Indonesia flag Indonesia: Economic and Political Overview

The economic context of Indonesia

Economic Indicators

Indonesia is seen as a future economic giant. It is the largest economy in Southeast Asia and the world's seventh by purchasing power parity (IMF). In 2023, the real GDP growth closely approached the approximately 5% average annual rate attained since 2000. By the end of the third quarter, the manufacturing sector sustained its expansion, albeit at a slightly moderated yet robust pace, while the hotel occupancy rate from January to July surpassed pre-pandemic levels. The country is anticipated to sustain rapid and stable growth throughout the projection period. Improved labour market conditions, reduced inflation rates, and enhanced investor sentiment will bolster both consumption and investment, counterbalancing the challenges posed by a subdued global trade environment. Moreover, the tourism sector is expected to witness ongoing recovery, with increasing arrivals and average expenditures contributing positively to economic dynamics. For 2024 and 2025, the OECD forecasts a growth rate of 4.9% and 5.2% of GDP, respectively.

After experiencing a widening of the budget deficit during the pandemic, authorities have intensified fiscal consolidation efforts since 2022. The IMF estimated the government’s budget deficit at 2.2% in 2023; while the 2024 budget aims for a deficit of 2.3% of GDP, with a commitment to maintaining a neutral fiscal stance in the foreseeable future. Public debt has shown a significant improvement since the Asian Financial Crisis in 1998 (it reached up to 150% of GDP), and stood at 39% of GDP as of 2023. The IMF expects the debt ratio to further decrease to 38.2% by 2025, although still above the 2019 level of 30.6%. The impact of Bank Indonesia's previous six-step increase of the policy rate is becoming more evident, as inflation (at 3.6% in 2023) now aligns within the target range (3.0% consumer price inflation with a ±1% corridor). Nevertheless, the Rupiah's depreciation amid rising global uncertainty prompted the central bank to implement another policy rate hike in October. Given current assumptions in commodities markets and barring escalation of global tensions, Bank Indonesia is poised to execute the first rate cut around mid-2024. The IMF expects the inflation rate to hover around 2.5% over the forecast horizon.

The number of unemployed persons has fallen below 8 million and the jobless rate stood at 5.3% in 2023 with a stable outlook for the near future. Indonesia has achieved enormous gains in poverty reduction, cutting the poverty rate by more than half since 1999, to approximately 9.5% of the population in 2022. While the average GDP per person (PPP) was estimated at USD 15,834 in 2023 by the IMF, the country has still one of the fastest-rising inequality rates in the East Asia region according to World Bank.

 
Main Indicators 20222023 (E)2024 (E)2025 (E)2026 (E)
GDP (billions USD) 1,318.811,417.391,542.371,670.631,805.25
GDP (Constant Prices, Annual % Change) 5.35.05.05.05.0
GDP per Capita (USD) 4,7985,1095,5095,9156,337
General Government Balance (in % of GDP) -2.1-2.2-2.2-2.1-2.1
General Government Gross Debt (in % of GDP) 40.139.038.638.237.9
Inflation Rate (%) n/a3.62.52.52.5
Unemployment Rate (% of the Labour Force) 5.95.35.25.15.1
Current Account (billions USD) 12.67-3.72-9.83-17.34-21.00
Current Account (in % of GDP) 1.0-0.3-0.6-1.0-1.2

Source: IMF – World Economic Outlook Database, October 2021

Main Sectors of Industry

Indonesia is a market economy with abundant natural resources, a young, large and burgeoning population (279 million), a labour force of 137.2 million people in 2022, and political stability. The country changed from being an economy that was highly dependent on agriculture into a more balanced economy which is lessening its traditional dependency on primary exports. The agricultural sector contributes to 12.4% of the country’s GDP and employs 29% of the active population (World Bank, latest data available). Indonesia is the second-largest natural rubber producer in the world. Other major crops include rice, sugarcane, coffee, tea, tobacco, palm oil, coconuts and spices. Besides, the country is the world's biggest nickel ore producer and has become a major exporter of stainless steel. Indonesian land area used for agriculture has been growing and is currently around 30%. This is mainly due to the establishment of large-scale plantations - in particular for palm oil production (second-largest export). According to data from FAO, 2023 paddy production was estimated at a below‑average level of 53.3 million tonnes, while maize crop production hit 21.5 million tonnes as large sowings driven by strong demand by the poultry industry almost entirely offset reduced yields due to dryness.

Industry contributed approximately to 41.4% of GDP and employed over 22% of the labour force in 2022 (World Bank). The Indonesian industrial sector encompasses a diverse range of industries contributing significantly to the country's economy. Key sectors include manufacturing, which encompasses textile and garment production, automotive manufacturing, and electronics assembly, with notable hubs in cities like Jakarta, Surabaya, and Bandung. The mining industry, particularly in coal, palm oil, and natural gas extraction, remains a crucial pillar of Indonesia's industrial landscape, driving export revenues. Moreover, the country is witnessing the emergence of renewable energy as an increasingly important sector, with investments in solar, wind, and hydroelectric power projects aimed at diversifying the energy mix and reducing dependence on fossil fuels. Infrastructure development and construction also play pivotal roles in Indonesia's industrial growth, spurred by ongoing urbanization and investment in transportation networks. Additionally, technology-driven sectors such as information technology (IT) and telecommunications are experiencing rapid expansion, fueled by a growing digital economy and increasing connectivity.

The service sector contributes to 41.8% of the GDP and employs around 49% of the active population (World Bank). Key sectors include tourism, which capitalizes on Indonesia's rich cultural heritage and natural landscapes, drawing millions of visitors annually (as of November, the number of foreign tourist arrivals in 2023 reached 10.4 million, an increase of 110.86% as compared to the same period one year earlier), finance, telecommunications, and retail, which have historically been significant contributors to Indonesia's GDP. With the rise of technology and digitalization, emerging sectors such as e-commerce, fintech, and digital services are gaining momentum, reflecting the country's growing connectivity and innovation landscape. Additionally, Indonesia's vast archipelago and rich cultural heritage foster opportunities in hospitality, entertainment, and creative industries.

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 29.0 21.8 49.3
Value Added (in % of GDP) 12.4 41.4 41.8
Value Added (Annual % Change) 2.3 4.1 6.5

Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.

 

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Indicator of Economic Freedom

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.}}

Score:
66,9/100
World Rank:
56
Regional Rank:
10

Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation

 

Business environment ranking

Definition:

The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by The Economist Intelligence Unit’s Country Forecast reports. It examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.

Score:
5.95/10
World Rank:
58/82

Source: The Economist Intelligence Unit - Business Environment Rankings 2021-2025

 

Country Risk

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Latest Update: February 2024

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