Economic and Political Overview

flag Indonesia Indonesia: Economic and Political Overview

In this page: Economic Outline | Political Outline | COVID-19 Country Response

 

Economic Outline

Economic Overview

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) 5.0-2.1e3.35.66.0
GDP per Capita (USD) 4,1963,922e4,2254,5384,889
General Government Balance (in % of GDP) -2.2-4.7e-4.9-4.1-2.6
General Government Gross Debt (in % of GDP) 30.636.6e41.443.342.8
Inflation Rate (%) 2.82.0e1.63.33.3
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.

 

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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

See the country risk analysis provided by Coface.

 

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Political Outline

Current Political Leaders
President: Joko Widodo (since 20 October 2014) - PDI-P
Vice-President: Ma'ruf Amin (since 20 October 2019) - Independent
Next Election Dates
Presidential: 2024
House of Representatives: 2024
Current Political Context
The government led by the President Joko Widodo, who was re-elected for a second five-year term in May 2019, focuses on structural reform and improving governance. It has begun a thorough overhaul of the energy subsidy programme, which will fund infrastructure renovation and provide aid to the agricultural sector. With a focus on domestic issues during his second term, the president reaffirmed the reform agenda in 2020, particularly regarding labour, healthcare and infrastructure, in order to lure foreign investments and bolster growth. Seeking to push forward the reform agenda with ease, Joko Widodo brought key opponents into his cabinet to form a broad coalition, hoping that it would weaken critics over the government. The Omnibus Bill was passed and signed into law in October 2020 and could reform labour, taxes and other important laws in order to reduce bureaucracy and stimulate investment in a post-pandemic economy. Moreover, to respond to the COVID-19 crisis, the Government has announced a fiscal package amounting to 4.3 percent of GDP. The package includes funds to improve the preparedness of the health sector and a substantial increase in social assistance.

In 2021, the President Joko Widodo pulled another political party, the National Mandate Party, into his expanding coalition, which now controls 82 percent of the 575 seats in the House of Representatives. Despite growing public concern about pressures on civil liberties and the government’s pandemic difficulties, he remains incredibly popular with Indonesian voters. The President has accelerated the construction of dozens of much-needed highways, ports, and airports, with traffic-clogged Jakarta getting the country’s first-ever subway line in 2019. But in 2021, in the context of an aggravating COVID crisis, he struggled to deliver on his promises of high economic growth, pro-business reform, and improved social welfare.

Main Political Parties
Single parties have little chance of garnering power alone. Thus, parties often work together to form coalition governments. Primary representation in parliament consists of both nationalist secular parties and moderate and Islamic-oriented groups. The major parties are:
Governing Coalition
- Indonesian Democratic Party of Struggle (PDI-P): centre-left, follows Pancasila’ideology based on the five founding principles of the Constitution; split-away group from the PD, led by ex-President Megawati Sukarnoputri
- Party of Functional Groups (Golkar): follows conservative liberalism, advocates democratic and liberal values
- National Awakening Party (PKB): Islamist, Pancasila ideoligy, nationalism
- United Development Party (PPP): Islamic democracy, nationalist islamism, Pancasila ideology
Opposition:
- National Mandate Party (PAN), Islamic democracy, Pancasila ideology
- Democratic Party (PD): centrist, Pancasila ideology
- Prosperous Justice Party (PKS), Islamist, conservative
- Great Indonesia Movement Party (Gerindra), conservatism, nationalism, populism
Type of State
Indonesia is a unitary republic made up of 514 administrative districts, based on parliamentary democracy with a Presidential form of government.
Executive Power
The President is both the head of the State and the head of the Government. The President enjoys the executive power and appoints the cabinet. Both the President and the Vice-President are elected through direct universal suffrage for five-year terms. The President is the commander-in-chief of the armed forces and responsible for domestic governance and policy-making and foreign affairs.
Legislative Power
The legislature in Indonesia is bicameral. The highest representative body at the national level is the parliament of the country, the People's Consultative Assembly (MPR). It consists of the DPR (House of People’s Representatives - lower house) with 575 members elected directly to serve five-year terms, and the DPD (House of Regional Representatives - upper house) with 136 seats, each province electing 4 members on a non-party basis. The President cannot dissolve the parliament but he has the power to veto bills. In turn, a super-majority of legislators may act to override the veto. The people of Indonesia have limited political rights.
 

Indicator of Freedom of the Press

Definition:

The world rankings, published annually, measures violations of press freedom worldwide. It reflects the degree of freedom enjoyed by journalists, the media and digital citizens of each country and the means used by states to respect and uphold this freedom. Finally, a note and a position are assigned to each country. To compile this index, Reporters Without Borders (RWB) prepared a questionnaire incorporating the main criteria (44 in total) to assess the situation of press freedom in a given country. This questionnaire was sent to partner organisations,150 RWB correspondents, journalists, researchers, jurists and human rights activists. It includes every kind of direct attacks against journalists and digital citizens (murders, imprisonment, assault, threats, etc.) or against the media (censorship, confiscation, searches and harassment etc.).

World Rank:
113/180

Source: World Press Freedom Index, Reporters Without Borders

 

Indicator of Political Freedom

Definition:

The Indicator of Political Freedom provides an annual evaluation of the state of freedom in a country as experienced by individuals. The survey measures freedom according to two broad categories: political rights and civil liberties. The ratings process is based on a checklist of 10 political rights questions (on Electoral Process, Political Pluralism and Participation, Functioning of Government) and 15 civil liberties questions (on Freedom of Expression, Belief, Associational and Organizational Rights, Rule of Law, Personal Autonomy and Individual Rights). Scores are awarded to each of these questions on a scale of 0 to 4, where a score of 0 represents the smallest degree and 4 the greatest degree of rights or liberties present. The total score awarded to the political rights and civil liberties checklist determines the political rights and civil liberties rating. Each rating of 1 through 7, with 1 representing the highest and 7 the lowest level of freedom, corresponds to a range of total scores.

Ranking:
Partly Free
Political Freedom:
2/7
Civil Liberties:
4/7

Political freedom in the world (interactive map)
Source: Freedom in the World Report, Freedom House

 

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COVID-19 Country Response

COVID-19 epidemic evolution
To find out about the latest status of the COVID-19 pandemic evolution and the most up-to-date statistics on the COVID19 disease in Indonesia please visit the official website Covid19.go.id (in Indonesian), as well as the daily updates from The Jakarta Post.
For the international outlook you can consult the latest situation reports published by the World Health Organisation as well as the global daily statistics on the coronavirus pandemic evolution including data on confirmed cases and deaths by country.
Sanitary measures
To find out about the latest public health situation in Indonesia and the current sanitary measures in vigour, please visit the Indonesian Ministry of Health’s website, as well as that of the US embassy in Indonesia.
Travel restrictions
The COVID-19 situation, including the spread of new variants, evolves rapidly and differs from country to country. All travelers need to pay close attention to the conditions at their destination before traveling. Regularly updated information for all countries with regards to Covid-19 related travel restrictions in place including entry regulations, flight bans, test requirements and quarantine is available on TravelDoc Infopage.
It is also highly recommended to consult COVID-19 Travel Regulations Map provided and updated on the daily basis by IATA.
The US government website of Centers of Disease Control and Prevention provides COVID-19 Travel Recommendations by Destination.
The UK Foreign travel advice also provides travelling abroad advice for all countries, including the latest information on coronavirus, safety and security, entry requirements and travel warnings.
Import & export restrictions
For the up-to-date information on all the measures applicable to movement of goods during the period of sanitary emergency due to the COVID-19 outbreak (including eventual restrictions on imports and exports, if applicable), please consult the website of the Ministry of Trade and that of the Directorate General for Customs and Excise.
For a general overview of trade restrictions due to COVID-19 pandemic, please consult the section dedicated to Indonesia on the International Trade Centre's COVID-19 Temporary Trade Measures webpage.
Economic recovery plan
For information on the economic recovery scheme put in place by the Indonesian government to address the impact of the COVID19 pandemic on the economy, reference KPMG Indonesia’s Government and institution measures in response to COVID-19.
For a general overview of the key economic policy responses to the COVID-19 outbreak (fiscal, monetary and macroeconomic) taken by the Indonesian government to limit the socio-economic impact of the COVID-19 pandemic, please consult the section dedicated to Indonesia in the IMF’s Policy Tracker platform.
Support plan for businesses
For the information on the local business support scheme established by the Indonesian government to help small and medium-sized companies to deal with the economic impacts of the COVID-19 epidemic on their activity, refer to KPMG's website. Further details are available on the platform of the German-Indonesian Chamber of Industry and Commerce (EKONID).
For a general overview of international SME support policy responses to the COVID-19 outbreak refer to the OECD's SME Covid-19 Policy Responses document.
You can also consult the World Bank's Map of SME-Support Measures in Response to COVID-19.
Support plan for exporters
For the up-to-date information on possible support plans for exporters in Indonesia, if applicable, please consult the website of the Ministry of Trade.
 

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Latest Update: June 2022