ECONOMIC GROWTH OF INDONESIA

MEMBERS:

JENNY MARI MURGA

PRINCESS ALEXANDRA APUD

JULIVIER ANN GREGORIO

JEZEL T. SAYOSA

CRISTINE MAE S. FERRER

CHARMIE FAITH A. FUNGAN

JERRY C. BAGUIO CPA, MBA

 Introduction

Indonesia, the largest economy in Southeast Asia has seen significant economic
growth since the Asian financial crisis of the late 1990s. The country has made
significant progress in poverty reduction, cutting the poverty rate by over half since
1999. The World Bank is supporting Indonesia's COVID-19 emergency response,
including strengthening emergency response elements, vaccination programs, social
assistance, healthcare systems, and financial sector resilience.
Additionally, Indonesia's economy is recovering after a COVID-19 surge, with
GDP rebounding to 5% year-over-year in Q4 2021. High commodity prices supported
exports in 2021 and are expected to continue in 2022. The IMF forecasts real GDP
growth of 5.6% in 2022, the fastest since 2013. However, headwinds include
government restrictions, renewed healthcare pressures, and a coal export ban. A
decline in global growth and commodity prices could threaten recovery, and Indonesia's
dependence on capital inflows and elevated external debt makes it vulnerable to US
interest rate rises and currency depreciation.
In 2022, Indonesia's economy grew 5.31%, marking a return to pre-pandemic
growth. The gross domestic product accelerated from 3.69% in 2021 to 5.31%, with
household consumption increasing by 4.93% Year-over-Year. The Asian Development
Bank predicts Indonesia's economy will grow by 5.4% in 2022 and 5.0% in 2023.
However, inflation is expected to rise significantly in 2022 and remain high in 2023.
Indonesia`s economic growth can be attributed to various factors, including a
stable political climate, a dynamic workforce, and strategic trade and investments. The
government`s commitment to economic development and infrastructure development
has also played a vital role in the country`s growth. Indonesia has successfully
diversified its economy, moving away from its heavy reliance on agriculture toward
manufacturing and services sectors. Industries such as textiles, automotive and
electronics, and tourism have witnessed significant growth, contributing to job creation
and increased foreign investments.

The country`s rich resources, including oil, gas, coal, and minerals, have also
been instrumental in driving economic growth. Indonesia is one of the world’s leading
exporters of palm oil, rubber, and coffee. The government also promoted renewable
energy sources and solar power to ensure suitable development. Indonesia`s growth
has not only resulted in improved living standards for its citizens but also lifted millions
of people out of poverty.

Consumer Price Indices and Gross Domestic Product

Consumer Price Indices

Figure 1: Consumer Price Indices of Indonesia

In 2021, Indonesia's CPI stood at 1.66%, lower than the 2.03% recorded in 2020.
This decline was attributed to a slowdown in economic activity due to the COVID-19
pandemic, a decrease in demand for goods and services, and lower food prices.
Despite the decline in CPI, the inflation rate remained higher than the target range of 2-
4% set by Bank Indonesia (BI). Consumption was the main driver of economic growth
in Indonesia in 2021, with household consumption growing by 2.0%. Investments also
increased, as businesses began to recover from the economic slowdown. Investment
grew by 3.0%, with investment in machinery and equipment growing by 4.5%.
Government spending was also supportive of growth, with government spending
growing by 2.5%. Net exports, however, were negative, as imports outpaced exports.
Imports grew by 10.0%, while exports grew by 5.0%.
 In contrast, Indonesia's CPI in 2022 bucked the global trend by peaking at 5-6 %
in the second half of the year despite pressures from increasing demand and rising
input costs. Unlike its peers, Indonesia's inflation rate remained broadly flat and only
started to pick up with rising global commodity prices in early 2022. The authorities
partially removed caps on fuel prices in September 2022, resulting in a 30% increase in
gasoline prices. This led to the highest inflation level in seven years. Data from
Statistics Indonesia (BPS) shows that net exports in 2022 were positive, with exports
worth US$291.98 billion, an increase of 26.07% year-on-year. Imports in 2022 were
valued at US$237.52 billion, an increase of 21.07% year-on-year. Indonesia received
some US$43 billion in foreign investment in 2022, the highest in the country's history
and an increase of 44 percent from 2021. This was mainly supported by the metal
mining industry through which the Indonesian government is seeking to develop its
downstream capabilities, particularly for nickel.

Gross Domestic Product

Figure 2: Gross Domestic Product of Indonesia

 In 2021, Indonesia experienced a significant economic slowdown due to the
COVID-19 pandemic. The country`s GDP contracted by 2.07% in 2020, and the
recovery in 2021 has been gradual. The government implemented various measures to
support the economy, such as infrastructure development, and vaccination campaigns.
Indonesia`s GDP growth in 2021 is expected a growth rate of 4.3% for Indonesia in
2021, these considers the factors such as the pace of vaccination, the effectiveness of
containment measures, and global economic conditions. Indonesia's economy grew
5.31% in 2022 from a year earlier, government data showed, highlighting that Southeast
Asia's largest economy has now returned to a pre-pandemic economic growth path as
the government eased COVID restrictions and businesses got back into gear.

According to the World Bank, Indonesia`s GDP in 2021 experienced a positive

growth compared to the data in 2020 due to COVID-19 pandemic. This growth was
driven by factors such as gradual reopening of the economy, increased consumer
spending, and government support. The recovery was also supported by the
government such as manufacturing, construction, and trade.

Consumption

Figure 3: GDP on Consumption

The 2021 Indonesia’s consumption was significantly impacted by the COVID-19

pandemic. The restrictions and lockdown measures implemented to control the spread
of virus affected the consumer spending patterns, leading to a decline in consumption.
As vaccination efforts progress and restrictions ease, consumption is expected to
recover gradually. Annual household consumption grew 4.93% every year from 2.02%
in 2021. After confirming that daily COVID-19 cases had dropped, the government
removed restrictions last year, driving up household consumption. Indonesia`s GDP
based on consumption is expected to have been influenced by the gradual reopening of
the economy and increased consumer spending as the country recovered from the
COVID-19 pandemic. As businesses reopen and people return to work, and consumer
confidence improves, it is anticipated that consumption levels will increase. This
increase in consumption will drive the growth and contribute to a positive GDP growth.

Investment

Figure 4: GDP on Investment

The pandemic's uncertainty and economic disruptions led to a drop in investment

activity. Businesses faced challenges such as decreased demand, supply chain
disruptions, and financial constraints, all of which affected investment decisions. As a
result, Indonesia's GDP growth in 2021 will be limited by a decline in investment.
However, as the country recovers, investment activity is expected to increase. The
recovery in 2022 investment is expected to contribute to the overall growth of
Indonesia's GDP, as the economy stabilizes and businesses regain confidence.
Domestic and foreign direct investment, particularly in infrastructure, manufacturing, and
technology, could be included. Efforts by the government to improve the investment,
such as reforming regulations and infrastructure development, can also help to attract
investment and drive economic growth.

Government Spending

Figure 5: GDP on Government Spending

In 2021, Indonesian government implemented various measures to support the

economy during the COVID-19 pandemic. These measures include infrastructure
development projects, and assistance programs. The increased government spending
aimed to boost economic activity, protect jobs, and provide relief to affected individuals
and businesses. The government spending in 2021 have a positive impact on
Indonesia`s GDP. By injecting funds into the economy, the government aimed to
stimulate consumption and investment, which are key drivers of economic growth.

Government spending in 2022 is expected to continue playing a significant role in

supporting Indonesia`s GDP. The government focuses on infrastructure development,
including transportation, energy, and digital infrastructure that is expected to contribute
in the economic growth. Additionally, continuous support of assistance programs is
expected in the economy. Government spending in 2021 has likely contributed to
Indonesia`s GDP by providing support to the economy during the pandemic. In 2022,
government spending focuses on the infrastructure development and assistance
programs for the economy.

Net Exports

Figure 6: GDP on Net Exports

Indonesia`s net exports experienced a significant increase compared to the

previous year. The COVID-19 pandemic affected the global trade and the restrictions in
international travel and trade, reduced economic demand affected the country`s exports
and import performance. Imports were affected due to supply chain disruptions and
reduced domestic consumption. As the country is heavily reliant on exports, it reduced
the exports revenue and trade volumes. However, in 2022 the recovery in global
pandemic conditions and easing of travel and trade restrictions improves the country’s
activities. Indonesia is known to be a significant exporter of commodities such as pal oil,
coal and natural gas. The performance of this export sectors, as well as other
manufactured goods and services can contribute to Indonesia`s GDP based on net
exports.

EXPORTS. The top exports of Indonesia are Coal Briquettes ($28.4B), Palm
Oil ($27.3B), Petroleum Gas ($8.06B), Ferroalloys ($7.16B), and Large Flat-Rolled
Stainless Steel ($6.68B), exporting mostly to China ($54.5B), United
States ($26.2B), Japan ($18.6B), India ($14.5B), and Singapore ($13B).

IMPORTS. The top imports of Indonesia are Refined Petroleum ($14.5B), Crude
Petroleum ($6.03B), Petroleum Gas ($4.27B), Vaccines, blood, antisera, toxins and
cultures ($3.42B), and Motor vehicles; parts and accessories (8701 to 8705) ($3.19B),
importing mostly from China ($60.4B), Singapore ($18.4B), Japan ($13.2B), United
States ($9.69B), and Malaysia ($9.55B).

Productivity and Economic Growth

Indonesia, a diverse archipelago Southeast Asia, has significant economic

growth in productivity improvements in recent years, with a large and youthful
population, strategic geographic location, and abundant natural resources. Indonesia
has become a key player in the global economy.

Natural Resources

As of my last knowledge update in May 2023, Indonesia is rich in natural

resources, including vast forests, minerals, and a diverse agricultural landscape. The
country has been a major exporter of natural resources, with palm oil, rubber, coal,
natural gas, and minerals among its key commodities. Additionally, natural resources
are often divided into renewables and non-renewables.

Non-renewable natural resources are only available for a certain period. This
means that consuming a certain amount will result in these resources becoming
unavailable at a later date. On the other hand, the stock of renewable natural resources
can regrow over a period of time.

However, the management of natural resources has faced challenges, such as

deforestation and environmental issues linked to palm oil production. Efforts have been
made to balance economic development with sustainability, including initiatives for
responsible resource extraction and conservation.
 For the latest and most accurate information on Indonesia's current situation
regarding natural resources, I recommend checking recent reports from reputable
sources or official government publications as my data may be outdated.

Technology

Indonesia has been making strides in the field of technology, with a growing
digital economy and increased internet penetration. The country has seen
advancements in e-commerce, fintech, and startup ecosystems. Cities like Jakarta have
become hubs for tech innovation and entrepreneurship.

When we think of tech in Indonesia, the first thing that usually comes to mind are
homegrown unicorns like GoTo and Traveloka, big consumer-facing start-ups that are
integral to the country’s rapidly growing digital economy. And for a while, it seemed like
this would become a new frontier of global competition, as companies like Uber tried to
enter the market and waves of foreign investment underwrote explosive growth.

Education

Indonesia has been working to improve its education system, facing challenges
like unequal access to quality education across regions. Efforts have been made to
enhance curriculum standards, teacher training, and infrastructure. Indonesia has also
embraced digital learning technologies to expand educational reach, especially in
remote areas. The government has initiatives to increase school enrollment and literacy
rates, but there's still work to be done in addressing educational disparities.

In Indonesia education is centrally controlled by the ministry of national

education. 6 years in primary school and 3 years in junior high school are compulsory.
The primary phase follows on after optional pre-school playgroups that may commence
in a child’s third year. Most elementary schools are government controlled. Some offer
accelerated programs that compress the phase to 5 years.

Economic Policy
 In 2022, Indonesia was in a recovery phase from COVID-19's impact on its
economy, food security, and livelihoods. However, natural hazards, climate change, and
global inflation affected food systems, particularly impacting vulnerable groups like
adolescent girls and pregnant/lactating women. The World Food Programme (WFP)
focused on supporting Indonesia's Sustainable Development Goals (SDGs), especially
SDG 2: Zero Hunger and SDG 17: Partnerships for the Goals, through its Country
Strategic Plan (CSP) 2021-2025.The CSP aligned with Indonesia's national
development plan and the UN Sustainable Development Cooperation Framework. WFP
tackled challenges across three strategic outcomes: strengthening food security and
nutrition evidence, enhancing food supply resilience, and addressing malnutrition
through innovations. Under these outcomes, WFP collaborated with various ministries
and agencies, improving data quality, advocating for policies using evidence-based
tools, facilitating partnerships, and promoting healthy diets. Notable achievements
include advocating for the use of the Food Security and Vulnerability Atlas, signing
agreements for disaster preparedness partnerships, launching digital campaigns for
healthy eating, and initiating rice fortification programs.WFP emphasized Sustainable
Development Goal 17 by promoting South-South and Triangular Cooperation (SSTC)
initiatives. Contributed to these initiatives, enabling WFP Indonesia to address critical
issues related to food security, nutrition, and disaster management.

The Indonesian economy has recorded strong growth over the past few decades,
and in recent years the firm pace of economic expansion has been accompanied by
reduced output volatility and relatively stable inflation. Indonesia’s economic
performance has been shaped by government policy, the country’s endowment of
natural resources and its young and growing labor force. Alongside the industrialization
of its economy, Indonesia’s trade openness has increased over the past half century.

The Indonesian economy has recorded relatively strong average growth over a
number of decades. Considerable structural change has taken place over this time, with
Indonesia becoming increasingly industrialized and integrated into the global economy.
With plans for substantial infrastructure spending over the next several years and
favourable demographics, the Indonesian economy is widely expected to continue to
grow at a strong pace over the next decade. Nevertheless, as elsewhere in the
emerging world, policy implementation will be a key challenge in realising the country’s
growth plans.

Political Stability

Figure 7: Political Stability – Recent Values Figure 8: Historical Chart

The average value for Indonesia during that period was -1 points with a minimum
of -2.1 points in 2003 and a maximum of -0.37 points in 2016. The latest value from
2021 is -0.51 points. For comparison, the world average in 2021 based on 193 countries
is -0.07 points. See the global rankings for that indicator or use the country comparator
to compare trends over time.

Political Stability and Absence of Violence/Terrorism measures perceptions of

the likelihood that the government will be destabilized or overthrown by unconstitutional
or violent means, including politically-motivated violence and terrorism. The index is an
average of several other indexes from the Economist Intelligence Unit, the World
Economic Forum, and the Political Risk Services, among others.
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