Indonesia flag Indonesia: Economic and Political Overview

The economic context of Indonesia

Economic Indicators

For the latest updates on the key economic responses from governments to address the economic impact of the COVID-19 pandemic, please consult the IMF's policy tracking platform Policy Responses to COVID-19.

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 (Index Mundi, 2021). 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 +3.2% (IMF, October 2021). The usual key drivers of the economy are private domestic consumption - stimulated by its huge market with a growing middle class of nearly 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 2021 forecast, GDP growth is expected to return in full force at 5.9% in 2022 and 6.4% in 2023, subject to the post-pandemic global economy recovery.

According to the IMF, the budget deficit rose from 2.2% of GDP in 2019 to 4.7% in 2020 and 4.9% in 2021.The estimation predicts stabilisation of the deficit at 4.1% in 2022, before a reduction to 2.6% in 2023. Inflation was estimated at 1.6% in 2021 and is expected to increase to 2.8% in 2022 and 3.2% in 2023 (IMF, October 2021). 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 36.6% in 2020 and 41.4% in 2021. The debt is expected to reach 43.3% in 2022 and 42.8% in 2023 (IMF, October 2021). 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.

In 2022, the country’s most immediate challenge remains related to the economic, social and public health impacts of the COVID-19 pandemic. 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 and 6.6% in 2021. It should remains relatively high for the region in 2022 with 6% before being reduced to near pre-COVID level in 2023 with 5.6% (IMF, October 2021). The number of people working in vulnerable conditions has also increased in 2021. 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 (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, 2021).

 
Main Indicators 201920202021 (e)2022 (e)2023 (e)
GDP (billions USD) 1,120.041,059.64e1,150.251,247.351,356.34
GDP (Constant Prices, Annual % Change) 5.0-2.13.35.66.0
GDP per Capita (USD) 4,1963,922e4,2254,5384,889
General Government Balance (in % of GDP) -2.2-4.7-4.9-4.1-2.6
General Government Gross Debt (in % of GDP) 30.636.641.443.342.8
Inflation Rate (%) 2.82.01.63.33.3
Unemployment Rate (% of the Labour Force) 5.27.16.66.05.6
Current Account (billions USD) -30.28-4.45-3.11-12.69-23.71
Current Account (in % of GDP) -2.7-0.4-0.3-1.0-1.7

Source: IMF – World Economic Outlook Database, October 2021

Note: (e) Estimated Data

Main Sectors of Industry

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 13.7% of the country’s GDP and employed 27.7% of the active population in 2021 (World Bank, 2022). 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 38.3% of GDP and employed 22.7% of the labour force in 2021 (World Bank, 2022). 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 44.4% of the GDP and employed 49.6% of the active population in 2021 (World Bank, 2022). 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. From January to October 2019, the country received 13.6 million visitors, an increase of 4.6% compared to the same period of 2018 (Ministry of Tourism data). The government was expecting the country to become a leading Asian and World tourism destination by 2045 with 73 million tourists. Since 2020 the country is waiting for the world's borders to open again to international travel.

The COVID-19 pandemic has had a powerful impact on the global economy since 2020. Nevertheless, the global recovery continues, even if the momentum has weakened towards the end of 2021 and uncertainty has increased as the pandemic resurged, leaving lasting imprints on medium-term performance. The surge in global inflation has investors fretting about future growth, but many economists say price surges will subside, making way for 4.7% global GDP growth in 2022 (International Monetary Fund - IMF, 2022 & Morgan Stanley, 2021). The impact of the pandemic appears to have affected both sides of most sectors and markets in Indonesia for the second 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) 13.7 38.3 44.4
Value Added (Annual % Change) 1.8 -2.8 -1.4

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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Sources of General Economic Information

Ministries
Ministry of Finance
Ministry of Industry
Ministry of Trade
Statistical Office
BPS-Statistics Indonesia
Central Bank
Bank Indonesia
Stock Exchange
Indonesia Stock Exhange
Economic Portals
Economic, commercial and sectoral information about Indonesia and Asia in general
 

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Latest Update: June 2022