6 sectors; insurance, capital market, pension fund,
banking, guarantee companies, also another one covering finance companies, pawnshop, and venture
capital. Two financial literacy strategy has also been introduced by OJK in 2013 and 2017. The strategy
provides guidance for financial service providers to carry out financial literacy programs. According to a
2019 OJK survey, the percentage of Indonesians having the knowledge, skills and confidence to say that
they understand their financial products and services in full had increased from 30 percent in 2017 to 38
percent in 2019. BI has introduced the legal basis for market conduct supervision in 2020 with the view of
pilot and gradual implementation starting 2021. OJK is planning to issue the legal basis for its market
conduct supervision in early 2021, despite conducting regular small scope market conduct exercise since
2017. With the introduction of market conduct supervision practice there is a hope for a better
enforcement of financial consumer protection regulations.
55 Further updated in the new regulation issued in 2020.
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Key statistics
Stability
2017 2018 2019 2020
Capital Adequacy
Risk Weighted CAR (%) 23.18 22.97 23.40 23.89
Bank Capital to Assets (%) 15.78 15.74 16.09 14.82
Banking Liquidity
Private Credit to Deposit (%) 90.04 94.78 94.43 82.54
Liquid Assets/ Deposits & ST Funding (%) 24.06 19.90 20.54 24.24
Assets Quality
NPL Ratio (%) 2.59 2.37 2.53 3.06
Provision to NPL (%) 123.34 125.16 116.09 181.37
Source: OJK
Efficiency
2017 2018 2019 2020
3-Bank Concentration Index (%) 37.76 38.17 39.36 40.38
NIM (%) 5.32 5.14 4.91 4.45
Lending-Deposit Spread (%) 7.20 6.38 4.57 7.23
Non-interest Income/Total Income (%) 39.26 40.91 45 51.63
Overhead Costs/ Total Assets (%) 4.80 4.48 4.68 5.36
ROA (%) 2.45 2.55 2.47 1.59
ROE (%) 13.49 14.08 13.16 8.73
Credit to Gov. & SOEs/ GDP (%) 2.29 2.90 2.91 2.79
Sources: OJK, BI
Depth
2017 2018 2019 2020
Bank
Assets/GDP (%) 55.29 55.29 55.02 60.57
Credit/GDP (%) 35.10 35.91 35.5 35.52
Deposits/GDP (%) 37.85 37.9 37.9 43.19
NBFI
Insurance Assets/GDP (%) 8.33 8.15 8.37 9.13
Pension Fund Assets/GDP (%) 1.92 1.82 1.84 2.04
Capital Market
Mutual Fund Assets/GDP (%) 3.37 3.41 3.48 3.72
Equity Market Cap./GDP (%) 51.90 47.34 46.1 45.15
Government Debt/GDP (%) 29.4 30 30.1 39.40
Domestic Corporate Debt/GDP (%) 6.18 5.23 5.08 4.22*
International Corporate Debt/GDP (%) 5.85 7.11 7.94 7.13
Government Bond/GDP (%) 15.45 15.94 25.23 25.08
Domestic Corporate Bond/ GDP (%) 2.85 2.78 2.88 2.80
International Corporate Bond/GDP (%) 3.47 4.25 4.45 5.69*
Foreign ownership on Local Currency 39.82 37.71 25.16
38.57
Government Bond (%)
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Share of FX-Denominated Corporate Bond 54.94 60.49 66.49*

61.24
to Total Corporate Bonds (%)
Sources: OJK, BI, AsianBondOnline, BIS, World Bank
*) Data as of September 2020
Access
2017 2018 2019 2020
Access
ATM Per 1,000 km2 56 56 56 55
Branches Per 1,000 km2 16 16 16 18
Usage
Deposit Accounts Per 1,000 Adults 1565 1589 1632 1909
Credit Accounts Per 1,000 Adults 222 230 241 247
Findex
Transaction Account by All Adults 49 - - -
Mobile Account by All Adults 3.1 - - -
Sources: BI, Findex
Financial Industry as of December 2020

Financial Sector Institution Financial sector assets/ GDP Number of financial
(%) institutions
Bank 60.57 1778
Insurance 9.13 148
Finance Company 2.95 176
Pension Fund 2.04 219
MFI 0.01 226
Pawnshop 0.47 94
Venture Capital 0.13 61
Infrastructure Finance Companies 0.75 2
Other Financial Institutions 1.17 26
Total 77.22 2,730
Sources: OJK, BI (Data as of December 2020)
Table 7 - Procurement Profile and Performance of the Procurement System
Dimension Performance indicator Value Observations
Competition % of total value of contracts 60 % Majority of the awarded contracts (85 %) are
procured using open procured using non-competitive methods,
competitive bidding. which are used for small value contracts
estimated to cost not more than IDR 100 million
(for consulting services) and not more than IDR
200 million (for goods, works and other
services).
Efficiency % of finalized bidding 94.2 % The % has substantially increased from 66 % in
processes 2015 to 94.2% in 2019
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% of failed/canceled bidding 5.8% The % has been substantially reduced from 33.5
processes % in 2015 to 5.8 % in 2019
Transparency % of total procurement 43.9 % The % has been substantially increased from 18
expenditures conducted % in 2018 to 43.9% in 2019.
through e-procurement Use of e-procurement planning tool (SIRUP) is
system mandatory for all activities regardless of value
and methods since 2018. SIRUP and e-
procurement system (SPSE) has been fully
interoperable since 2019, which enable
automated processing of registered activities
(contracts) using e-tendering and e-purchasing
platform.
Source of data: Public Procurement Profile Fiscal Year 2019 published by LKPP
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ANNEX 6: GENDER ANALYSIS
(i) Analysis
Indonesia has made considerable progress in ensuring more gender-equitable financial inclusion. Data
from Global Findex (2018) and SNKI (2018) note that although there is an average gap in account
ownership of 8 percentage points in developing countries, no such gap exists in Indonesia. Between 2016
and 2018, women saw faster growth in account ownership than men; and now equal proportions of
women (55.6 percent) and men are account owners (55.7 percent).56 Government assistance received by
women digitally has helped to close the gender gap in account ownership.57
Despite this progress, global measures (Global Findex, Financial Inclusion Index [FII], and GSMA)
indicate that several disparities persist that affect women’s access and use of financial services and
undermine full financial inclusion in Indonesia. First, gender gaps in digital literacy and readiness exist.
GSMA (2020) indicates that 72 percent of females versus 80 percent of males own mobiles.58 2019 FII data
shows that 45 percent of men are digitally ready—that is, own smartphone and can use it to download
apps and surf the web—compared to 38 percent of women. 59 Meanwhile, OJK’s SNLIK indicates that
although women’s financial literacy grew at a faster rate than men’s literacy, men are consistently more
literate than women—men’s financial literacy is approx. 40 percent compared to 33 percent for women.60
Second, gender gaps in access to collateral and credit also exist. A World Bank 2016 study estimated three
to four million women entrepreneurs are capable of expanding their business, but face a series of
nonfinancial and financial constraints, such as access to credit or collateral. In 2016, IFC estimated that
Indonesian female entrepreneurs’ financing needs total US$6 billion. Although 2019 FII data indicates that
there is a minimal gender disparity in women and men’s access to loans (with banks, multifinance,
pawnshops, microfinance, cooperatives), 61 this data does not capture loan size. Anecdotal evidence
suggests that women are more likely to access smaller loan sizes and group loans compared to men, which
can affect their ability to start up or expand their business.
Although global measures are useful to identify higher level gender gaps, they do not capture the
breadth and depth of data needed to develop targeted policy responses to increase women’s access
and usage of particular financial services, including digital financial services (DFS) (mobile money) and
credit. Both the National Council for Financial Inclusion’s National Women’s Financial Inclusion Strategy
(NWFIS), as well as the Ministry of Women’s Empowerment and Child Protection (MoWECP), note that a
lack of national sex-disaggregated data is a key gap within the financial sector, which undermines the
government’s financial inclusion efforts.62 Although, several global measures exist that disaggregate data
by sex (e.g., Global Findex, FII and GSMA), a large proportion of Indonesia’s financial data is yet to be
disaggregated by sex, such as data on credit rating, MSME ownership, transaction frequency, the loan
56 http://finclusion.org/uploads/file/fii-indonesia-2018-2019-final-report(1).pdf
57 http://finclusion.org/uploads/file/fii-snki-indonesia-2018-2019-final-report.pdf
58 GSMA. (2020). The Mobile Gender Gap Report 2020. GSMA;
59 Moorena, L., Schaner, S. ad Setiabudi, N. (2020). Improving women’s digital literacy as an avenue for financial inclusion. JPAL.
60 Moorena, L., Schaner, S. ad Setiabudi, N. (2020). Improving women’s digital literacy as an avenue for financial inclusion. JPAL.
61 0.09 percent of men vs 0.9 percent of women have a loan at the bank; 0.12 percent of men vs. 0.10 percent of women have a
loan from multifinance; 0.03 percent of men vs. 0.05 percent of women from a pawnshop; 0.03 percent of men vs. 0.04 percent
of women from a microfinance; and 0.03 percent of men vs. 0.03 percent of women from a cooperative (Moorena et al. 2020)
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type and size, etc.63 Further, while government already collects some sex disaggregated financial inclusion
data (e.g., as part of government-executed MSME and social assistance programs), there is no system in
place to organize, process, and report the sex-disaggregated data. Consequently, the data is underused in
terms of identifying granular gender gaps, assessing performance of government financial assistance
programs, and formulating targeted policy responses. The under-utilization of sex-disaggregated data is a
key issue across several sectors in Indonesia. For example, a recent internal World Bank review of GoI
social assistance programs to support women entrepreneurs, particularly in response to COVID-19, found
that there is a lack of publicly available sex-disaggregated data and information about how programs are
targeted and benefit women.64
Given the current context and scope, DPO2 will focus on institutionalizing a sex-disaggregated data
system to enable greater understanding of granular gender disparities and more evidence-based
policymaking in the financial sector. The rationale for focusing on this gender gap in DPO2 is outlined
below:
i. Limitations with global financial measures: Several global measures currently exist measuring
financial inclusion disaggregated by sex, including the World Bank Global Findex, which is a cross-
country dataset that tracks how individuals from 148 economies save, borrow, make payments,
and manage risk,65 as well as GSMA’s Mobile Gender Gap dataset, which tracks mobile and digital
gender gaps. 66 Such measures provide regional and country-level comparisons to measure
financial inclusion gender gaps. However, they do not provide subnational granularity (beyond
urban/rural characterizations), which is required for policy formulation and decision-making.67
Further, the data is not owned by the government, which can hamper government ownership and
buy-in. A sex-disaggregated national-level system and dataset would provide a deeper
understanding of gender disparities in financial inclusion and allow the Government of Indonesia
(GoI) to measure progress in closing gaps in a more nuanced way. For example, beyond many of
the access and use barriers captured by Findex, a national data system could help deepen
understanding about men’s and women’s access and usage of mobile money, as well as the type
and size of loans received by men and women, etc.
ii. Political economy: Institutionalizing a sex-disaggregated data system under the Financial Inclusion
Council presents a major opportunity in helping the GoI better understand and respond to gender
disparities in the financial sector more broadly. The President of Indonesia is the Chairperson of
the Financial Inclusion Council, meanwhile the Indonesian Vice President is the Vice Chairperson,
and the Coordinating Minister for Economic Affairs (CMEA), which coordinates 10 line ministries,
is the Executive Chairperson. Demonstrated commitment at this high level is significant and will
help prompt changes among several line ministries.
iii. Sequencing of reforms: Institutionalizing a sex-disaggregated data collection system presents a
major step in helping the GoI, and the financial sector more broadly, realize (and take ownership
of) gender disparities in financial inclusion. It is expected that institutionalizing a sex-
disaggregated data system will provide a deeper understanding of more granular disparities in
64 Internal World Bank review
65 See https://datacatalog.worldbank.org/dataset/indonesia-global-financial-inclusion-global-findex-database-2017
66 See https://www.gsma.com/r/gender-gap/
67 https://data2x.org/wp-content/uploads/2019/08/MeasuringWomensFinInclusion-ValueofSexDisaggData.pdf
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financial inclusion, such as (i) gender gaps in access to DFS (mobile money); and (ii) disparities in
the type and size of loans received by women and men. This will help set the stage for deeper
reforms and commitments to meaningfully address gender disparities in access and usage of
mobile money, and credit and loans, including under DPO3.
Global evidence shows that institutionalizing collection and use of sex-disaggregated data is key to
bridging financial inclusion gaps. Sex-disaggregated financial inclusion data is essential for uncovering
who is excluded, what financial products are being used (and by whom), the impacts of financial inclusion
interventions, how men and women’s financial needs differ, and how products should be adapted
accordingly. 68 Several countries have institutionalized the use of sex-disaggregated data to inform
policymaking in the financial sector, such as Mexico, Chile, and Solomon Islands.69 In the case of Mexico,
the country’s National Policy for Financial Inclusion is heavily driven by data collection, including supply-
side data regarding women-owned small and medium enterprises (SMEs) and demand-side financial
inclusion data to identify granular gender and regional disparities. The Mexican government also
institutionalized the use of sex-disaggregated data to assess the impact of digitizing the country’s social
assistance program Prospera.70 The data showed that the policy included women and was effective in
closing gender gaps in account ownership (as a result of digitizing Prospera, the share of women with
accounts increased from 30 percent in 2012 to 42 percent in 2015). 71 Examples of Bank-supported
projects that have institutionalized sex-disaggregated metrics to inform financial inclusion policy making,
include the Vietnam Financial Sector Soundness and Inclusion Programmatic Approach (P145781), Jordan
MSME Development Project for Inclusive Growth (P132314), and Pakistan Financial Inclusion Support
Framework Country Support Program (P156886).
It is expected that institutionalizing a sex-disaggregated data system will reveal more granular gender
disparities in Indonesia’s financial sector and inform future dialogue and reforms to close the gaps. The
data system will institutionalize the regular processing, reporting, and use of sex-disaggregated financial
inclusion data to inform future dialogue and reforms to close gender gaps in the access and usage of
financial services (such as mobile money and credit). Specifically, it will allow the NFIS and relevant line
ministries to reveal more granular gender disparities in access and usage of particular financial services
(e.g., mobile money and credit), assess the performance of government interventions in closing financial
inclusion gender gaps in these areas, and to formulate (or reformulate) targeted interventions to increase
access and usage of financial services based on data and evidence. This will set the stage for additional
reforms under DPO3. For example, the data system will enable government to assess the effectiveness of
the G2p 4.0 reforms, as well as the need to revise them, by identifying women and men’s usage of
accounts (frequency of transactions).
(ii) Action
The DPO will address this gap through Prior Action (PA) DPO2 #1: To strengthen the coordination of
financial inclusion activities and increase outreach to women and youth, the Borrower, through the
National Financial Inclusion Strategy, has (a) established the Financial Inclusion Council and (b) mandated
68 FinEquity. (2020). “Gender Data in Financial Inclusion”. FinEquity Brief.

https://www.findevgateway.org/sites/default/files/publications/2020/FinEquity_GenderDataBrief_Final.11.06.2020.pdf
69 https://data2x.org/wp-content/uploads/2019/08/MeasuringWomensFinInclusion-ValueofSexDisaggData.pdf
70 http://idrc.canadiangeographic.ca/blog/mexico-digital-money-revolution.asp
71 https://www.devex.com/news/sponsored/how-good-financial-data-drives-gender-inclusive-growth-91808
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a sex-disaggregated financial inclusion data system as evidenced by Presidential Regulation no. 114 year
2020. Institutionalizing a sex-disaggregated data system, under the leadership of the Financial Inclusion
Council, will enable the government to identify more granular gender disparities within the Indonesian
financial sector. It will also provide the basis for more evidence-based policymaking and set the stage for
deeper reforms and commitment to addressing gender disparities in accessing and utilizing financial
services, such as DFS (mobile money) and credit (larger loan sizes).
(iii) Results
Progress towards closing this gap will be measured by the following indicator: Sex-disaggregated financial
inclusion data regularly collected and made publicly available (Baseline: no; target: yes)
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ANNEX 7: ADJUSTMENTS TO THE COUNTRY PROGRAM IN RESPONSE TO COVID-19
Impact of the COVID-19 pandemic on the country and government response
Indonesia experienced its first recession in two decades due to the impacts of the COVID-19 pandemic.
The economy shrank by 2.1 percent in 2020, compared to a pre-COVID-19 projection of 5.1 percent
growth (see Table in section 2.1) as private consumption and investment fell sharply while public spending
rose to cushion the shock. Net exports contributed positively to growth; imports contracted sharply due
to weak domestic demand whilst exports rebounded mid-year driven by stronger external demand and
commodity prices. More contact-intensive and labor-intensive sectors such as transport, hospitality,
construction, and manufacturing were severely hit while less contact-intensive sectors such as
information and telecommunication, finance, and social sectors such as education and health were more
resilient. The crisis led to a rapid increase in unemployment and underemployment in 2020. The
unemployment rate rose by 1.8 percentage points to 7.1 percent and the underemployment rate
increased by 3.8 percentage points to 10.2 percent in the third quarter of 2020 compared to the year
before.
Bank of Indonesia (BI) strongly responded to the crisis, but some measures involve macro-financial risks
that need to be managed. Bank Indonesia (BI) loosened monetary policy and deployed a large local
currency government bond purchase program to further stabilize the economy and help finance the fiscal
deficit (3.6 percent of GDP of which 83 percent in the primary market). BI bond purchases helped maintain
financial stability amid high capital flight to safety in March and contributed to lowering long-end local
currency government bond yields. But the program involves capital flow and currency risks and may
heighten concerns about the credibility and effectiveness of monetary policy if not kept time-bound, well
calibrated and communicated.
The fiscal response to save lives and livelihoods and stimulate the recovery was decisive. But financing
needs have increased, public debt is rising, and the fiscal space risks tightening in the absence of reforms.
The government implemented a significant fiscal package (3.6 percent of GDP) to support the health
response, and to provide relief and support the recovery. The pandemic response, recession-led drop in
revenues and recent tax measures including a reduction of the corporate income tax rate contributed to
significantly increasing the deficit, financing needs and public debt (see Tables 1, 2 and 3 in section 2.1
and 2.2). The higher financing needs (9.8 vs 5.9 percent of GDP in 2020 vs 2019) were met through higher
local currency bond emissions, including BI purchases in the primary market, foreign currency loans and
bonds and drawdown of cash reserves.
The poverty rate hit a three-year high in September 2020, though the impact was partially cushioned
by the government’s social assistance program. The poverty rate rose to 10.2 percent in September 2020,
a 1 percentage point increase over 12 months. This is the highest poverty rate recorded since 2017. The
poor population increased by 2.8 million to reach 27.6 million people. World Bank simulations indicated
that 8.5 million people could have fallen into poverty in 2020 without social assistance. In 2020, the
government spent IDR 220.4 trillion (1.4 percent of GDP) on social assistance programs, including food
assistance, conditional and unconditional cash transfers, employment programs etc.
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The economic recovery through the first quarter of 2021 has been uneven. But the government and Bank
of Indonesia have room to continue responding to the crisis. High frequency indicators show that
manufacturing has rebounded more strongly than retail sales which remain subdued during the fourth
quarter of 2020 and first quarter of 2021. Recent World Bank high frequency household and firm surveys
show that activity and employment have rebounded partially but labor earnings and revenue shortfalls
remain important. Moreover, consumer confidence remains pessimistic despite positive signals on
vaccine rollout. However, the government maintains a substantial fiscal package in 2021 (4.2 percent of
GDP) to fight the pandemic, provide relief and support the recovery. Most DSA shocks show that debt
would remain sustainable in the near term (see section 2.2). Given the high financing needs, the
exceptional deficit financing by BI is expected to remain in 2021 with BI acting as a buyer of last resort
following market principles. In addition, the government is working on landmark reforms to attract foreign
investment and strengthen competitiveness which could improve medium-term prospects.
WBG support for responding to the crisis
The WBG has adjusted its Portfolio to support Indonesia’s response to the pandemic both by adjusting
existing programs and developing new ones. The support is organized across 3 pillars: (i) saving lives; (ii)
protecting poor and vulnerable people; and (iii) ensuring sustainable business growth and job creation.
Pillar 1 - Saving Lives
In response to the pandemic, the World Bank delivered three emergency operations totaling US$950m,
which were approved by the Board in May 2020. These include the US$250m Indonesia Emergency
Response to COVID-19 project, which aims to prevent, detect and respond to the threat posed by COVID-
19, and strengthen national systems for public health preparedness, in particular through support for the
procurement of COVID-19 vaccines. At the request of the Government of Indonesia, the project uses the
PforR instrument, and is the only COVID-19 response project globally to use this instrument under the
World Bank’s Fast Track COVID-19 Facility. The PforR supports the immediate needs for response to
address the surging need for diagnostic capabilities, quarantine capacity and intensive care facilities
during the pandemic, and the longer term strengthening of pandemic preparedness and of the
surveillance information system.
Pillar 2 - Protecting Poor and Vulnerable People
Additional Financing in the amount of $400m was approved in May 2020 for an existing PforR and
became effective on July 7th, 2020. The PforR supports the Ministry of Social Affairs to further strengthen
Indonesia’s Conditional Cash Transfer program’s delivery system, building on the successfully
implemented parent PforR operation since 2017. In addition, it supports two additional strategic areas to
enhance the impact of the country’s overall social assistance spending: (i) strengthening the delivery
systems of the new Social Entrepreneurship program as a pathway to sustainable poverty reduction of
CCT beneficiaries; and (ii) supporting inclusion of poor and vulnerable households in the social registry
and expanding the use of the social registry for disaster response. To support the government’s
emergency responses to COVID-19, this Additional Financing supports a temporary emergency cash
benefit on top of the regular CCT benefit to quickly reach 10 million poor and vulnerable beneficiary
families, leveraging the CCT program’s delivery system in place. Finally, restructuring is ongoing in the
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Indonesia National Slum Upgrading Project to reallocate funds to anticipate impact during post-pandemic
period.
Pillar 3 - Ensuring Sustainable Business Growth and Job Creation
Supplemental financing totaling US$300m was approved for the First Indonesia Financial Sector Reform
DPF to provide overall support to financial stimulus measures. This has helped the government of
Indonesia to diversify its financing sources to meet the unanticipated financing gap caused by the impact
of the COVID-19 outbreak. In line with the parent operation (approved in March 2020), the development
objective of the supplemental operation aimed at supporting financial sector reforms that will assist the
GoI in achieving a deep, efficient and resilient financial sector. The program includes key areas which are
of direct relevance for the COVID emergency and recovery phases (i.e. banking resolution, firms’
insolvency regime, deepening of financial markets; promotion of digital payments).
Selectivity, Complementarity, Partnerships
The Indonesia Emergency Response PforR has leveraged partner resources for greater impact and
efficiency. This has resulted in nearly tripling the US$ 250m IBRD resources, with the AIIB contributing
US$250m in co-financing and US$200m in parallel financing from the Islamic Development Bank. The
World Bank closely collaborates with several other development partners, including USAID, DFAT, UNICEF
and WHO, in providing technical assistance to the Government of Indonesia to help achieve the results
areas of this PforR. Contributions from other development partners in co-financing or parallel financing
for vaccine procurement and deployment are expected to amount close to $1 billion.
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References
Aggarwal, Shilpa, Valentina Brailovskaya, and Jonathan Robinson. 2020. "Cashing In (and Out):
Experimental Evidence on the Effects of Mobile Money in Malawi." AEA Papers and Proceedings, 110: 599-
604.
Buri, Sinja; Cull, Robert; Gine, Xavier; Harten, Sven; Heitmann, Soren. 2018. Banking with Agents:
Experimental Evidence from Senegal. Policy Research Working Paper; No. 8417. World Bank, Washington,
DC.
Bharadwaj, Prashant, William Jack, and Tayneet Suri. 2019. “Fintech and household resilience to shocks:
Evidence from digital loans in Kenya.” National Bureau of Economic Research, Inc, NBER Working Paper
No. 25604.
Cai, Hongbin, Yuyu Chen, Hanming Fang, and Li-An Zhou. 2015. “The Effect of Microinsurance on Economic
Activities: Evidence from a Randomized Field Experiment.” Review of Economics and Statistics 97 (2): 287–
300.
Cai, Jing. 2016. “The Impact of Insurance Provision on Household Production and Financial Decisions.”
American Economic Journal: Economic Policy 8 (2): 44–88.
Cole, Shawn, Xavier Giné, and James Vickery. 2017. “How Does Risk Management Influence Production
Decisions? Evidence from a Field Experiment.” The Review of Financial Studies 30 (6): 1935–1970.
Giné, Xavier, and Inessa Love. “Do Reorganization Costs Matter for Efficiency? Evidence from a Bankruptcy
Reform in Colombia.” The Journal of Law & Economics, vol. 53, no. 4, 2010, pp. 833–864.
Groh, Matthew and David McKenzie. 2016. “Macroinsurance for microenterprises: A randomized
experiment in post-revolution Egypt,” Journal of Development Economics, Volume 118, Pages 13-25
Suri, Tavneet, and William Jack. 2016. “The Long-Run Poverty and Gender Impacts of Mobile Money.”
Science 354 (6317): 1288–1292.
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The World Bank

FOR OFFICIAL USE ONLY

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT FOR A

IN THE AMOUNT OF US$ 400 MILLION TO

THE REPUBLIC OF INDONESIA

INDONESIA SECOND FINANCIAL SECTOR REFORM DEVELOPMENT POLICY FINANCING

Finance, Competitiveness And Innovation Global Practice

ABBREVIATIONS AND ACRONYMS

ADB Asian Development Bank CMEA Coordinating Ministry of Economic Affairs

Regional Vice President: Victoria Kwakwa

INDONESIA SECOND FINANCIAL SECTOR REFORM DEVELOPMENT POLICY FINANCING

SUMMARY OF PROPOSED FINANCING AND PROGRAM .......................................................................3

1. INTRODUCTION AND COUNTRY CONTEXT ...................................................................................5

SUMMARY OF PROPOSED FINANCING AND PROGRAM

Project ID Programmatic If programmatic, position in series

Proposed Development Objective(s)

Borrower: REPUBLIC OF INDONESIA

Implementing Agency: FISCAL POLICY AGENCY, MINISTRY OF FINANCE

PROJECT FINANCING DATA (US$, Millions)

Total Financing 400.00

International Bank for Reconstruction and Development (IBRD) 400.00

Climate Change and Disaster Screening

IBRD PROGRAM DOCUMENT FOR A PROPOSED

1. INTRODUCTION AND COUNTRY CONTEXT

policy matrix, it is likely to be part of the third DPO of this series.

2. MACROECONOMIC POLICY FRAMEWORK

2.1. RECENT ECONOMIC DEVELOPMENTS

Table 1. Key Macroeconomic Indicators 2019-2024

2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY

implementation of structural reforms, including to reduce barriers to investment.

8Ministry of Finance regulation No. 77/PMK.01/2020 Strategic Plan 2020-2024

Table 3. Baseline Medium-Term Fiscal Framework (Central Government), percentage of GDP

Box 1. Growth and Fiscal Downside Scenarios

2.3. IMF Relations

4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION

Table 4: Comparison of Triggers and Prior Actions for DPO2

introduced age-relevant amended the risk Regulations]

Pillar B: Improving the Efficiency of the Financial Sector

T6. Application The action has been

T8. OJK has monitored PA8. To ensure Minor changes in the

principles by major banks sustainability

T9. The Borrower has Dropped The PA has been

NEW. Proposed reform PA9. To ensure a more This is a new line of

4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS

Reform Area 1: Increasing outreach of financial services

Nasional Keuangan Inklusif Perempuan). DNKI.

Reform Area 2: Broadening financial market products

Reform Area 3: Mobilizing long-term savings

Reform Area 4: Strengthening insolvency and creditor rights

limited to larger firms only.

Mora, World Bank Blog, May 2020. https://blogs.worldbank.org/voices/strengthen-insolvency-frameworks-save-firms-and-

32Based on OJK’s National Survey on Financial Literacy and Inclusion (2017).

Reform Area 6: Strengthening Payment Systems

obtain loan from the Government.

Reform Area 8: Implementing sustainable finance practices

Reform Area 9: Establishing disaster risk finance mechanisms

Reform Area 10: Advancing the effectiveness of financial sector oversight

Prior Actions Analytical Underpinnings

Pillar A: Increasing the depth of the financial sector

The Capital Market Technical Note of the Indonesia Financial Sector

Pillar B: Improving the efficiency of the financial sector