Indonesia: Economy

After 4 years of decelerating growth in Indonesia, policy reform to improve the investment climate is expected to spur economic recovery this year and next. Reform of fuel subsidies has already freed significant public funding for social and physical infrastructure. Inflation is seen subsiding to moderate rates through the forecast period, and the current account deficit to narrow. Challenges center on maintaining reform momentum, bolstering government revenue, and developing export-oriented manufacturing.

Selected Economic Indicators (%) - Indonesia 2015 2016
GDP Growth 5.5 6.0
Inflation 5.5 4.0
Current Account Balance (share of GDP) -2.8 -2.4

Source: ADB estimates.

Economic performance

Political transition to the new government in Indonesia in October 2014 went smoothly and policy reform gathered momentum. Nevertheless, measures over the previous 2 years to restrain domestic demand and curb the current account deficit, coupled with sluggish exports, weighed on the economy. Growth in the gross domestic product (GDP) slowed to 5.0% in 2014, a fourth consecutive year of deceleration. In 2014, personal consumption remained buoyant, but government spending and fixed investment slowed and net exports fell.

Economic prospects

Projections for 2015 and 2016 assume that the new government’s rapid reform momentum is maintained through both years and that the administration follows through on policies to accelerate infrastructure development, improve the investment climate, reduce logistic costs, and enhance budget implementation. On this basis, GDP growth is forecast to recover to 5.5% this year and 6.0% in 2016.

Excerpted from the Asian Development Outlook 2015.