Indonesia’s economy is projected to grow steadily in the coming years, bolstered by increased public spending, rising business investment, and steady consumer demand, according to a new report from the World Bank.
The report, titled "Indonesia Economic Prospects," forecasts that Indonesia's gross domestic product will grow at an average rate of 5.1% annually from 2024 to 2026. This growth comes despite challenges such as a waning commodity boom, heightened volatility in food and energy prices, and increasing geopolitical uncertainties.
"Indonesia’s successful economic performance is in big part thanks to the government’s robust macroeconomic policy framework, which helped attract investment," said Carolyn Turk, World Bank Director for Indonesia and Timor-Leste. "It is important to maintain prudent, credible, and transparent macro policy whilst creating fiscal space that enables priority spending on social protection and investment in human capital and infrastructure."
Rising food prices have contributed to an increase in headline inflation this spring. Consumer prices rose by 2.8% year-over-year in May, up from a 2.6% increase in January. Adverse climate conditions have reduced domestic rice harvests and broadly affected food prices. Headline inflation is expected to average around 3% in 2024.
In April 2024, Bank Indonesia raised its benchmark interest rate by a quarter percentage point to 6.25%, marking the highest level since 2016. This decision followed delays in anticipated policy rate cuts by central banks in advanced economies, leading to significant portfolio outflows and currency pressures in Indonesia and other emerging markets. Bank Indonesia is expected to begin cutting rates next year.
As commodity windfalls subside, the government is increasing social spending and public investment even as revenues decline. Public debt is projected to remain stable.
The report also identifies four emerging structural challenges: rising concentration in the manufacturing sector; a slowdown in reducing regional income disparities; weaker wage growth and increasing inequality since the COVID-19 pandemic; and limited geographic mobility of the labor force, which hampers efforts to match workers with jobs that can improve living standards.
The second part of the report outlines Indonesia's pathway towards becoming a more dynamic and productive economy with aspirations of moving from middle-income status to high-income status by 2045.
"A boost in private sector investment and dynamism is needed to accelerate long-term growth," said Habib Rab, World Bank Lead Economist for Indonesia and Timor-Leste. "This calls for regulatory reforms that help open markets and enhance the productivity of firms across manufacturing and services."
The "Indonesia Economic Prospects" report received support from funding provided by the Australian Department of Foreign Affairs and Trade.