ASEAN+3 Macroeconomic Research Office

SINGAPORE, June 20, 2025 – Indonesia’s economy maintained solid growth of 5.0 percent in 2024, underpinned by sustained domestic demand and a rebound in exports and tourism. Inflation moderated, anchored within the 2.5±1% target corridor. 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.

These insights are highlighted in the 2025 Annual Consultation Report on Indonesia released today by the ASEAN+3 Macroeconomic Research Office (AMRO). The report is based on AMRO’s Annual Consultation Visit conducted in February 2025.

Economic developments and outlook

Strengthened domestic demand and a rebound in exports supported Indonesia’s robust growth in 2024. Domestic demand is expected to remain resilient along with the implementation of growth-fostering policies, including new government priority programs, amid a challenging external environment in 2025.

Inflation moderated to 1.6 percent at the end of 2024, averaging 2.3 percent for the year. Inflation remains well anchored within the target corridor of 2.5±1 percent in 2025, underpinned by the close policy synergy between Bank Indonesia (BI) and the government to control inflation.

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. Meanwhile, domestic policy priorities, fiscal challenges, layoffs in several labor-intensive sectors, and heightened financial market volatilities affected investor sentiment and contributed to downward pressure on the rupiah in early 2025.

Policy responses

Bank Indonesia (BI) strengthened its policy mix to ensure stability and support growth. A prudent interest rate policy, coupled with judicious foreign exchange interventions and pro-market monetary operations supported inflation control and stabilized the rupiah exchange rate in 2024. BI lowered the policy rate to 5.75 percent in early 2025 to support the economy as inflation was below the target band and expected to remain low while the rupiah exchange rate was consistent with fundamentals. With banks remaining sound, BI strengthened the effectiveness of the liquidity incentive policy related to the reserve requirement ratio (KLM) to encourage bank lending to micro, small and medium enterprises (MSMEs) and targeted sectors that supported growth and job creation. The central bank also enhanced efforts to improve payment systems efficiency and promote local currency transactions (LCTs).

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 has introduced new priority programs including a free nutritious meal program for children, pregnant women and breastfeeding mothers, and additional subsidies to low-income households, while revenue collection from the increase in VAT rate to 12 percent will be lower than planned because it applies 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, face risks and challenges primarily stemming from new US government protectionist trade policies and global trade tensions that raise economic 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 LCTs 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 mobilisation 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 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 welcomes the authorities’ commitment to conduct the debt switch in accordance with prudent fiscal and monetary policy principles, while upholding market disciplines to avoid market disruptions. Efforts should be strengthened vis-à-vis bond investor engagement and bond market deepening.

Structural reforms must be accelerated to enhance economic diversification and productivity. Besides resource-based downstreaming efforts, it is crucial to increase productivity and create jobs in agriculture, manufacturing, and services, notably tourism. Enhancing implementation capacity of local governments will help drive regional economic development and reduce income disparities. The central government launched the Daya Anagata Nusantara Investment Management Agency (Danantara) in 2025, aimed at directing investment to high-growth sectors. A clear and credible investment plan is essential to strengthen investor confidence and help Danantara fulfill its mandate to promote economic growth.

To attract investment, especially foreign direct investment, equally critical steps to take are fostering local supply chains, upskilling the workforce, strengthening infrastructure, and ensuring a conducive regulatory environment. Expanding financial inclusion by refining MSME support programs and improving credit information sharing should also be pursued. The authorities are encouraged to further support the inclusion of MSMEs in the formal financial system by enhancing access to bookkeeping tools, facilitating tax compliance, and expanding their participation in digital financial platforms. Lowering borrowing costs will also require enhanced access to financial data through public and private initiatives, expanded non-bank funding, and strengthened credit infrastructure.

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.

About AMRO’s Annual Consultation Report

The Annual Consultation Report was prepared in fulfillment of AMRO’s mandate. AMRO is committed to monitoring, analyzing and reporting to its members on their macroeconomic status and financial soundness. It also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.