Indonesia’s Economy Sees Rebound in 2022 following Post-Covid Reopening

Indonesia’s economic conditions have remained stable amid global shocks, according to the latest edition of the Indonesia Economic Prospects. Although inflation has picked up, reaching 5.7 percent year-on-year in October, and food prices increased by 7.9 percent year-on-year in September, inflation is projected to peak in 2023 at 4.5 percent and is expected to remain at Bank Indonesia’s upper bound target at an average of 3.5 percent over 2024 and 2025.

Growth has been boosted by a sharp acceleration in private consumption following the lifting of mobility restrictions, and fiscal consolidation has been helped by high revenues due to commodity earnings and lower spending on COVID-related measures. However, these effects were partially offset by a rising energy subsidy bill and interest costs.  The fiscal deficit is projected to remain below 3 percent of GDP in 2023.

The growth outlook is subject to significant downside risks. Weaker global demand, tighter global financing conditions, capital outflows and currency pressures could trigger more rapid monetary policy tightening than expected.

Indonesia can sustain robust growth and address potential challenges ahead with several initiatives, the report, Trade for Growth and Economic Transformation, says. Continuing to implement tax reforms will help create space for investments and create resilience to shocks. Moving to a rules-based pricing model for energy could contain subsidy pressures. Social safety net programs could be targeted more effectively and expanded to create guaranteed minimum protection across the lifecycle.

“Indonesia’s social protection system can help households manage rising risks and volatility from external conditions, but it needs to be strengthened to fill remaining coverage and inclusion gaps,” said World Bank Director for Indonesia and Timor-Leste Satu Kahkonen. “Fortunately, Indonesia can build on its existing programs, just as it did in mitigating the impact of COVID-19 pandemic on poverty. A future-ready social protection system that pays adequate benefits should be accessible to all Indonesians, regardless of where and how they make a living.”

The report examines how Indonesia, which has lagged the unprecedented expansion of global trade over the past four decades, could fully realize the potential of trade for economic development. Indonesia has significant scope to boost the growth of exports, which are concentrated in resource intensive industries, by diversifying its economy. In addition, the potential of the services sector remains largely untapped.

“Indonesia’s history, location, demography and resource endowments set it up for great international trade potential,” said World Bank Indonesia and Timor-Leste Lead Economist Habib Rab. “An enabling trade policy framework could play a critical role in boosting Indonesia’s long-term growth and economic transformation. Targeted reforms to reduce constraints to trade, enhance market access, and address domestic bottlenecks will be key to realizing this potential.”

Reforms to non-tariff-trade measures such as import approvals and port of entry restrictions could have significant economy-wide benefits and boost growth by as much as 5 percent. Committing to trade agreements that go beyond traditional market access issues and cover provisions including competition policy, intellectual property rights, and environmental protection, among other issues, would further boost Indonesia’s trade. Trade reforms could enable Indonesia to tap into the growing demand for goods and technologies to reduce carbon emissions, enable the climate transition, and access lower cost and higher quality environmentally friendly products and services.

The Indonesia Economic Prospects is supported by funding from the Australian Department of Foreign Affairs and Trade.