Asia Economy

OECD Casts Doubt on Indonesia’s High Growth Plan

Ansuya Harjani |Assistant Producer, CNBC Asia Pacific

Indonesia may miss its goal of becoming one of the world’s 10 largest economies by 2025, as it is still far from growing at the 7 to 9 percent annual rate needed to meet the target, according to the Organization for Economic Co-operation and Development (OECD).

Adek Berry | AFP | Getty Images

The country’s economy – which currently ranks as the world’s sixteenth largest - grew 6.5 percent in 2011, and is expected to expand 6 percent this year. 

Angel Gurria, secretary general of the OECD told CNBC that Indonesia needs to engage in a range of serious reforms across areas such as taxation and labor markets to remain on a high growth trajectory.

“It is a country that is growing at 6 percent, and is looking to grow at even higher rates. In order for that to be sustainable in the medium and long term, it requires a number of structural changes. We're no longer talking about macroeconomics,” Gurria said on Thursday.

These comments follow a report by consulting firm McKinsey last week, which said that the Southeast Asian economy is on track to become the world’s seventh largest by 2030, boosted by its soaring consumer demand. (Read More: Indonesia's Economy to Surpass Germany, UK by 2030: McKinsey)

Indonesia has enjoyed steady growth of 5 to 6.5 percent in recent years, helped by robust domestic consumption – driven by the country’s young and growing middle class population, alongside its vast natural resources. But, the OECD warns that the demographic dividend will fade over the next decade.

In terms of taxation, OECD points out that there is significant scope to raise government revenues by improving the tax system and administration.

“Broadening tax bases and improving compliance, particularly by high income individuals, would make the system fairer. This should be achieved by allocating more audits where risks of underpayment are higher,” the organization said in a report released on Thursday.

In addition, Gurria noted that the government should work towards significantly cutting back its energy subsidies, which would free up resources for more pressing infrastructure and social spending needs. 

“Almost one-fourth of the budget goes to subsidize fossil fuels and energy. Can you imagine the potential that there is there to reallocate this?”