According to the World Bank’s Indonesia Economic Prospects report, Indonesia’s gross domestic product (GDP) growth is expected to average 5.1% annually from 2024 to 2026, despite challenges such as a decline in the commodity boom, increased fluctuations in food and energy prices, and rising geopolitical risks.

Carolyn Turk, the World Bank Director for Indonesia and Timor-Leste, stated that Indonesia’s strong economic performance is largely due to the government’s effective macroeconomic policies, which have attracted investment. She emphasized the importance of maintaining prudent, credible, and transparent macro policies while creating fiscal space for priority spending in social protection, human capital, and infrastructure development.

This spring, rising food prices increased headline inflation, with consumer prices climbing 2.8% year-over-year in May, up from 2.6% in January. Adverse weather conditions impacted domestic rice production and affected overall food prices. It is anticipated that headline inflation will average around 3% in 2024.

In April 2024, Bank Indonesia raised its benchmark interest rate by 0.25% to 6.25%, the highest rate since 2016. This increase occurred as central banks in developed countries postponed expected rate cuts, leading to significant outflows from portfolios and other investments, creating currency pressures in Indonesia and other emerging markets. Bank Indonesia is projected to start reducing rates next year.

As the government increases social spending and public investment amidst declining revenues from falling commodity prices, public debt is expected to remain stable.

The report also identifies four key structural challenges: growing concentration in the manufacturing sector, a slowdown in efforts to reduce income disparities across regions, weakened wage growth and rising inequality since the COVID-19 pandemic, and limited geographic mobility of the workforce, which hinders the matching of workers to jobs and locations that can improve living standards.

The latter part of the report outlines Indonesia’s strategy for developing a more dynamic and productive economy with the aim of advancing from middle-income to high-income status by 2045.

Habib Rab, the World Bank Lead Economist for Indonesia and Timor-Leste, highlighted the need for increased private sector investment and dynamism to boost long-term growth, advocating for regulatory reforms that would open up markets and improve the productivity of firms in both manufacturing and services.

https://www.worldbank.org/en/news/press-release/2024/06/24/indonesia-economy-projected-to-remain-resilient