Indonesia Economy Facts
Economical overview
Indonesia is Southeast Asia’s largest economy. The country has undergone extensive economic transformation since the 1998 Asian crisis and now attracts investors with a large consumer market, rich natural resources and political stability.
Indonesia has several sources of income and the country’s economy is well balanced. There are plenty of natural resources, not least oil, natural gas and other minerals. At the same time, the agricultural sector is productive and plays an important role for the economy, even though the manufacturing industry has been around agriculture since 1991 in terms of GDP share . The service sector has also grown rapidly in recent years.
- Countryaah.com: Major imports by Indonesia, covering a full list of top products imported by the country and trade value for each product category.
From the 1960s until 1997, Indonesia was able to show major economic progress with an average growth of 7 percent each year. From being a low-income country, Indonesia was classified as a middle-income country from the early 1980s. However, the economic crisis in Southeast Asia, which hit Indonesia in 1997, became devastating for the economy (see Modern History). It exposed several basic problems, such as shortcomings in the banking system and legislation, restrictions on imports and high subsidies of domestic industries.
Economic reforms
After the crisis, Indonesia became dependent on external loans and assistance to meet the state budget. From 1997, Indonesia was supported by the IMF and the World Bank, which demanded economic and political reform as conditions for their loans. The requirements mainly concerned the abolition of import protection and subsidies on domestic goods, the privatization of state-owned companies and a restructuring of the banking system. The Group of Indonesia’s most important donor led by the World Bank, the Consultative Group for Indonesia (CGI), called for similar changes in the exchange of aid and loans.
- Abbreviationfinder.org: Check this abbreviation website to find three letter ISO codes for all countries in the world, including INA which represents the country of Indonesia. Check findjobdescriptions to learn more about Indonesia.
The reforms were initially sluggish. Shortly after the turn of the millennium, growth was relatively good, but that was not enough to stave off high unemployment. In addition, inflation had risen to double-digit figures. The terrorist act in Bali in October 2002 became a death blow to the tourism industry. However, increasing private consumption led to continued good growth.
At the beginning of 2004, the reform of the banking system was complete. Around 100 of 250 banks had been closed since 1997 and the rest had been restructured or sold. A sound financial sector was developing. In addition, the high external debt had fallen significantly. The budget deficit and central government debt were reasonably under control. Economic growth in the same year was just over 5 percent, the highest figure since 1997. However, a full 40 million Indonesians were still estimated to be unemployed or underemployed. Another remaining problem was the lack of foreign investment as a result of inadequate legislation and widespread corruption.
Growing foreign investment
When Susilo Bambang Yudhoyono took over as president in October 2004, he promised to invest heavily in economic development. He sought to increase foreign investment by reforming the justice system and countering corruption. Already the following year, foreign investment began to increase thanks to ongoing reform of the tax system and a review of other laws as well as anti-corruption initiatives. Indonesia regained its middle-income status in 2005 as it lost in 1997. Sky-high oil prices on the world market, however, led to a dramatic increase in government spending on fuel subsidies. In an effort to lower the cost of subsidies, the government in October 2005 raised the price of gasoline by 88 percent and kerosene by a full 186 percent.
During most of President Yudhoyono’s first term (2004–2009), Indonesia’s economic development was positive: the deficit in the state budget was at a reasonable level and government debt was under control. Foreign investment continued to increase, growth in the economy was good and the value of the rupiah increased. The tourism industry recovered. However, continued high unemployment and severe corruption posed serious problems.
The economy is booming
In the spring of 2008, the government implemented new sharp price increases on fuel and during the autumn, the Indonesian economy began to be adversely affected by the global financial crisis. The value of rupiah fell, as did the stock market. Despite stimulus packages from the government, unemployment rose, while exports, growth and investment declined.
However, the Yudhoyono government adhered to a strict fiscal and budgetary policy, and during the second half of 2009, Indonesia proved to be better off through the crisis than several of the more export-dependent neighboring countries. 2010–2012 was a good year, with rising growth, booming exports and increasing investments. In 2012, Indonesia became a donor country in the IMF after being a recipient country for about four decades. Indonesia was able to showcase one of Asia’s strongest economies, mainly thanks to strong domestic private consumption.
The fact that the private home market is so large makes Indonesia less susceptible to fluctuations in the global economy than more export-dependent countries such as Thailand. Strong domestic consumption, combined with large foreign investment, usually outweighs reduced export earnings.
Foreign exchange concerns
In June 2013, the Parliament adopted a budget that cut government subsidies on gasoline and diesel. As a result, fuel prices were expected to rise significantly, which would particularly affect poor families. The measure was therefore combined with a cash grant to about 15 million poor households, each receiving $ 60 each over a four-month period. The decision to reduce the subsidies was made because they drained the Treasury, which caused concern among the country’s important foreign investors.
During the summer of that year, Indonesia became one of several so-called emerging economies that saw its currency weaken sharply following a message that the US central bank would suspend its stimulus of the US economy. The data, which indicated that an expected economic upswing was underway in the US, caused many investors to move their money from Asian markets to the US. By the end of 2013, rupiah had lost almost 20 percent of its value against the dollar, compared with a year earlier. The Central Bank of Indonesia responded with five interest rate hikes between May and November 2013, hoping to keep investors in the Indonesian market.
The economy is weakening
But in the second half of 2013, the Indonesian economy’s growth rate was the slowest in four years. The reason was a combination of poorer exports, reduced domestic private consumption as a result of higher interest rates and higher prices of basic commodities such as fuel. Another reason was the foreign investors who left the country during the summer. In addition, Rupiahn had fallen in value and inflation rose.
The negative trend continued during the first half of 2014, when growth was the lowest since 2009. Although the growth rate exceeded 5 percent, it was lower than expected. Foreign investors were frightened by the fact that the government in January 2014 banned the export of raw metals in the hope that a greater proportion of the processing would be done in the country.
The Widodo government, which took office in October 2014 (see Current Policy), was facing the task of restoring confidence in the Indonesian economy among investors around the world. In November of the same year, the government cut government subsidies on fuel, which led to price increases of just over 30 percent on gasoline and diesel. The aim of the measure was to reduce the large deficits in the state budget and to achieve a better balance in foreign trade.
Stimulatory measures are taken
In 2015, the Indonesian economy continued to show signs of weakness, with a declining value of rupiah and with relatively weak growth. One reason was the continued decline in domestic demand for goods and services. In August 2015, Widodo, who had gone to elections on promises of a seven percent growth rate, reformed his government in an attempt to get ministers to cooperate better on economic policy.
In September of that year, the government presented the first of three packages of financial measures aimed at reversing the economic trend. Rupiah’s value had then fallen to its lowest relative to the dollar since the 1998 financial crisis.
The second financial stimulus package was presented at the end of the same month. Amongst the incentive measures were the short time that a company may wait for an investment permit as well as further tax cuts for investors.
The third stimulus package, presented by the Widodo government in October 2015, was more targeted at the Indonesian population. The package included price reductions on a number of fuels as well as contributions from the government to insure the country’s many farmers from losses. A start-up grant for entrepreneurship was also included.
Uneven result
During the summer and autumn of 2015, the economy was adversely affected by the unusually severe forest fires (and the smoke development they brought) that ravaged around the island world. Estimates from the World Bank showed that the fires and smoke is costing Indonesia US $ 16 billion. That was more than twice the cost of rebuilding the Aceh province after the 2004 tsunami (it cost $ 7 billion). The fires destroyed 2.6 million hectares of forest and agricultural land between June and October. The cost was equivalent to almost 2 percent of Indonesia’s GDP for 2015.
As a result, GDP growth in 2015 declined for the fifth consecutive year. The reasons for the weak economic development were mainly low commodity prices, mainly coal, a declining domestic consumption and the slowdown in China’s economy.
Indonesia’s economic development during Widodo’s first term (2014–2019) was uneven. Average growth was relatively good, but still a couple of percent lower than the government’s target of 7 percent. Indonesia felt the effects of the US trade war with China, including in the form of failing exports and high pressure on rupiah. The state must raise more tax and other income to be able to finance the investments in infrastructure, healthcare and education that Widodo promised in the 2019 elections.
In March 2020, Indonesia was hit by the pandemic caused by the new coronavirus sars-co-2. The country’s economy was hit quickly when tourism almost completely stopped. The tourists traveled home and flights from abroad were canceled. Travel restrictions were imposed on the worst-affected countries, including China. The government promised a $ 1.5 billion support package to the poorest households.
Lively foreign trade, growing tourism
Exports play a significant role for the economy, even though Indonesia’s large domestic market makes the country less export-dependent than several of its neighboring countries. Oil and natural gas have long been by far the most important export goods, but from the mid-1980s the regime managed to encourage exports of other goods. Since then, oil and gas exports have declined in importance.
Exports mainly consist of coal products, natural gas, palm oil, natural rubber, oil and electrical appliances. Imports comprise, among other things, fuel, machinery, vehicles, electronic equipment and food. The country’s largest trading partners are China, Japan, the United States and Singapore. The trade balance has for a long time shown a surplus (exports are larger than imports), but the size of the surplus has varied mainly with the oil price on the world market.
Indonesia also receives foreign capital from tourism and from guest workers in other countries, mainly in the Middle East. Tourism is of great importance to the economy as a whole. The Indonesian tourism industry developed rapidly in the 1980s and 1990s with the encouragement of the Suharto regime. In 2018, nearly 16 million tourists visited Indonesia, compared to 8 million in 2012.
In 2007, the Asian countries agreed to form an economic union with, among other things, free trade cooperation. Through Asean, Indonesia 2010 entered into a free trade agreement with China.
FACTS – FINANCE
GDP per person
US $ 3,894 (2018)
Total GDP
US $ 1,042,173 million (2018)
GDP growth
5.2 percent (2018)
Agriculture’s share of GDP
12.8 percent (2018)
Manufacturing industry’s share of GDP
19.9 percent (2018)
The service sector’s share of GDP
43.4 percent (2018)
Inflation
3.2 percent (2019)
Government debt’s share of GDP
30.1 percent (2018)
External debt
US $ 354,352 M (2017)
Currency
Rupiahs
Merchandise exports
US $ 180 725 million (2018)
Imports
US $ 181 164 million (2018)
Current account
– US $ 31,051 million (2018)
Commodity trade’s share of GDP
35 percent (2018)
Main export goods
coal products, natural gas, palm oil, natural rubber, oil, electrical appliances
Largest trading partner
China, Singapore, South Korea, Japan, USA
2005
December
Government forces leave Aceh
The last government forces leave the province of Aceh.
September
GAM is disarmed
The separatist guerrilla GAM in Aceh is starting to give up arms.
August
Aceh peace agreement signed
The government and the separatist guerrilla GAM in Aceh sign a peace agreement, which among other things means that the government soldiers leave the province and GAM is allowed to disarm.
March
Prayer leaders are sentenced to the Bali Council 2002
The Islamist böneledaren Abu Bakar Baasyir (see Militant Islamism), widely regarded as the terror network Jemaah Islamiahs spiritual leader, sentenced to 2.5 years in prison for involvement in planning the Bali bombings in October 2002, when 202 people were killed.
