GDP growth is projected at 5.1% in 2024, 5.2% in 2025 and 5.1% in 2026. Domestic demand continues to be driven by private consumption, and investment growth will strengthen over the next two years. Headline inflation is expected to be 2.3% in 2024 and remain around that value in 2025 and 2026, which is inside the central bank’s target corridor (1.5-3.5%). The current account deficit is expected to widen, but FDI inflows are strong and international reserves remain high. An additional softening of global demand for commodities could widen the current account deficit and reduce fiscal revenues.

Monetary policy is expected to ease further in 2025. Fiscal policy is projected to remain mildly expansionary, but the deficit will remain below the 3% limit imposed by the fiscal rule. Public spending efficiency is a policy priority, including by improved targeting of social benefits to vulnerable households. Addressing labour market informality would help alleviate labour market imbalances. Supporting the transition to net-zero emissions while also ensuring energy security calls for the expansion of renewable energy sources.

Government consumption increased strongly in the first half of 2024, with a surge in transfers and subsidies in the run-up to the February election. Investment grew modestly during the same period but seems to have picked up more recently. Exports and imports have grown strongly in the first half of 2024. Indicators of tourist arrivals and spending are near their pre-pandemic record levels. Unemployment fell to 4.8% in the first quarter of 2024, below the pre-pandemic average of 5%. After a small surge in early 2024 caused by high food prices, headline inflation has declined, from 3% in April to 1.7% in October. Business confidence has improved, and consumer spending remains strong. Car sales have declined since 2023, though this partly reflects the end of post-pandemic tax breaks. The Indonesian Rupiah appreciated during the summer after a surprise rate increase in April but has depreciated since the mid-September rate cut, falling by about 5% against the US dollar.

Crop yields and prices have largely normalised since El Niño in 2023 depressed yields and increased prices. Exchange rate appreciation over the summer has further contributed to a decline in headline inflation, though depreciation since mid-September could exert some upward pressure on prices. Despite the price fall of Indonesia’s commodity exports (principally comprising coal, palm oil and metals) from their 2022-2023 peaks, the trade balance has remained positive in 2024.

Bank Indonesia’s policy rate increased in a series of steps from 3.5% in August 2022 to 6.25% in April 2024, which helped to lower inflation and support the Rupiah. The mid-range of the central bank’s CPI inflation target was reduced in January 2024 from 3% to 2.5% (with a ±1% corridor around it). The central bank made its first rate cut in mid-September 2024 and has kept its policy rate unchanged during its November meeting, amid exchange rate pressures. Further monetary easing is expected in 2025. The policy rate is expected to reach 5% at the end of 2025 and remain at this level in 2026.

Following a fiscal deficit of 1.5% of GDP in 2023, the deficit is expected to reach 2.7% in 2024 (above the initial objective of 2.3%). Extending the school lunch programme, as proposed by the new administration, combined with the funding of other electoral proposals, will put pressure on public finances. The 2025 Budget (announced in August 2024) targets a deficit of 2.5% of GDP, and the deficit is likely to remain below the 3% deficit limit in 2026. Debt stands at 44% of GDP, well below the 60% limit, and is expected to decrease from high post-pandemic levels, thanks to robust nominal growth. Fiscal prudence remains warranted, nevertheless. Over the medium and long term, ageing and demands for better public services in the context of rising incomes will add to spending pressures and require a structural increase in government revenues.

Improved business and consumer confidence, higher government spending and lower interest rates will support domestic demand and growth in 2025 and 2026. The trade surplus is expected to shrink, partly due to higher imports. Strong domestic demand and a tight labour market are projected to put some pressure on core and headline inflation, but prices of imported goods should remain moderate, and headline inflation is expected to hover slightly below 2.5% in 2025-26.

The economy remains dependent on international demand for commodities, notably from China, despite diversification efforts and a push to expand downstream manufacturing. Weaker than projected growth in China would hurt exports. Domestic political or financial risks remain limited as the new government is likely to follow broadly the policies of its predecessor, though fiscal slippage could increase.

Indonesia aims to become a high-income country by 2045, but economic convergence with richer economies has slowed. Structural reforms are needed to boost growth, including removing distortions and increasing clarity in business regulations to foster higher productivity and greater competitiveness. Efforts have been undertaken to increase openness to foreign direct investment, but Indonesia could still benefit further from international trade and foreign investment, including by removing unnecessary restrictions on the import and export of commodities, materials and final goods. The digital and green transitions will require sizable investments in infrastructure, as well as efficient market regulation favouring free business entry. Labour market informality remains high, and the coverage of some social security programmes excludes small-firm employees, despite significant steps to improve social safety nets over the past decade. A further shift towards broader formalisation would help broaden the tax base, improve tax compliance and provide revenue to invest in physical infrastructure, including in clean energy, and human capital. Shifting the funding of maternity leave from employers to social insurance, in particular for smaller firms and self-employed women, would help improve female labour force participation and labour market outcomes. Addressing infant malnutrition through the free nutritious meal programme will help to improve education outcomes, along with further improvements in education and vocational training.