Indonesia's GDP growth has rebounded from the COVID-19 recession and inflation has come down significantly, but exposure to global uncertainty remains high. To maintain high levels of growth, Indonesia needs to further improve the environment for productivity growth, reap further gains from digitalisation and continue advancing towards net-zero emissions, according to a new OECD report.
The latest OECD Economic Survey of Indonesia says that GDP growth is projected to remain robust, at 5.1% in 2024 and 5.2% in 2025. Private consumption remains the main engine of growth, while export volumes have benefited from buoyant global commodities demand. Consumption will remain strong and private investment is likely to pick up.
"Per capita income in Indonesia has more than doubled over the past quarter of a century, with significant declines in poverty," OECD Secretary-General Mathias Cormann said, presenting the Survey in Jakarta. "With continued structural reforms, including to improve its business environment, Indonesia will be able to further strengthen and improve the quality of its growth momentum moving forward, helping to deliver higher incomes and living standards on the path to becoming an advanced economy by 2045," he said. Increased use of digital technologies, will help drive productivity improvements, including in agriculture with the increased efficiencies and agricultural productivity helping to achieve Indonesia's food security objectives."
Inflation has returned to target. Headline inflation peaked at 6.0% in September 2022 amid surging food and energy prices. High interest rates and currency strengthening have tamed price growth. This has allowed the central bank to start reducing its policy rate in September. Last month, headline inflation was 1.7%, within the central bank's 1.5% - 3.5% target band.
The unemployment rate has fallen from 7.1% in mid-2020, at the peak of the pandemic, to 4.9% in mid-2024, below the pre-pandemic prevailing range of 5% - 5.5%.
Reducing the gender gap in the employment participation rate, as well as reducing the level of informality, will help Indonesia make the most of its available workforce. Shifting the funding of maternity leave from employers to social insurance would bolster formal employment among women.
Spending pressures on government will grow due to the green transition and increasing demand for public services by a more affluent and older population. Broadening the tax base, including through fewer exemptions and stronger enforcement, is needed. This will help absorb growing spending pressures, while keeping budget balances low.
Improvements to the business environment would boost productivity. There is scope to lower barriers to foreign investment and trade, better enforce competitive neutrality, as well as rationalise and improve the governance of state-owned enterprises. Continued progress in improving education, including by harmonising curricula, would also strengthen the economy's productive capacity and improve living standards.
The digital sector represents a growing share of the economy, but infrastructure needs are only partly met. Digital access and adoption among business fall short, and related skills remain insufficient. Removing unnecessary regulations could spur the digital transition. Digital access in rural areas can boost agricultural productivity and help towards food security.
Geographic, gender and age-related gaps in individuals' access to, and adoption of, the Internet and related tools need to be closed. Access and adoption among business lags developments in peer countries. Faster deployment of 5G technology and fixed broadband is key.
Decarbonisation needs to be stepped up by bringing forward the decommissioning of coal-fired generation, expanding the share of renewables in the energy mix, reinforcing market mechanisms, and investing in mass transport.
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