Indonesia’s economy expanded 5.0% in 2024, supported by firm domestic demand and a rebound in exports and tourism, but rising global uncertainties in 2025 are prompting calls for stronger policy coordination and accelerated structural reforms, the ASEAN+3 Macroeconomic Research Office (AMRO) said in its latest consultation report released Friday.
Inflation moderated to 1.6% by the end of 2024, averaging 2.3% for the year, keeping well within Bank Indonesia’s target range of 2.5% ±1.
With inflation subdued and the rupiah largely aligned with economic fundamentals, the central bank cut its policy rate to 5.75% in early 2025 in a bid to bolster economic momentum.
“Bank Indonesia continues to maintain policy prudence while responding flexibly to changing global and domestic conditions,” AMRO noted, citing BI’s combined use of rate policy, foreign exchange interventions, and liquidity support to ease pressure on the currency and support lending, particularly to MSMEs and priority sectors.
Despite robust trade surpluses and foreign investment inflows, Indonesia faces persistent pressure on the rupiah due to market volatility and investor concerns over fiscal sustainability.
In early 2025, the currency weakened amid layoffs in labor-intensive sectors and fears over global protectionism following a shift in U.S. trade policy.
The government widened its fiscal deficit to 2.3% of GDP in 2024 to stimulate growth and ramp up infrastructure spending.
That shortfall could grow further in 2025 as new social welfare programs—including a national free meal initiative—add to expenditure, while higher VAT revenue from luxury goods falls short of expectations.
To maintain macroeconomic stability, AMRO recommends the government reprioritize spending, improve tax collection, and accelerate structural reforms.
These include expanding economic diversification, boosting productivity in key sectors like manufacturing, agriculture, and tourism, and bridging regional disparities.
Efforts to green the economy must also gain traction, though limited funding remains a constraint.
AMRO welcomed the 2025 launch of the Daya Anagata Nusantara Investment Management Agency (Danantara), which aims to direct capital toward high-growth sectors, but emphasized the need for a “clear and credible investment plan” to enhance investor confidence.
“Revenue mobilization, efficient budget targeting, and deepening of the local bond market will be crucial to meet rising fiscal demands while maintaining market discipline,” the report said.
Indonesia’s longer-term challenges include transitioning to high-income status, managing global trade fragmentation risks, and enhancing the resilience of its capital markets.
With capital outflow risks still elevated, AMRO urged further development of the onshore money market and greater use of local currency transactions to strengthen financial buffers.
As policymakers weigh further rate adjustments, AMRO concluded that flexibility, coordination, and reform execution will be critical to securing Indonesia’s stability and growth in an increasingly volatile global landscape.
Business News Asia