In a global economic landscape that continues to change and is full of uncertainty, Indonesia continues to show promising growth prospects. Indonesia has demonstrated its resilience with stable economic growth. Global conditions which are full of challenges, ranging from geopolitical conflicts, fluctuations in commodity prices, to a prolonged pandemic, have not prevented Indonesia from continuing to navigate the path of positive growth.
Indonesia’s stable economic growth is not the result of coincidence. A number of key factors have contributed to this achievement, including appropriate fiscal and monetary policies, economic diversification, and the government’s active role in maintaining political and social stability.
Based on the latest report from the World Bank, Indonesia’s economic growth is expected to remain stable in the coming years, supported by various strong domestic factors. Despite facing global challenges such as commodity price volatility, geopolitical tensions, and fluctuations in food and energy prices, Indonesia’s economy is projected to grow by an average of 5.1% per year from 2024 to 2026.
Increased public spending, growing business investment and stable consumer demand are the main pillars that support this projection. World Bank Director for Indonesia and Timor Leste, Carolyn Turk, underscored the importance of the strong macroeconomic policy framework that has been implemented by the Indonesian government. This policy not only helps attract investment, but also maintains resilient economic growth amidst various external shocks. It is critical to maintain prudent, credible and transparent macroeconomic policies to create fiscal space that allows priority spending on social protection and investment in human capital and infrastructure.
However, structural challenges remain and require special attention. The World Bank highlighted some of these challenges, including increasing concentration in the manufacturing sector, a slowdown in reducing regional income gaps, weaker wage growth and rising inequality since the Covid-19 pandemic. Limited labor force mobility also makes it difficult to match workers with suitable employment opportunities, which in turn influences the increase in living standards. To overcome these challenges, regulatory reform is needed that can help open markets and increase the productivity of companies in the manufacturing and services sectors.
One important element that is in the spotlight is increasing public consumption. The new social spending program from the incoming government is expected to encourage increased consumption, which in turn will support economic growth. However, with increasing social spending and public investment, the fiscal deficit is expected to be higher but still within acceptable limits, namely around 3% of Gross Domestic Product (GDP). Indonesia’s external position is expected to remain challenging, with the slow recovery in global trade and financing pressures being the main obstacles.
Inflation, which is expected to average around 3% in 2024, is also a concern. This increase in inflation was largely caused by rising food prices, which were triggered by adverse climate conditions which reduced domestic rice harvests. To overcome this inflation, Bank Indonesia (BI) has raised its benchmark interest rate to 6.25% in April 2024. However, BI is expected to start lowering interest rates next year, in line with the stabilization of the economy and reduction in external pressure.
On the other hand, private sector dynamism is also key in driving long-term growth. Regulatory reforms that support the private sector are expected to accelerate growth and increase productivity. The World Bank notes that large companies in Indonesia are still showing declining productivity, and if not immediately addressed, this could lead to inefficient allocation of resources in the economy. Therefore, reforms that support private sector dynamism are urgently needed.
In facing external challenges such as the potential for increased armed conflict or geopolitical uncertainty, Indonesia needs to remain vigilant. These external shocks could result in a sharper-than-expected decline in trade exchange rates, resulting in a tighter impact on revenues and a tighter fiscal position. For this reason, a looser fiscal stance along with increased social spending needs to be balanced with careful debt management so as not to interfere with priority development spending.
Looking at the long-term prospects, Indonesia has great potential to rise from middle-income country status to high-income country status by 2045. To achieve this goal, investment encouragement and private sector dynamism need to be maintained and enhanced. The World Bank’s Lead Economist for Indonesia and Timor-Leste, Habib Rab, emphasized that regulatory reforms that help open markets and increase the productivity of companies in the manufacturing and services sectors are urgently needed.
Overall, despite various challenges, Indonesia’s economic outlook remains positive. With the right policies and a commitment to addressing structural challenges, Indonesia can continue to grow and achieve its long-term goals. Macroeconomic stability, increased consumption, sustainable investment and regulatory reform are key to ensuring sustainable and inclusive economic growth in the future. With a careful and planned approach, Indonesia can face global dynamics full of uncertainty and still maintain its economic growth.
