ACCORDING to the Indonesian Finance Minister (May 2024), the country’s economy remains robust amidst the global challenges as the Southeast Asian country registered a 5.11 percent year-on-year growth in the first quarter of 2024 which is indeed a good omen. The strong domestic demand and the state budget played an important role in the economic stability and sustainability. Actually its state budget acted as a shock absorber to maintain the people’s purchasing power and the economic growth momentum in the high zone. Resultantly, its unemployment rate reached the pre-pandemic level.
Indonesia’s GDP at constant price reached Rupiah 3,112.9 trillion (around US$190 billion) in Q1-2024, showing positive trends. The country’s GDP at current prices stood at around Rupiah 5,288.3 trillion that period. Obviously, the US Fed’s uncertain policies/unwise monetary & fiscal policies/protectionism, emerging geopolitical tension, and disruptions over the global supply chain somehow affected the Indonesian economy but its Q1 economic performance remained outstanding.
However, it is feared that domestic growth may face challenges related to higher and prolonged interest rates, which will eventually weaken the global and domestic demand. Indonesia is the largest country in Southeast Asia. It is the world’s largest Muslim-majority state and the third-biggest democracy. Unfortunately, somehow Indonesia remained the world’s largest invisible economy and full of insignificance. The economy is driven by informal economic activities, untraceable transactions, un-bankable merchants, and completely unclear industrial agenda.
Comparative study of its national economy establishes that Indonesia has enjoyed economic growth since 1980’, but it was tampered down by the unexpected Asian financial crisis in 1997. The crisis itself made the political situation turmoil and the structure of the state reformed. Since then, Indonesia has tried some ways to regain its position as one of the rising stars of global economies and journey of socio-economic prosperity, immense banking & financial integration, digitalization, e-commerce, modernization, openness and qualitative industrialization still goes on achieving new avenues of diversified economic growth.
Persuading constant structural reforms, Indonesia has successfully attained global attention as a shining star in Asia. Indonesia is a sleeping economic & industrial giant. With the passage of time, it successfully drives the economy into a highly successful industrial rising-power house. For the last twenty years, Indonesia’s economy continued to grow at an average of 5 percent each year. The World Bank repeatedly positioned Indonesia as one of the upper-middle income countries and Indonesia eagerly continues its ambition to become one of the high-income countries by 2045.
As the 7th largest economy by GDP, Indonesia is projected to rise to the 5th position globally by 2024. Rapid transformation, driven by a young population and urbanization, is igniting growth across diverse sectors. While natural resource exports once fuelled economic growth, their contribution has decreased since 2000, despite rising resource prices. Currently, mining and oil and gas comprise only 9 percent of Indonesia’s nominal GDP. However, with one-fifth of the world’s nickel reserves, Indonesia is poised to play a crucial role in the green transformation, especially in the production of batteries for electric vehicles, further boosting its economy.
Additionally, Indonesia is also one of the biggest sources of cobalt, another vital input for batteries. Indonesia sees this opportunity to build new industrializing forces that process the essential resources to drive an economic revival and accelerate the rate of growth. It seems that the policies implemented by the government in recent years built attractive incentives for foreign investors. Its constant and matured economic and political diplomacy always provide fair play and equal opportunities to Chinese and western companies alike. The incumbent President Joko Widodo since 2014 has built 16 new airports, 18 new ports, 2,100 kilometres of operational toll roads, and 36 new dams transforming its economy, trans-regional connectivity and services sector.
The 2014 policy banning the export of unprocessed raw materials marked a significant turning point in Indonesia’s industrial transformation. This policy, requiring value addition before export, incentivized companies to process raw materials domestically, attracting new investments, particularly in metal processing. Consequently, it spurred growth and drew foreign investors to Indonesia. However, high energy and transportation costs hindered further investment, leading to relatively low net inflows of Foreign Direct Investment (FDI) in 2022 at 1.6 percent of GDP, compared to ASEAN peers like Vietnam (4.4%) and Thailand (2.1%).
Another issue that holds back the investment and the development of the manufacturing sector is the lack of substantial productivity improvements. It includes labour market issues, uncertainty of business climate, and wiggling policies on economic reform. In summary, it is predicted that in the next 10 years, there will be an influx of more or less 90 million additional consumers with significant spending power, bridged by digital services that help create a more integrated consumer market thus digitalization of its consumer market and regional economy is must. This rate of growth in Indonesia’s consuming class is faster and stronger than any economies in the world apart from China and India which clearly demonstrates the real essence and strength of its macro-economy.
Economic statistical data upholds that its domestic consumption rather than exports and services rather than manufacturing or resources, are the real engine of its upward growth. Undoubtedly, Indonesia is a fast growing economy with abundant natural resources and favourable demographics which needs to be further strengthened and integrated in which a relatively resilient banking system, solid public finances and sound fiscal policies would play an important role. However, a weak legal system, inefficient tax administration and strong informal economy, exports’ dependency on commodities, serious infrastructure gap compared to regional peers, increasing inequality poses a threat to social cohesion and inclusive economic growth must be rectified and reformed as soon as possible.
— The writer is President: Pak-China Corridor of Knowledge, Pakistan, Executive Director: The Centre for South & International Studies (CSAIS) Islamabad, Regional Expert: Indonesia, China, CPEC & BRI
Email: [email protected]
