SINGAPORE, March 5, 2025 – Indonesia’s economy maintained solid growth of 5.0 percent in 2024, driven by sustained domestic demand. Inflation was anchored within the 2.5±1% target band. With global uncertainties rising in 2025, policymakers are urged to strengthen policy coordination to safeguard stability and support economic activity. Structural reforms remain crucial for achieving long-term growth potential, according to the preliminary assessment of the ASEAN+3 Macroeconomic Research Office (AMRO) following its Annual Consultation Visit to Indonesia from February 3-14, 2025.
The mission was led by AMRO Lead Economist Sumio Ishikawa. AMRO Director Kouqing Li and Chief Economist Hoe Ee Khor participated in the policy meetings. Discussions focussed on Indonesia’s economic outlook, risks, and policy options to maintain stability and sustain growth momentum.
Economic developments and outlook
“AMRO staff project Indonesia’s economy to maintain robust growth of 5.0 percent in 2025,” said Ishikawa. “Domestic demand is expected to remain strong, underpinned by growth-supporting policies, including the implementation of new government priority programs. Policy coordination remains key to sustaining both stability and growth amid a challenging external environment.”
Inflation declined to 1.6 percent at the end of the year, averaging 2.3 percent in 2024. Close policy coordination between Bank Indonesia (BI) and the government is expected to keep inflation within the target band in 2025. Meanwhile, resilient trade surpluses and robust foreign investment inflows have bolstered Indonesia’s external position despite global uncertainties, including policy shifts by the new US administration.
Policy responses
BI strengthened its policy mix in 2024 to strike a balance between maintaining stability and supporting growth. A prudent interest rate policy, coupled with judicious foreign exchange market interventions and pro-market monetary operations, supports inflation control and stabilizes the rupiah exchange rate in 2024. The central bank reduced the policy rate to 5.75 percent in early 2025 to support economic growth in view of low inflation projections and the rupiah exchange rate was consistent with fundamentals. With the banking sector remaining sound, BI strengthened the effectiveness of the liquidity incentive policy related to the reserve requirement ratio (KLM) to encourage bank lending to MSMEs and targeted sectors which support growth and job creation. Efforts to enhance the efficiency of payment systems and promote local currency transactions have been also strengthened.
The government has adopted an expansionary fiscal stance, widening the budget deficit to 2.3 percent of GDP in 2024 to boost the economy and accelerate infrastructure projects. In 2025, budget deficit might increase further as the government introduces new priority programs including a free nutritious meal program, provides additional subsidies to low-income households, and applies the higher VAT rate at 12 percent to luxury goods only. The introduction of a new Core Tax Administration System is aimed at enhancing tax administration efficiency and improving taxpayer compliance.
Risks and vulnerabilities
Indonesia’s short-term growth outlook, like other emerging market economies, may face risks and challenges primarily stemming from new US government policies and potential global trade tensions that raise growth uncertainties in major trading partners, notably China, US, and Europe.
Risks of capital flow volatility and high borrowing costs persist against the backdrop of plausible global financial tightening.
It may be challenging to achieve the government’s medium-term fiscal consolidation target with budget deficits expected to widen due to rising spending needs from new priority programs.
Longer-term structural challenges include economic diversification and moving up to the high income status, narrowing regional disparities, and transitioning to a green economy with limited funding options.
Policy recommendations
AMRO recommends that BI flexibly recalibrates its policy mix to address evolving risks. As domestic inflation is expected to remain subdued, further rate cuts could be considered to support the economy in line with global and domestic dynamics, provided the rupiah exchange rate is in line with fundamentals and its volatility is not excessive. Deepening onshore money markets should strengthen resilience against persistent capital flow volatility risks, while improving payment systems and promoting local currency transactions will continue to facilitate regional trade and investment, and contribute to the stability of regional exchange rates.
The government should step up efforts to enhance revenue mobilization and reprioritize spending to foster economic growth. Tax policy and administration reforms should be advanced to increase revenue. AMRO welcomes the reprioritization of the budget by cutting non-essential expenditures and enhancing the targeting of current subsidy policies in order to channel fiscal resources to infrastructure and human capital development, and climate change mitigation. The planned debt switch for government bonds issued to BI during the pandemic is a positive step. AMRO welcome the authorities’ commitment to conduct the debt switch in accordance with prudent fiscal and monetary policy principles, while upholding market disciplines and integrity to avoid market disruptions. Efforts on bond investor engagement and deepening the government bond market should be prioritized.
Structural reforms must be accelerated to enhance economic diversification and productivity. While Indonesia strengthens its position in nickel downstream industries and the global electric vehicle supply chain, boosting productivity in agriculture, tourism, and manufacturing is equally vital. Enhancing implementation capacity of local governments will help drive regional economic growth and reduce income disparities. To attract foreign direct investment, fostering local supply chains, enhancing workforce skills, upgrading infrastructure, and ensuring a conducive regulatory environment are critical. Expanding financial inclusion by refining MSME support programs and improving credit information sharing should also be pursued.
AMRO appreciates the cooperation, insights, and hospitality extended by the Indonesian authorities and stakeholders during this mission.
About AMRO
The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute toward securing macroeconomic and financial resilience and stability of the ASEAN+3 region, comprising 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support regional financial arrangements, and provide technical assistance to the members. In addition, AMRO also serves as a regional knowledge hub and provides support to ASEAN+3 financial cooperation.
AMRO Director Kouqing Li met with Finance Minister Sri Mulyani Indrawati.
AMRO Director Kouqing Li and Chief Economist Hoe Ee Khor met with Bank Indonesia’s Deputy Governor Filianingsih Hendarta (middle).