Indonesia's infrastructure lags behind other countries in Asia, especially in power and transport, Lagarde said.
Logistics costs account for 24% of GDP in Indonesia, compared to 13% in Malaysia, and disparities in transport costs mean that the price of basic commodities can be 20 times higher in remote regions than in Java, she said.
In a country made up of more than 17,000 islands, a modern and efficient infrastructure is vital to connect people and markets both within the country and with the world, Lagarde said.
Electrification is only at about 80%, compared to universal coverage in other Asian countries, Lagarde said.
"Clearly, reducing transport costs and ramping up power production can help create jobs in manufacturing and services. It also sets you up to better connect and serve a global clientele. President Jokowi has rightly made infrastructure improvement a top policy priority. Over the coming four years, infrastructure spending will be boosted by an average of 8% per year. This is very encouraging," she said.
Indonesia is the eighth largest economy in the world and home to over half the labour force in the ASEAN economy. However, high unemployment rates and growing inequality have to be tackled, Lagarde said.
"Creating greater investment and trade opportunities would allow your country to benefit from the momentum in the fastest growing region in the world, and it would help other countries to partake in Indonesia’s growth as well," Lagarde said.
Creating a healthy investment climate and trade development strategy is also important, so Indonesia's investment regulations should be streamlined and barriers to competition removed, Lagarde said. Constraints that "shackle" the private sector have to be removed and local and national investment regulations harmonised.
"Here again, President Jokowi’s commitment to jump-start investment is very encouraging. The land acquisition law is being revamped, and a one-stop services shop has been established for business licensing. These are steps in the right direction," Lagarde said.
Lagarde is in Indonesia to attend a regional conference in Jakarta called "Future of Asia's Finance: Financing for Development 2015".
Government sources said this week that Indonesia is leaning towards China rather than Japan to build the country's first high-speed railway, Shanghai Daily said.
The two countries have been bidding for the contract, which is worth around US$5 billion, and have sent envoys to lobby Indonesian government officials, Shanghai Daily said.
"Indonesia is leaning toward China because their proposal is less financially burdensome on the Indonesian government and because the issue of safety has been adequately addressed," a source told the newspaper.
The winner is expected to be announced this week, Shanghai Daily said.
Projects expert Ian Laing of Pinsent Masons, the law firm behind Out-Law.com said: "Connectivity across the whole infrastructure spectrum is critical to Indonesia’s ambitions. Both Tokyo and Beijing are keen to export their respective HSR capabilities leaving Jakarta with a difficult binary choice, and yet it is still very early days commercially."
The 150-kilometer rail line should cut the journey between Jakarta and Bandung to 35 minutes from about three hours. Trains are expected to reach speeds of more than 300kph. Indonesia hopes to extend the line later to connect Jakarta with the city of Surabaya, the newspaper said.
Indonesia said in March that it was seeking US$7 billion in foreign investment to upgrade its ports as part of a five-year, Rp5,519.4 trillion (US$429 million) plan to improve its ports network.