Jakarta. The World Bank has upgraded Indonesia's expected gross domestic product (GDP) growth to an average of 5.1 percent per year from 2024 to 2026, up from the earlier projection of 4.9 percent for both 2024 and 2025.

According to the World Bank, Indonesia’s economy is expected to maintain a steady growth trajectory in the upcoming years, driven by increased public spending, rising business investments, and stable consumer demand.  This outlook holds despite challenges such as a declining commodity boom, greater fluctuations in food and energy costs, and rising geopolitical uncertainties.

“Indonesia’s strong economic performance largely stems from the government’s robust macroeconomic policies, which have bolstered investment attraction,” said Carolyn Turk, World Bank Director for Indonesia and Timor-Leste in a statement on Monday. “It is crucial to uphold prudent, credible, and transparent macro policies while creating fiscal room for prioritizing expenditures on social protection, human capital, and infrastructure.”

The Indonesian government and parliament are targeting economic growth between 5.1 percent and 5.5 percent in 2025, surpassing the 5.05 percent recorded in 2023 and the 5.2 percent target for the current year.

The World Bank report highlights that rising food prices contributed to headline inflation increases this spring, with consumer prices rising 2.8 percent year-over-year in May, up from a 2.6 percent increase in January. Adverse climate conditions led to reduced domestic rice harvests, impacting food prices more broadly. Headline inflation is anticipated to average around 3 percent in 2024 and stabilizes at 2.9 percent thereafter, staying comfortably within BI’s target range but facing upward pressure from food and energy costs.

In April 2024, Bank Indonesia raised its benchmark interest rate by a quarter percentage point to 6.25 percent, the highest level since 2016. This move was in response to delayed policy rate cuts by central banks in advanced economies, prompting significant outflows in portfolios and other investments, and exerting currency pressures on Indonesia and other emerging markets. Bank Indonesia is expected to initiate rate cuts next year.

"Higher interest rates could raise borrowing costs and restrict external financing access, potentially increasing public debt servicing expenses. External shocks like heightened armed conflicts or geopolitical uncertainties could lead to an unexpectedly sharp decline in terms of trade, resulting in reduced revenues and a more stringent fiscal position," the World Bank wrote in its report.

Despite declining revenues from diminishing commodity windfalls, the government is intensifying social spending and public investments. However, projections indicate that the fiscal deficit will widen but stay within the 3 percent threshold.

The report also focuses on Indonesia’s path from a middle-income country to a high-income status by 2045. To achieve this, Indonesia must accelerate annual growth to more than 6 percent. This would require a productivity increase of 3 percent—one percentage point higher than recent averages. World Bank data shows labor productivity declined from $7,530 per worker in 2015 to $5,336 in 2023, partly due to the economic impacts of the Covid-19 pandemic

“To accelerate long-term growth, there is a need for enhanced private sector investment and dynamism,” emphasized Habib Rab, World Bank Lead Economist for Indonesia and Timor-Leste. “This necessitates regulatory reforms that facilitate market openness and boost firm productivity across manufacturing and services.”

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