The Indonesian Economy in Turbulent Times

Abstract

The year 2022 got off to a relatively optimistic start for Indonesia’s economic managers. Notwithstanding the serious health and social outcomes inflicted by the Covid pandemic, the government had successfully minimised the economic fallout. It could reasonably contemplate a period of sustained economic recovery and rising prosperity in preparation for the 2024 national elections. However, the outlook began to deteriorate in the face of heightened global economic volatility and uncertainty: the economic and geostrategic ramifications of the Ukraine War, a sudden slowdown in the global economy, rising interest rates, historically high and volatile prices for some key commodities, international trade and transport disruptions, uncertainty about China’s current economic trajectory and persistent if (so far ) manageable Covid challenges. Nevertheless, the Indonesian economy is continuing its steady post-Covid progress: the return to 5% growth in late 2021 continued through to second quarter 2022, inflation remains moderate and living standards are slowly recovering. However, there are potentially major macroeconomic challenges on the horizon. In fiscal policy, there are many demands on the budget, yet there is limited fiscal space, and much of the increased budget revenue this year is again being allocated to subsidies. In monetary policy, there is concern that, as in many countries, the monetary authorities could be ‘behind the curve’ of rising inflationary pressures. In his 16 August 2022 speech, President Joko Widodo (Jokowi) emphasised the importance of the industrial sector and of ‘downstreaming’ as a means of accelerating industrial growth. Against this backdrop, and the sector’s sluggish growth for much of this century, the paper also surveys recent patterns of industrialisation and prospects for the future.