Several global financial institutions, including the World Bank, the International Monetary Fund (IMF), and the Asian Development Bank (ADB), have released their forecasts for global economic growth in 2025. Their reports estimate that Indonesia’s economy will grow within the range of 5% to 5.1%.
This projected growth is slightly lower than the 5.2% target set in the 2025 State Budget Draft (RAPBN). In his final state address on Friday, August 16, 2024, Indonesia’s 7th President, Joko Widodo (Jokowi), explained that the relatively stagnant global economy has compelled Indonesia to rely heavily on domestic demand.
“Household purchasing power will be tightly maintained through inflation control, job creation, and support from social assistance and subsidy programs,” said Jokowi at the Parliament Building in Senayan, Jakarta.
In the four months leading up to 2025, Indonesia has faced a series of economic challenges that have raised public concerns about the country's future. These include the political transition, the government's failure to rescue Southeast Asia's largest textile factory, and the last-minute cancellation of the planned 12% value-added tax (VAT) implementation at the end of 2024.
Economist from UMS Prof. Dr. Anton Agus Setyawan, S.E., M.Si., highlighted Indonesia's stagnant economic growth at 5%. He attributes this stagnation to the lingering impacts of the COVID-19 pandemic.
To boost the economy, create jobs, and absorb the growing workforce, Anton emphasized that Indonesia requires at least 6% economic growth. However, the 8th President, Prabowo Subianto, has set an ambitious target of 8% growth for his administration. “I think that goal is overly optimistic,” Anton commented on Tuesday, (31/12/2024).
Indonesia continues to face several challenges that may hinder its 2025 economic growth targets. According to Anton, Indonesia's incremental capital output ratio (ICOR) remains relatively high compared to other countries.
Statistics Indonesia (BPS) recorded Indonesia's ICOR at 6.33% in 2023. By comparison, ICOR rates for Malaysia, Thailand, Vietnam, and the Philippines were notably lower, at 4.5%, 4.4%, 4.6%, and 3.7%, respectively, according to CNBC Indonesia.
ICOR is a key parameter for assessing a country's investment efficiency. It helps governments gauge the investment needed to achieve specific economic growth targets.
The Dean of the Faculty of Economics and Business at Universitas Muhammadiyah Surakarta (UMS) explained that for Indonesia to increase its economic growth by 1%, it requires an investment of 7%. Meanwhile, other ASEAN countries only need 3% to 4% investment for the same growth rate. “If we need seven times the capital just to achieve a 1% growth, that indicates inefficiency,” he emphasized.
This inefficiency, he added, is closely tied to income inequality in Indonesia. The March 2024 BPS report highlighted this issue, with Indonesia's Gini coefficient recorded at 0.379.
The Gini ratio is an index used to measure income inequality, ranging from zero to one. The closer the ratio is to one, the higher the inequality. According to Anton, Indonesia's Gini ratio is relatively high, nearing 0.4.
“To put it into perspective, the combined wealth of Indonesia's four richest individuals is equivalent to the total wealth of a thousand average citizens,” he explained.
Read more: Deflation Woes: A Signal of Economic Downturn
This inequality is further underscored by data from the Indonesia Deposit Insurance Corporation (LPS) in July 2024, which revealed that approximately 580 million depositors, 98.9% of the population, hold savings of less than Rp 100 million. “This clearly illustrates significant inequality,” Anton added.
Beyond income disparity, another major challenge lies in budget leakage. Research from the Institute for Development of Economics and Finance (INDEF), as cited by Suara, revealed that up to 40% of Indonesia's state budget (APBN) is lost to corruption annually.
Additionally, Tempo reported that Indonesia Corruption Watch (ICW) documented a total state loss due to corruption in 2023 amounting to Rp 56 trillion, with only Rp 7.3 trillion recovered by the government.
Anton emphasized that corruption by government officials is a primary factor in economic stagnation and disrupts the investment climate. Bribery, in particular, deters potential investors, making them hesitant to invest in Indonesia. “Investment costs are high, and on top of that, services are slow,” he remarked.
Regarding global factors and the potential for a second trade war between the United States and China, Anton believed Indonesia would not experience significant direct impacts. Instead, the focus should be on boosting domestic purchasing power to strengthen the economy.
Anton suggested one strategy to bolster Indonesia’s economy is to decrease its reliance on imported goods. “Our dependence on imports is incredibly high,” he stressed. This issue has been exacerbated by the enactment of Ministry of Trade Regulation No. 8 of 2024, which relaxed import policies.
According to Tirto, this regulation permitted easier import of various commodities, including steel, textiles, chemical products, and electronics. As a result, many domestic industries have suffered, with some even collapsing under the pressure of increased competition from imported goods.
One of the hardest hit sectors is the textile industry, which has led to massive layoff. The crisis peaked with the bankruptcy of PT Sri Rejeki Isman, Southeast Asia’s largest textile conglomerate, leaving tens of thousands of workers at risk of losing their livelihoods.
“If we can reduce our reliance on imports by developing import substitution industries, we can mitigate the impact of global economic instability,” Anton suggested.
A report from the Indonesia Economic Outlook Q3/2024, published by the Institute for Economic and Social Research at the Faculty of Economics and Business, Universitas Indonesia (LPEM FEB UI), revealed a significant drop in Indonesia’s middle class. From approximately 60 million individuals in 2018, the number fell to 52 million in 2023, a decline of more than 8.5 million people.
Read more: Reviving Indonesia's Middle Class
To address this challenge, Anton highlighted the need for the Prabowo-Gibran administration to focus on empowering the middle class. This includes reducing their burgeoning expenses, particularly in the education and healthcare sectors. One strategy he proposed is expanding the Kartu Indonesia Pintar (Smart Indonesia Card) program to include middle-class families, alleviating financial burdens in these essential areas.
“Currently, the KIP primarily targets low-income groups, especially KIP for higher education, which aims to improve human resources,” Anton explained. “It should at least cover the lower-middle class as well.”
Anton emphasized that enhancing the formal industry is equally crucial. The middle class, being a skilled group, requires access to formal employment opportunities that align with their competencies.
Formal industries must regain their competitiveness to expand business operations and create new jobs. “When formal job opportunities are broadened and improved, I believe it will help our middle class and drive economic growth,” he added.
Anton encouraged the government to continue direct cash aid programs and grants for micro, small, and medium enterprises (MSMEs). Moreover, streamlining bureaucracy and intensifying anti-corruption efforts are essential steps to promote investor confidence in Indonesia.
New year, new optimism. This should be resonated through a genuine commitment to improving the national economy. “If all these measures are implemented, I believe we can achieve better economic growth,” Anton concluded.
Writer: Gede Arga Adrian
Translator: Farizal Luqman Majid
Editor: Al Habiib Josy Asheva
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