Indonesia has demonstrated consistently high GDP growth rates for several decades, thanks to which the republic has been able to achieve significant progress in the socio-economic field, significantly increasing the level of well-being of its citizens.
As a result, in 2019, Indonesia was included for the first time in the World Bank's classification of upper middle-income countries. Despite a temporary exclusion from this group in 2020-2021 due to the negative impact of the COVID-19 pandemic on the economy, a rapid recovery in output in 2022-2023 allowed the country to regain the level of GNI per capita necessary to reenter this category. As of 2023, Indonesia's GNI per capita, calculated using the Atlas method, was USD 4.8 thousand. Besides, the share of citizens living below the poverty level has been steadily decreasing in the country. In 2023, about 17.5% of Indonesia's residents lived on less than US$3.65 per day (the poverty level set for lower-middle income countries). In comparison, at the beginning of the 21st century, the rate was around 80%. Today, Indonesia's GNI per capita is at the lower end of the upper-middle income group, and the share of citizens living below the poverty level for these countries (less than US$6.85 per day) remains high at 61.8% as of 2023.
The key problem of the Indonesian economy is its dependence on the price situation in the world market of commodities, which form the basis of the country's poorly diversified export structure. The decline in the value of key export items in 2023 led to a reduction in overseas shipments in value terms, which, in turn, negatively affected the dynamics of real GDP growth in the country. Moreover, the concentration of labor force in the low-productive raw materials sector causes social vulnerability of a significant part of the working population, especially during large-scale crises. Thus, due to the pandemic in Indonesia, the level of socio-economic inequality increased markedly: the value of the Gini coefficient increased from 0.353 in 2020 to 0.361 in 2023.
Nevertheless, the country managed to avoid a significant decline in real GDP growth rates in 2023 against 2022 due to the high level of domestic demand. At the end of the year, the indicator amounted to 5.0% (5.3% in 2022). According to IMF estimates, the country has maintained a real GDP growth rate of 5.0% in 2024. It is expected that a stable macroeconomic situation will allow Indonesia to improve the welfare of its citizens. In particular, the World Bank forecasts that at current GDP growth rates, the share of the population living below the poverty level will continue to decline, reaching 12.7% by 2026.
Indonesia's economy is expected to grow at annual growth rate of 5.1% in the medium term, primarily due to strong consumer activity and domestic demand, which will be further boosted by the government's reforms. One of the key tasks set by the Government of the republic is to make the country one of the high-income countries, according to the World Bank classification, by 2045. An important role in its implementation will be played by the ongoing structural transformations aimed at achieving real GDP growth of 8% by 2028, since, according to estimates, such growth rates are a prerequisite for achieving the GNI per capita required for high-income countries.
The inflation rate in Indonesia has been gradually declining after reaching its peak in 2022, when the year-end price increase amounted to 4.1%. The inflationary pressure was reduced by the actions of the Bank of Indonesia, which from August 2022 to April 2024 increased the key rate by 275 bps to 6.25%. In addition to the geopolitical factors that contributed to the growth of inflation around the world, this indicator in Indonesia was also affected by unfavorable weather conditions, which resulted in a reduction in agricultural production, which accelerated the growth of food prices. The tight monetary policy pursued by the regulator has made it possible to restrain a further increase in the value of the indicator: by the end of 2023, inflation fell to 3.7%, and in 2024, according to estimates, it amounted to 2.5%. The stabilization of price growth at the level corresponding to the inflation target range set by the Bank of Indonesia at 2.5±1% made it possible to start the process of softening the regulator's monetary policy. From August 2024 to January 2025, the key rate is reduced by a cumulative 50 bps to 5.75%. Keeping inflation within this range is expected to allow the Bank of Indonesia to conduct a softer monetary policy in the medium term.
Despite the positive outlook, pro-inflationary factors remain in the country, primarily related to the volatility of prices for Indonesia's main export commodities. The high domestic demand observed in the country, in addition to having a positive impact on economic growth rates, under certain conditions also contributes to price growth. However, in general, inflation expectations in Indonesia remain moderate.
