Indonesia's Economic Prediction Stagnant 5 Percent In 2025, AMRO Suggests Strengthen Policy Coordination

JAKARTA - The Indonesian economy managed to record solid growth of 5.0 percent in 2024, driven by continued domestic demand and controlled inflation in a 2.5 percent plus minus 1 percent target.

According to the ASEAN+3 Macroeconomic Research Office (AMRO) in its statement after the annual consultation visit to Indonesia on February 3-14, 2025, coordinated policies are key in maintaining stability and supporting economic activity amid rising global uncertainty by 2025.

AMRO Main Economist Sumio Ishikawa said AMRO projects that the Indonesian economy will grow strong by 5.0 percent in 2025, driven by domestic demand to remain strong thanks to government policies that support growth, including the implementation of new priority programs.

"Policy coordination remains the key to maintaining stability and growth amidst increasingly large external challenges," he said in his statement, Wednesday, March 5.

In addition, inflation fell to 1.6 percent by the end of 2024, with an average annual inflation of 2.3 percent throughout the year and close policy coordination between Bank Indonesia (BI) and the government expected to maintain inflation in the target by 2025.

Meanwhile, a strong trade surplus and a steady flow of foreign investment have strengthened Indonesia's external position despite global uncertainty.

Meanwhile, Bank Indonesia (BI) strengthened monetary policy in 2024 to maintain a balance between stability and support for growth such as a prudent interest rate policy, along with wise foreign exchange market interventions, helping control inflation and stabilize the rupiah exchange rate.

In early 2025, BI lowered the policy interest rate to 5.75 percent to support economic growth, along with low inflation projections.

In addition, the Government has also implemented an expansionary fiscal policy by increasing the budget deficit to 2.3 percent of GDP in 2024 to boost the economy and accelerate infrastructure projects.

By 2025, the budget deficit may further increase in line with the introduction of new priority programs, including free nutritious food programs and additional subsidies for low-income households.

Ishikawa said that in the future, Indonesia's economic growth, such as other developing market countries, will face risks related to the new US government policies and the potential global trade tensions that could affect key trading partners, such as China, the US and Europe.

"The risk of capital flow volatility and high loan costs remains amid the potential tightening of global financial policy," he said.

In the financial sector, AMRO advises BI to adapt its monetary policy more flexibly to address the growing risks.

Meanwhile, AMRO estimates that domestic inflation will remain low, further rate cuts can be considered to support the economy if the rupiah exchange rate remains in accordance with its fundamentals.

In addition, the government is also advised to strengthen efforts to mobilize revenue and prioritize spending to support economic growth, including tax and administrative policy reforms that can increase revenue.

AMRO supports the government's move to prioritize the budget by cutting non-essential expenses and improving subsidy policies that are more targeted and structural reforms must be accelerated to increase economic diversification and productivity.

In addition, AMRO also emphasized the importance of increasing the capacity of local government implementation to encourage regional economic growth and reduce income inequality.