World Bank Projects Steady Growth for Indonesian Economy Amid Fiscal Challenges

26 Jun 2024


Indonesia's economy is expected to grow steadily over the next few years, supported by robust domestic consumption and investment, according to a World Bank report released on Monday. The report forecasts a GDP growth rate of 5% for 2024, followed by 5.1% for both 2025 and 2026. This marks an upward revision from previous estimates of 4.9% for 2024 and 2025, and 5% for 2026.


The "Indonesia Economic Prospects" report attributes this growth to strong household spending, public consumption, and investment. In the first quarter of 2024, Indonesia's GDP grew by 5.11%, driven by household and election-related spending. However, the report warns of challenges such as worsening terms of trade, high interest rates, and geopolitical uncertainties affecting exports.


Wael Mansour, a senior economist at the World Bank, highlighted the stable outlook of the Indonesian economy, but noted that risks are titled to the downside. "Our baseline projection assumes continuity in policy, especially those linked to boosting investment," he said. The report also noted Indonesia’s credible fiscal rule, which has helped attract investments and lower risk premiums.


The budget deficit is projected to widen to 2.5% of GDP in 2024 from 1.7% in 2023 due to increased social spending and falling commodity prices. It is expected to remain at 2.5% in 2025 before slightly narrowing to 2.4% in 2026. Despite these challenges, the fiscal stance is within the legislated ceiling of a 3% budget deficit and a maximum debt-to-GDP ratio of 60%.


President-elect Prabowo Subianto, set to take office in October, aims to boost growth to 8% during his term. His flagship program to provide free, nutritious meals to students is estimated to cost US$27.35 billion, about 2% of GDP. The World Bank suggests implementing this program gradually and enhancing tax receipts through reforms, such as lowering tax thresholds and removing exemptions.


The report also highlights structural challenges, such as rising concentration in the manufacturing sector, regional income disparities, weaker wage growth, and increasing inequality since the COVID-19 pandemic. Limited geographic mobility of the labor force is also a concern.


Carolyn Turk, World Bank Director for Indonesia and Timor-Leste, emphasized the need for prudent macroeconomic policies to attract investment. Habib Rab, World Bank Lead Economist for Indonesia and Timor-Leste, called for regulatory reforms to boost private sector investment and productivity, essential for Indonesia’s goal of achieving high-income status by 2045.


Despite the fiscal challenges, the World Bank's projections indicate a resilient economic trajectory for Indonesia, supported by sound fiscal policies and strategic investments.