Indonesia faces significant economic challenges as it strives to maintain stability and growth amid political transitions and external pressures. The nation, under the new leadership of President Prabowo Subianto, managed to uphold 5% economic growth throughout 2024, even as rising food prices and fluctuated energy prices plagued the economy, largely attributed to factors like El Niño.
The transition to Prabowo's administration, following the February 2024 general elections, was largely smooth, succeeding the administration of former President Joko Widodo. There were notable signs of improvement, particularly in the latter half of the year, as the strain from high food and energy prices began to ease. According to Siwage Dharma Negara from the East Asia Forum, the first year posed four main challenges for the new government, threatening Indonesia's economic aspirations for 2025.
Firstly, the legacy of weak domestic consumption has cast shadows over future growth. With household spending declining as incomes stagnated and the job market showed signs of stress, the effect on consumer confidence is palpable. Although the government has rolled out assistance programs like cash transfers and subsidies, they primarily offer limited relief to middle and aspiring middle-class households. Despite headline inflation trending downward, many families continue to struggle with elevated food prices.
Secondly, Indonesia's export growth has taken a hit, contending with dwindling global demand for key commodities such as coal, nickel, and crude palm oil. The United States and China have also introduced higher tariffs affecting Indonesia's manufacturing exports, particularly textiles. Efforts to diversify exports through value-added initiatives have proven costly and less effective than anticipated.
Thirdly, fiscal pressures are rising. The government’s budget was tested during the first half of 2024, driven by increased subsidy spending, pushing the fiscal deficit to 2.7% of GDP. Public debt has surged to almost 40% of GDP, thing compounded by the heightened debt service burden on tax revenues, which has risen dramatically over recent years. Consequently, urgent prioritization of government spending has become imperative.
On the revenue side, collecting taxes becomes increasingly difficult, as noted by experts. The government faces challenges implementing new digital compliance systems aimed at increasing tax efficiency and collecting dues without excessively burdening the populace. Originally ambitious plans to raise the value-added tax were scaled back amid public discontent.
At the same time, the government must navigate the complex investment climate; progress on reforms has been inconsistent. The Job Creation Law aimed to simplify regulations, but recent legal questions raised uncertainty, creating hurdles for potential investors. While energy security indices are prioritized, tangible plans for phasing out coal remain unclear, drawing skepticism from local and international stakeholders.
Despite these challenges, Indonesia is actively pursuing innovative solutions for its future economic prosperity. An important step was taken with the signing of a Memorandum of Understanding (MoU) between the Wadhwani Foundation and Indosat Ooredoo Hutchison during the Indonesia-India CEO Forum held on January 26, 2025. This partnership, aimed at equipping one million Indonesian digital talents with advanced skills, is anchored to Indonesia’s Golden Vision 2045 strategy, charting the path to become a developed nation.
With investments worth IDR 3.5 trillion, the initiative will also focus on fostering 100,000 future-ready entrepreneurs, enhancing job prospects for the country’s youth. Ajay Kela, President of the Wadhwani Foundation, emphasized the collaboration's potential to significantly transform Indonesia's workforce capabilities, stating, "With its vibrant and growing young population, Indonesia is key for us."
Vikram Sinha, President Director & CEO of Indosat Ooredoo Hutchison, shared insight on the partnership's objectives, connecting with the global market’s digital transformation demands. He remarked, "This collaboration aligns with Indosat’s larger purpose of empowering Indonesia, preparing the next generation of leaders with the skills and resources they need to thrive."
Looking forward, Indonesia stands at a crossroads, needing to address its structural economic challenges head-on to secure its position on the global stage. The incoming government, buoyed by their public approval, has the political capital needed to implement necessary reforms. Opportunities and risks are pervasive as Indonesia navigates relationships within BRICS, leading to anticipations of increasing reliance on Chinese investments and technologies. To achieve sustainable growth, it must strike the right balance among advancing domestic industry and forging beneficial international partnerships.