Indonesia: Economic and Political Overview
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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 (World Economics, 2022). Due to the COVID-19 pandemic, the country registered negative GDP growth for the first time since 1998, going from +5% in 2019 to -2.1% in 2020. The GDP growth rate for 2021 was back in the positive territory with an estimated +3.7% and +5.3% in 2022 (IMF, October 2022). The usual key drivers of the economy are private domestic consumption - stimulated by its huge market with a growing middle class of over 70 million people (55% of GDP), while the major issues are the ongoing trade tensions between China and the US, the country's two biggest trading partners, and the prolonged depreciation of the Rupiah. According to the IMF's October 2022 forecast, GDP growth is expected to stay high at 5% in 2023 and 5.1% in 2024, subject to the post-pandemic global economy recovery.
According to the IMF, the budget deficit rose from 2.2% of GDP in 2019 to 5% in 2020 and 3.7% in 2021.The deficit stabilised at 3.3% in 2022 and is expected to remain at 2.7% in 2023 and 2024. Inflation reached 1.6% in 2021 and increased to 4.6% in 2022. It is expected to stay high in 2023 at 5,5% before coming down at 3.4% in 2024 (IMF, October 2022). Public debt has shown a significant improvement since the Asian Financial Crisis in 1998 (it reached up to 150% of GDP), but it rose slightly to 30.6% of GDP in 2019 before climbing again due to the COVID pandemic to 39.8% in 2020 and 41.2% in 2021. The debt remained at 40.9% in 2022 and is expected to stabilise at 40.4% in 2023 and 2024 (IMF, October 2022). Three social programmes (RPJMN, PNPM Urban and PAMSIMAS) have been launched to ensure that the poorest strata of the population have access to healthcare and education. Other structural issues that remain to be tackled include a large public infrastructure gap, high labour informality and youth unemployment, and low educational attainment. Environmental protection also remains a major challenge. The government hopes to take advantage of the country's strategic location between Asia and the Pacific in the current unfavourable international context (weakening demand from China and falling commodity prices), and aims to be in the top six largest economies by 2030.
Although it has been decreasing over the last decade the unemployment rate has sharply increased from 5.2% in 2019 to 7.1% in 2020 before reaching 6.5% in 2021 and 5.5% in 2022. It should remains relatively high for the region in 2023 and 2024 with 5.3% and 5.2% respectively (IMF, October 2022). The number of people working in vulnerable conditions has also increased in 2022. Indonesia has achieved enormous gains in poverty reduction, cutting the poverty rate by more than half since 1999, to approximately 9.8% of the population in 2020. The effect of the pandemic pushed it to 10.4% in 2021 and 9.5% in 2022 (World Bank, 2022). Indeed, the country has still one of the fastest rising inequality rates in the East Asia region according to World Bank. In a few months, the pandemic reversed some hard-won advances in well-being, with poverty, malnutrition, and even hunger rising fast (OECD, 2022).
In 2023, the country’s most immediate challenge will be to navigate the volatile international context, facing steep challenges against a backdrop of the persistent health and economic overhang of a global pandemic and a war in Europe, a cost-of-living crisis caused by persistent and broadening inflation pressures, and the slowdown in China.
| Main Indicators | 2020 | 2021 | 2022 (E) | 2023 (E) | 2024 (E) |
| GDP (billions USD) | 1,062.53 | 1,187.73 | 1,318.81 | 1,391.78 | 1,508.55 |
| GDP (Constant Prices, Annual % Change) | -2.1 | 3.7 | 5.3 | 5.0 | 5.1 |
| GDP per Capita (USD) | 3,932 | 4,363 | 4,798 | 5,017 | 5,388 |
| General Government Balance (in % of GDP) | -5.3 | -3.9 | -2.1 | -2.6 | -2.5 |
| General Government Gross Debt (in % of GDP) | 39.7 | 41.1 | 39.9 | 39.1 | 38.8 |
| Inflation Rate (%) | 2.0 | 1.6 | 4.2 | 4.4 | 3.0 |
| Unemployment Rate (% of the Labour Force) | 7.1 | 6.5 | 5.9 | 5.3 | 5.2 |
| Current Account (billions USD) | -4.43 | 3.51 | 13.22 | -3.81 | -11.14 |
| Current Account (in % of GDP) | -0.4 | 0.3 | 1.0 | -0.3 | -0.7 |
Source: IMF – World Economic Outlook Database, October 2021
Indonesia is a market economy with abundant natural resources, a young, large and burgeoning population (277.7 million), a labor force of 135 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 13.3% of the country’s GDP and employed 29% of the active population in 2022 (World Bank, 2023). 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). Indonesia is the only Asian country to have been a member of the OPEC, although its membership is frozen since December 2017 because it would not agree to production cuts mandated by OPEC.
Industry contributed approximately to 39.9% of GDP and employed over 23% of the labour force in 2022 (World Bank, 2023). The industrial sector includes manufacturing of textiles, cement, chemical fertilisers, electronic products, rubber tyres, clothing and shoes (most of these are for the American market). Wood processing is also a major activity as the country is one of the world's largest timber producers. The implementation of the Indonesian-EU Forest Law Enforcement, Governance and Trade (FLEGT) to combat illegal logging is making progress and Indonesia has become the first country in the world to receive an exemption from screening to ensure its timber is sourced in accordance with EU regulations. Over 3 million hectares of Indonesian forests are certified, and over 2.2 million hectares among then are natural production forest concession.
The service sector (financial institutions, transportation and communications) contributes to 42.8% of the GDP and employed around 48% of the active population in 2022 (World Bank, 2023). The banking sector is well developed and the Islamic bank Syaria has expanded rapidly in recent years. Tourism is a major source of revenue, although the sector has suffered from terrorist threats and natural catastrophes in the past few years. The government was expecting the country to become a leading Asian and World tourism destination by 2045 with 73 million tourists. The country is still waiting for the positive effects of world's borders opening.
Global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades. The cost-of-living crisis, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering COVID-19 pandemic all weigh heavily on the outlook. Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023, the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic. Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024 (International Monetary Fund - IMF, 2023). The impact of the 2022 world events appears to have affected both sides of most sectors and markets in this country for the third year in a row - demand disruptions having run up against supply problems - making the short-term outlook uncertain for agriculture, industry and service sectors.
| Breakdown of Economic Activity By Sector | Agriculture | Industry | Services |
| Employment By Sector (in % of Total Employment) | 28.5 | 22.4 | 49.1 |
| Value Added (in % of GDP) | 13.3 | 39.9 | 42.8 |
| Value Added (Annual % Change) | 1.8 | 3.4 | 3.6 |
Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.
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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.}}
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Source: Index of Economic Freedom, Heritage Foundation
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.
Source: The Economist Intelligence Unit - Business Environment Rankings 2021-2025
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Latest Update: September 2023
