1. Population of Indonesia
With a population totaling around 250 million individuals, Indonesia is the fourth largest country with regard to population size. Its ethnic composition is characterized by a wide variety as the country contains hundreds of different ethnic groups and cultures. However, more than half of the population can be classified as belonging to the two main ethnic groups: Javanese (41 percent of the total population) and Sundanese (15 percent of the total population). Both these groups originate from the island of Java, Indonesia's most populous island, which contains almost sixty percent of the country's total population. When the island of Sumatra is included, this figure rises to approximately eighty percent of Indonesia's total population, indicating a significant population concentration in the western part of the country. The most populous province is West Java (with more than 43 million people), while the least populous province is that of West Papua in the far eastern region of Indonesia (having around 761,000 people).

Map of Indonesia

Five Most Populous Provinces (in millions) Province | Population | 1. West Java | 43.1 | 2. East Java | 37.5 | 3. Central Java | 32.4 | 4. North Sumatra | 13.0 | 5. Banten (Java) | 10.6 |
Source: Statistics Indonesia Population Census 2010

This section discusses a number of important aspects regarding Indonesia's demographic composition. Topics that are discussed include Indonesia's population growth, age structure and urbanization. Each of these topics is linked to Indonesia's (potential) economic performance.

Indonesia's Population Growth The annual national population growth rate of Indonesia between 2000 and 2010 was an average of 1.49 percent. This growth was highest in the province of Papua (5.46 percent), while the lowest figure came from Central Java (0.37 percent). Family planning is coordinated by the National Family Planning Coordinating Board (NFPCB), a government institution. Under president Suharto an effective family planning program was initiated in 1968 and - up to the present - continued by his successors. This program is a key strategy in the country's economic development as a low population growth rate translates into a higher per capita Gross Domestic Product, which translates into higher incomes, higher savings, higher investments and implies a decline in the poverty rate among the population. The national population growth rate in 2012 is estimated at 1.04 percent.
According to projections by the United Nations (UN) with regard to the future absolute population, Indonesia is expected to have a population that exceeds 250 million inhabitants by the year 2015, exceeds 270 million by 2025, exceeds 285 million by 2035 and exceeds 290 million by 2045. After 2050 Indonesia's population is estimated to decline. The UN also projects that by 2050 two thirds of Indonesia’s population will live in urban areas. Over the last forty years the country has experienced a process of rapid urbanization, resulting in the current situation in which over half of Indonesia's total population resides in urban areas (see table below). For the economy this constitutes a positive development as urbanization and industrialization are necessary to grow into the ranks of a middle income country. | 1995 | 2000 | 2005 | 2010 | 2050 | Rural Population (percentage of total population) | 64 | 58 | 52 | 46 | 33¹ | Urban Population (percentage of total population) | 36 | 42 | 48 | 54 | 67¹ |
Source: World Bank
¹
Forecast by the United Nations (UN)

Age Structure of Indonesia
One important strength of Indonesia's demographic composition in relation to its economy is that the country has a young population. This young population implies a - potentially - large workforce (thus making it of vital importance that this workforce is absorbed by employment opportunities). Indonesia's total median age is 28.2 years (2011 estimate). This indicates that one half of the population is older than 28.2 years, while the other half is younger than this number. When divided in sexes the female median age is one year older (28.7 years) as compared to the male one (27.7 years).
Below we present a table that indicates the percentage shares of the Indonesian people categorized in three age groups and the corresponding division in sexes (in absolute numbers): | Percentage share of total population | Male (absolute) | Female (absolute) | 0-14 years | 27.3 | 34,165,213 | 32,978,841 | 15-64 years | 66.5 | 82,104,636 | 81,263,055 | 65 years and over | 6.1 | 6,654,695 | 8,446,603 |
Source: CIA World Factbook

In 2010 around 19 percent of the Indonesian population was below ten years of age, around 37 percent was below twenty years of age, and around half of the population was below thirty years of age. Such numbers indicate that - from a demographic perspective - there is great potential for both productivity and creativity in Indonesia. 2. Demographics and Economic Waves
General Outline
A temper in population growth caused by decreases in fertility (which can be brought on by matters such as more access to birth control, rising incomes, urbanization and higher levels of education for women) helps to stimulate a significant shift in the age distribution of the population towards those of the working age (but at a later stage decreases in mortality and fertility will cause an aging population). This shift is able to accelerate economic growth as the working age population increases while the (relative) number of dependent children declines. This process can be thought of as constituting a series of waves. The first wave begins when this working age population is employed which results in increased production. Employment also implies higher incomes and consequently causes households to consume more products. Households might also save more due to the reduced number of child dependents which subsequently leads to increased investments, as well as rising capital stock and further increases in economic production. The second demographic wave occurs when large portions of the population approach the end of their working lives and begin to save and invest for their retirement. Thus, the resulting increased capital accumulation may help to drive economic growth further. After this stage concern for the economy can arise because of a stagnating population growth and an aging population.
The Indonesian Case
Currently Indonesia is positioned somewhere in the middle stage of that first wave. Both child mortality and fertility are declining quickly and the working age population is growing at a relatively fast rate while the total population is growing at a relatively slow rate. This has resulted in a large population group (around half of the total population, thus 120 million Indonesians) that is below the age of thirty years old, which -potentially- is productive and therefore can function as the engine of the national economy. Robust domestic consumption has already had its impact on Indonesia's continuously strong GDP performance as it forms one of the key drivers of this growth. The country's reliance on domestic consumption was actually one of the reasons why Indonesia weathered the global financial crisis of 2008-2009 relatively smooth with an average GDP growth of 5.6 percent in the years 2008-2010. Moreover, solid economic growth has resulted in an influx of Indonesians into the country's middle class. Annually, around seven million Indonesians join the ranks of this middle class according to a World Bank report.
A critical note, however, is that there are currently millions of (educated) unemployed Indonesians that cannot be absorbed by the Indonesian labour market. One characteristic of Indonesia is that the unemployment rate is highest for people between the age of 15 and 24, far above the country's national average. For a detailed account regarding unemployment in Indonesia, please visit our Unemployment page.

3. Economy of Indonesia
Indonesia is a country that contains great economic potential; a potential that has not gone unnoticed to part of the international community. Indonesia - Southeast Asia's largest economy - is increasingly mentioned as an appropriate candidate to be included in the BRIC countries (Brazil, Russia, India and China) as the country is rapidly showing signs of similar newly advanced economic development. Recently, a new set of emerging economies has gained public attention. Members of this set are countries that contain promising markets with diverse economies, reasonably sophisticated financial systems and fast-growing populations. These countries are grouped under the acronym CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa), and its combined Gross Domestic Product is predicted to account for half the global economy by 2020.
Another important example of international recognition regarding Indonesia's economy is the recent upgrades in the country's credit ratings by international financial services companies such as Standard & Poor's, Fitch Ratings and Moody's. Resilient economic growth, low government debt and prudent fiscal management have been cited as reasons for the upgrades and are key in attracting financial inflows into Indonesia: both portfolio flows and (significant increasing) foreign direct investments (FDI). These FDI inflows, which had been relatively weak for Indonesia during the decade after the Asian Financial Crisis had seriously shaken up the foundations of the country, showed a steep increase after the global financial crisis of 2008-2009.
What are Indonesia's strong points that explain increasing foreign investments and the recent macroeconomic growth?
•a. Abundant and diverse natural resources

* Commodities of Indonesia
Indonesia's abundance and variety of commodities is a vital asset to the country's economy (and government revenues) as commodities account for around 60 percent of exports. But being a major commodity producing and exporting country also implies being more susceptible to the effects of volatility in commodity prices on the global commodity market. This requires effective policy strategies in times of both price downswings and price upswings.
Being mainly a raw commodity-exporting country, the government is currently focussed on stimulating the establishment of downstream processing industries to deliver value-added products. This strategy will have significant impact on certain (export) industries such as mining and minerals. Policy changes that influence the investment climate in these industries are discussed in our Business Columns and News Columns. | Indonesian Production or Reserves (R) | Global Production or Reserves (R) | Indonesia's Share of Total | | Coal | 258.9 million tonnes | 3,881.4 million tonnes | 6.7% | Coalbed Methane | 453 trillion cubic feet (R) | 7,550 trillion cubic feet (R) | 6.0% | Cocoa | 0.48 million tonnes | 3.96 million tonnes | 12.2% | Coffee | 11.67 million bags | 145.19 million bags | 8.0% | Crude Oil | 882,000 bpd | 86,754,000 bpd | 1.0% | | Natural Gas | 70.4 billion m³ | 3369.9 billion m³ | 2.1% | Geothermal Energy | 27,510 MW (R) | 68,775 MW (R) | 40.0% | Gold | 97 tonnes | 2,700 tonnes | 3.6% | Palm Oil | 23.9 million tonnes | 48.9 million tonnes | 48.9% | Rice | 71.3 million tonnes | 672.0 million tonnes | 10% | | Rubber (Natural) | 3.01 million tonnes* | 10.97 million tonnes* | 27.4% | Tea | 0.14 million tonnes | 4.20 million tonnes | 2.8% |

* Number only includes members of the Association of Natural Rubber Producing Countries (Indonesia, India, Malaysia, Thailand, Vietnam, China, Sri Lanka, Philippines and Cambodia).

• Young, large and burgeoning population
• Political stability (relatively)
• Prudent fiscal management since the late 1990s
• Strategic location in relation to the giant economies of China and India
• Low labour costs
Indonesia, a market economy in which the state-owned enterprises (SOE) and large private business groups (conglomerates) play a significant role, thus shows a number of highly positive features at the beginning of - what can become - a period of substantial economic development. However, it should also be pointed out that Indonesia is a complex country that contains certain risks for investments and experiences difficulties within the framework of its unique dynamics and context. In order to be aware of the risks involved we advise you to read our Risks of Investing in Indonesia section and to keep track of Indonesia's latest economic, political and social developments through our News section, Business section and Finance section.
This Economics section provides an outline of the current state of the Indonesian economy and discusses a number of important chapters in the economic history of Indonesia:
Gross Domestic Product of Indonesia
Between the years 1965 and 1997 the Indonesian economy grew at an average annual rate of almost seven percent. This achievement enabled Indonesia to graduate from the ranks of 'low income countries' into that of the 'lower middle income countries'. However, the Asian Financial Crisis that erupted in the late 1990s caused a severe negative impact on the Indonesian economy, resulting in a decline in gross domestic product (GDP) of 13.6 percent in 1998 and limited growth of 0.3 percent in 1999. Between the years 2000 and 2004 a period of economic recovery took place with a combined average GDP growth of 4.6 percent annually. Hereafter GDP growth increased to an annual average of at least six percent with the exception of 2009 and 2013 when, amid global financial turmoil and uncertainty, Indonesia's GDP growth fell to - a still admirable - 4.6 percent and 5.8 percent respectively. | Average Annual GDP Growth (%) | 1998 – 1999 | - 6.65 | 2000 – 2004 | 4.60 | 2005 – 2009 | 5.64 | 2010 – 2013 | 6.15 | | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | GDP
(in billion USD) | 285.9 | 364.6 | 432.1 | 510.2 | 539.4 | 706.6 | 846.8 | 878.0 | GDP
(annual percent change) | 5.5 | 6.3 | 6.1 | 4.6 | 6.1 | 6.5 | 6.2 | 5.8 | GDP per Capita
(in USD) | 1,643 | 1,923 | 2,244 | 2,345 | 2,984 | 3,467 | 3,546 | 3,468 |
Sources: World Bank, International Monetary Fund (IMF) and Statistics Indonesia (BPS)
Visible from the table above is that the global economic downturn brought on by the global financial crisis in the late 2000s had a relatively small impact on the Indonesian economy as compared to its impact on other countries. In 2009 Indonesia's GDP growth dropped to 4.6 percent, which meant that the country was one of the top GDP growth performers worldwide (and the third-highest among the G-20 group of major economies). Despite sharply falling commodity prices, a falling stock market, higher domestic and international bond yields and a depreciating exchange rate, Indonesia was still able to grow significantly. This success was mainly due to relatively limited importance of Indonesian exports towards the national economy, maintained high market confidence, and sustained robust domestic consumption. Domestic consumption in Indonesia (in particular private consumption) contributes around two-thirds to the country's national economic growth. With annually around seven million people being added to its middle class, Indonesia contains a consumer force that drives the economy and has triggered significantly increased domestic and foreign investments from 2010 onwards. Slowing economic growth in 2013 (5.78 percent) was caused by a combination of severe global uncertainty due to the looming end of the Federal Reserve's monthly USD $85 billion bond-buying program (quantitative easing) resulting in significant capital outflows from emerging economies, and internal financial weaknesses: a record high current account deficit, high inflation (after the government raised prices of subsidized fuels in June 2013) and a sharply depreciating rupiah exchange rate. In order to tackle these troubles and safeguard the country's financial stability, Indonesia's central bank raised the country's benchmark interest rate significantly, at the expense of further economic growth.
Future forecasts for Indonesia's economic development are still positive but have been revised down by all international organizations and the Indonesian government due to prolonged global uncertainty. The recently unveiled Masterplan for the Acceleration and Expansion of Indonesia’s Economic Development (or, MP3EI), spanning the years 2011 to 2025 and which designates six regions as main economic corridors, aims to place Indonesia inside the top ten of biggest global economies by 2025. This Masterplan implies major investments in infrastructure - something that has been hampering Indonesia's economic growth - and is supposed to result in GDP growth reaching eight or nine percent annually. However, these growth rates seem too ambitious for the near future (2014 to 2017). Authoritative international institutions (World Bank, IMF and Asian Development Bank) project Indonesia's annual GDP growth in the range of 5.3 to 6.0 percent for the period 2014 to 2017. These organizations stress that sufficient political and economic reform, in combination with large investments in infrastructure, will add one or two percentage points to current GDP growth forecasts.
It is also interesting to analyze the extent to which certain features of Indonesian cultures (in particular the dominant Javanese culture) limit GDP growth (as compared to the influence of, for example, Chinese culture toward China's GDP growth). For more information on this topic, please visit our Indonesian Business Culture section.

Indonesia's GDP per Capita and Unequal Income Distribution
GDP per capita has currently reached its highest level in Indonesian economic history and is forecast to grow higher. However, one can question whether per capita GDP is an appropriate measurement for Indonesia as Indonesian society is characterized by a high degree of inequality with regard to income distribution. In other words, there exists a gap between statistics and reality as the wealth of the 43,000 richest Indonesians (who represent only 0.02 percent of the total Indonesian population) is equivalent to 25 percent of Indonesia's GDP. The 40 richest Indonesians account for 10.3 percent of GDP (which is the same amount as the combined wealth of the 60 million poorest Indonesians). These numbers indicate a huge concentration of wealth within the small elite. Moreover, this income distribution gap is estimated to widen in the foreseeable future.

Composition of Indonesia's GDP; Agriculture, Industry and Services
The table below shows a remarkable development in the composition of Indonesia's GDP. Indonesia changed from being an economy highly dependent on agriculture into a more balanced economy in which the share of manufacturing (a type of industry) exceeds that of agriculture. This also implies that Indonesia lessened its traditional dependency on primary exports. It should be noted, however, that all three main sectors underwent expansion throughout the indicated period. | 1965 | 1980 | 1996 | 2010 | Agriculture | 51% | 24% | 16% | 15% | Industry | 13% | 42% | 43% | 47% | Services | 36% | 34% | 41% | 38% |
Sources: World Bank and CIA World Factbook
It is assumed that the industry sector will strengthen its share of GDP at the expense of the agriculture and services sectors because manufacturing is currently Indonesia's most popular sector in terms of foreign direct investment. Moreover, for specific innovative industries the Indonesian government will grant tax holidays, while it is also preparing incentives to stimulate national industries by banning exports of raw materials by 2014 (in the mining industry). This measure forces industries to build smelters and processing facilities to produce value-added products.
A remarkable characteristic of Indonesia is that the western part of the country has a significant larger share with regard to its contribution to GDP growth. Java (especially the greater Jakarta area) and Sumatra together contribute more than eighty percent to Indonesia's total GDP. Primary reason for this situation is that western Indonesia is located close to Singapore and Malaysia. Together these three parts have historically functioned as the center of economic activity in Southeast Asia. The eastern part of Indonesia, however, is positioned in a more-or-less economic vacuum and is much less densely populated.

Indonesia's GDP in Global Perspective
The table below puts Indonesia's per capita GDP and real GDP in global perspective by comparing it to two important economic powers: the United States (USA) and China. | GDP per Capita (USD) | Real GDP Growth (%) | | 2010 | 2011 | 2012 | 2013 | 2010 | 2011 | 2012 | 2013 | USA | 48,358 | 49,854 | 51,749 | - | 2.9 | 1.5 | 2.8 | 1.9 | China | 4,433 | 5,447 | 6,091 | - | 10.3 | 9.2 | 7.4 | 7.7 | Indonesia | 3,010 | 3,540 | 3,592 | - | 6.1 | 6.5 | 6.2 | 5.8 |
Source: World Bank
Looking at GDP per capita it is immediately visible that Indonesia still has a long road ahead compared to the more developed nations. In fact, Indonesia has one of the lowest per capita GDP of any nation in the world. Through a number of government development plans, the Indonesian government intends to raise this figure to around USD $14,250 - $15,500 by 2025 but whether this ambitious intention will be realized remains doubtful and - as mentioned above - this indicator does not reflect the (unequal) distribution of income or wealth in the Indonesian society. Effective government policy is needed to provide more Indonesian children with education as well as to stimulate job creation in order to absorb a growing workforce.
Indonesian per capita GDP has been rising steadily in the 2000s and beyond. Initially, the World Bank had forecast Indonesia to hit the USD $3,000 mark around the year 2020 but the country managed to reach this level a decade earlier. Reaching this level of USD $3,000 is considered as being an important step because it will result in accelerated development in a number of sectors (such as retail, automotive, property) because of rising consumer demand, thus being a catalyst for economic growth. The Indonesian government has set the target of reaching USD $5,000 by the year 2015.
Real GDP growth shows a promising perspective. While the developed world in Europe and the United States - plagued by public debts - will grow modestly for some time to come, emerging economies in South America and Asia show robust economic growth. These countries share certain characteristics such as the presence of abundant natural resources, large and fast-growing populations, low labor and production costs and, lastly, relatively stable political environments. One of these countries is Indonesia. But to reach impressive growth rates such as China during the last two decades, it needs to invest heavily in its infrastructure and focus on more political, economic and social reforms. Inflation in Indonesia (Consumer Price Index)
The level and volatility of Indonesia's inflation rate have historically been higher than in some peer emerging nations. Whereas these other emerging countries shared inflationary rates of between three and five percent during the period 2005 to 2013, Indonesia contained an average annual inflation rate of around 8.5 percent in the same period.

Peaks in Indonesia's inflation volatility correlate with administered price adjustments. Energy prices (fuel and electricity) are set by the government and therefore do not float according to market conditions, meaning that the resulting deficit has to be absorbed by subsidies. This puts serious pressure on the government's annual budget deficit and also limits public spending in more long-term productive matters, such as infrastructure and social expenditures. Moreover, re-arranging energy subsidies implies political risks as social unrest emerges inflicted by inflationary pressures. One characteristic of Indonesia is that a large quantity of its population is clustered just above the poverty line, meaning that a relatively minor inflationary shock can push them below that line. When the Susilo Bambang Yudhoyono administration decided to reduce its massive fuel subsidies in late 2005 due to the rising international oil price, it soon led to double-digit inflation rates of between 14 and 19 percent (year on year) until October 2006. Furthermore, the country's core inflation - which excludes items that are vulnerable to temporary price volatility - has been volatile as well because of second round effects of energy price adjustments that pass through to the broader economy (for example through rising transportation costs).
Reduction of energy subsidies remain a top priority on the government's agenda. In early 2012, the government proposed a fuel price increase but social unrest and political opposition in parliament made a sudden increase impossible. Eventually in June 2013, gasoline was raised by 44 percent to IDR 6,500 (USD $0.66) and diesel by 22 percent to IDR 5,500 (USD $0.56) per liter. But despite the 2013 price hike, a significant portion of Indonesia's fuel prices remain subsidized and therefore various international organizations (including the World Bank and International Monetary Fund/IMF) as well as domestic institutions (such as Indonesia's Chamber of Commerce and Industry/Kadin) support further subsidy reductions. In 2013 and 2014, the government has also reduced subsidies for electricity - both for households (although exempting the poorer segments of society) and industries.
Indonesia's inflation outlook is highly influenced by the decision to further reduce these subsidies. The World Bank estimates that a IDR 2,000 increase in fuel prices can add about three percentage points to the level of headline inflation and can add over one percentage point to core inflation. Electricity price hikes, however, are estimated to have a smaller impact (< 1 percent) on the pace of inflation. As an illustration, the central bank of Indonesia (Bank Indonesia) initially targeted an inflation rate of 4.5 percent in 2013. However, after the fuel and electricity price hikes, inflation accelerated to 8.37 percent (yoy) by the year-end.

Inflation of Indonesia 2008-2015: | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | Inflation
(annual percent change) | 9.8 | 4.8 | 5.1 | 5.4 | 4.3 | 8.4 | - | - | Bank Indonesia Target
(annual percent change) | 5.0 | 4.5 | 5.0 | 5.0 | 4.5 | 4.5 | 4.5 | 4.0 |
Sources: World Bank and Bank Indonesia

Indonesia's characteristic volatile inflation rate causes a traditionally larger deviation from the annual inflation projections of Bank Indonesia. The consequence of such inflationary uncertainty is that it creates economic costs, such as the country's higher (domestic and international) borrowing costs compared to its emerging market peers. When a good track record of meeting annual inflation targets is established, greater monetary policy credibility will follow.
The lack of quantity and quality of Indonesia's infrastructure also entails robust economic costs. This hampers connectivity in the archipelago, thereby increasing transportation costs for services and products. Distribution disturbances due to infrastructure-related issues are frequently reported and made the government realize the importance of more investments in the country's infrastructure. Infrastructure has been labelled a top priority in the Masterplan for Acceleration and Expansion of Indonesia's Economic Development (abbreviated MP3EI); an ambitious long-term government development plan which is yet to bear fruit.
Food prices are traditionally highly volatile in Indonesia and subsequently impose a big burden on the poorer households who live under or just above the poverty line. These households spend more than half of their total expenditure on food items. Higher food prices therefore cause serious poverty basket inflation which may lead to increases in the level of poverty. Failing harvests in combination with a slow reaction of the government to substitute food products with food imports are causes for inflation peaks.

Traditional Peaks of Inflation in Indonesia
Discarding administered price adjustments, there are two traditional annual peaks of inflation in Indonesia. The December-January period always brings higher prices due to Christmas and New Year celebrations, while the traditional floods in January (amid a peak of the rainy season) results in disrupted distribution channels in several regions and cities, thus causing higher logistics costs. The second peak comes in the July-August period. Inflationary pressures in these two months emerge as a result of the holiday period, the holy Muslim fasting month (Ramadan), Idul Fitri celebrations and the arrival of the new school year. A marked increase is detectable in spending on food and other consumables, accompanied by retailers adjusting prices upwards.

Monetary Policy and the BI Rate
With annual GDP growth close to six percent, the economy of Indonesia has been rapidly expanding in recent years, characterized by surging domestic demand (domestic consumption accounts for around two-thirds of the country's economic growth), robust private sector credit growth and increased business access to credit. Moreover, public sector wages have increased due to administrative reforms and private sector wage growth has accelerated (Indonesia's regional minimum wages were raised significantly in 2012 and 2013). As robust economic growth brings along inflationary pressures, recent monetary policies (in 2013 and 2014) were aimed at safeguarding financial stability, particularly after inflation surged due to the 2013 fuel prices hike and amid the looming end of the Federal Reserve's quantitative easing program (which led to large capital outflows from emerging markets, including Indonesia), at the expense of further economic growth.
Bank Indonesia (BI), Indonesia's central bank, has as main objective to ensure rupiah stability. It uses a wide range of instruments to stem mounting inflationary pressures in the country. Its bank rate policy is adjusted when inflation targets are not met. Between February 2012 and June 2013, the country's benchmark interest rate (BI rate) had been set at a historic low of 5.75 percent. After this period, inflationary pressures increased due to higher fuel prices and global uncertainty about the US quantitative easing program. Subsequent capital outflows resulted in sharp rupiah depreciation. Therefore, Bank Indonesia adjusted its BI rate upwards. Another measure to tighten monetary policy was the raising of the reserve requirements on both local and foreign currency deposits at Indonesian banks. Lastly, BI curtailed foreign investors' demand for Central Bank bills (SBIs) by extending the required holding period from one to six months, stretching the maturity of SBI issues to nine months and by introducing longer maturity non-tradable term deposits (which are available to banks only). These measures aimed at mitigating the flow of 'hot money' into Indonesia.

Benchmark Interest Rate of Indonesia 2008-2013: | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | Bank Indonesia Rate
(percent at year-end) | 9.25 | 6.50 | 6.50 | 6.00 | 5.75 | 7.50 |
Source: Bank Indonesia

Indonesian Inflation in Global Perspective
The table below puts Indonesia's recent inflation performance (annual percent change) in global perspective by comparing it to inflation figures from the United States (USA) and China. | 2009 | 2010 | 2011 | 2012 | 2013 | USA | -0.4 | 1.6 | 3.0 | 1.7 | 1.5 | China | -0.7 | 3.3 | 5.4 | 2.6 | 2.6 | Indonesia | 4.8 | 5.1 | 5.4 | 4.3 | 8.4 |
¹ indicates prognosis
Source: World Bank
Public Debt of Indonesia
Indonesia's public debt as a share of its gross domestic product (GDP) has shown a significant improvement since the Asian Financial Crisis erupted in the late 1990s. From over 150 percent of GDP in 1998, Indonesia's external debt declined to around 28 percent in 2013. This represents a healthy condition compared to many developed countries that are currently in trouble to ease public debt. Similarly, Indonesia's external debt as a percentage of its exports has shown an impressive decline as well; from 179.7 percent in 2004 to 97.4 percent in 2011. These numbers measure the government's ability to make future payments on its debt, thus positively affecting Indonesia's borrowing costs, government bond yields and international credit ratings when this debt is as low as in the case of Indonesia. This development is particularly due to the prudent fiscal policy approach of the Indonesian government and compliance with fiscal rules that set limits on the upper level of debt.
The Indonesian government's external debt consists of bilateral and multilateral loans, export credit facilities, commercial loans, leasing and government securities (SBN) owned by non-residents, issued on both foreign and domestic markets. Government securities consist of government debt securities (SUN) and government Islamic securities (SBSN). Government debt securities consist of government bonds due more than 12 months and Treasury Bills (SPN) due less than or 12 months. Government Islamic Securities consist of both long-term security (Ijarah Fixed Rate/IFR) and Global Sukuk.

Largest Contributors to Indonesian Government Debt Bilateral Loans | 31.4% | SBN (non-resident) | 22.4% | Multilateral Loans | 20.2% | Bonds | 18.4% |
Source: Bank Indonesia (BI)

As of July 2012 around 40 percent of this public debt is borrowed in US dollars and approximately 28 percent in Japanese Yen. Indonesia borrows mostly from other countries; countries that act as creditor account for three thirds of total Indonesian public debt. Most important creditor countries are Japan and the United States. International organizations provide around 25 percent of Indonesia's debt, of which the World Bank, the Asian Development Bank and the International Monetary Fund are the largest contributors.
Around 93 percent of Indonesia's government debt constitutes long term debt, meaning that the debt is due at least one year after the date of indebtedness.
Although in absolute terms Indonesia's government debt has grown by approximately USD 48 billion between 2006 and 2012 (a number which includes debt held by the Central Bank), as a percentage of GDP it has fallen significantly since the end of the Asian Financial Crisis. Only sharp nominal depreciation in late 2008 as well as in early 2009 temporarily led to an increase in the external debt to GDP ratio. The IMF forecasts a further moderate decline in public debt due to rupiah appreciation, falling interest rates, and robust economic growth. Future energy subsidy reduction and tax administration reforms in combination with strong economic growth will support a further decline in public debt. Due to the persistent global economic turmoil, Indonesia's debt to GDP ratio increased a little in the first half of 2012 to 27.3 percent according to Bank Indonesia.

Indonesian Debt to GDP Ratio 2008–2013 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | Debt to GDP
(percent of GDP) | 33.2 | 28.6 | 27.4 | 26.6 | 27.3 | 28.7 |
¹ indicates a forecast Source: International Monetary Fund (IMF)

Macroeconomic shocks will only have a limited impact on Indonesia's public debt ratio. Standard stress tests suggest that even under severe shocks from contingent liabilities, sharp exchange rate movements and higher interest rates, the debt ratio is likely to remain modest. Fiscal contingent liabilities amounting to 10 percent of GDP could raise public sector debt to 30 percent of GDP by 2016. Currency depreciation of 30 percent would raise the debt ratio to about 25 percent of GDP. And an increase in real interests rates would have a smaller effect with the debt ratio reaching around 23 percent of GDP by 2015. Other macroeconomic shocks will likely have more limited impacts than the ones mentioned above.

Fiscal Deficit of the Indonesian Government
Since 2002, Indonesia's budget deficit has been maintained below two percent of GDP. This trend is not likely to continue in 2012 as the government has not cut the massive energy subsidies (both fuel and electricity) that is burdening the budget balance. Although progress has been made in shifting public spending from inefficient subsidies to pro-poor programs, Indonesia is still spending too little money on infrastructureand secondary education. There seems to be scope for increased spending in these fields, something which is in line with government targets in the Medium-Term Development Plan (RPJMN 2010‐2014).
Often Indonesia shows a significant discrepancy between the estimated annual budget deficit and its realized outcome. For instance, in 2010 the government's target was set at 2.1 percent of GDP but its outcome was 0.6 percent. This is caused by ongoing problems in the implementation of spending programs; problems with allocation, efficiency and execution of government spending. It is also a side effect of the success made by the independent Corruption Eradication Commission (Komisi Pemberantasan Korupsi or KPK) as fear of being charged with corruption makes some officials hesitant to spend public money.
Government spending is heavily concentrated at the end of the fiscal year. This can undermine effectiveness and quality of government spending. For that reason the president established a Budget Execution Task Force (Tim Evaluasi dan Pengawasan Pelaksanaan Anggaran, TEPPA) to monitor and accelerate budget execution in 2012. The government's accumulated unspent balance (Sisa Anggaran Lebih) stood at IDR 96.6 trillion by end 2011.

Indonesian Budget Deficit | 2009 | 2010 | 2011 | 2012 | 2013 | Budget Deficit
(percent of GDP) | 1.6 | 0.6 | 1.2 | 1.9 | 2.2 |
Source: World Bank

Exchange Rate Indonesian Rupiah (IDR) and Foreign Exchange Reserves
This section provides the daily up-to-date exchange rate of the Indonesian rupiah (IDR) compared to important foreign currencies:
Last Update: 05 Dec 2014 Currency | Value | Sell | Buy | Change | USD | 1.00 | 12,357.00 | 12,235.00 | -0.18% | EUR | 1.00 | 15,294.26 | 15,142.04 | 0.35% | CNY | 1.00 | 2,013.43 | 1,993.55 | -0.12% | JPY | 100.00 | 10,306.09 | 10,203.49 | -0.21% | GBP | 1.00 | 19,351.06 | 19,155.12 | -0.39% | HKD | 1.00 | 1,594.16 | 1,578.30 | -0.16% | SGD | 1.00 | 9,406.26 | 9,311.97 | -0.26% | AUD | 1.00 | 10,363.82 | 10,255.38 | -0.32% |
Source: Bank Indonesia

US Dollar (USD) to Indonesian Rupiah (IDR) |
Source: Bank Indonesia

Euro (EUR) to Indonesian Rupiah (IDR) |
Source: Bank Indonesia

Chinese Yuan (CNY) to Indonesian Rupiah (IDR) |
Source: Bank Indonesia

Japanese Yen (JPY) to Indonesian Rupiah (IDR) |
Source: Bank Indonesia

International Reserves
To manage volatile capital flows and provide a buffer against possible external shocks, continued exchange rate flexibility in combination with accumulated foreign exchange reserves are essential. Indonesia's foreign reserves have been growing quickly from USD $51.6 billion in 2008 to over USD $100 billion. This enables Indonesia to buffer a deterioration of international financial conditions for the foreseeable future.

Last Update: 10 August 2014 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | Foreign Exchange
Reserves¹ | 51.6 | 66.1 | 96.2 | 110.1 | 112.8 | 99.4 | 110.5 |
¹ in billion USD dollar
Source: Bank Indonesia

Poverty in Indonesia
Between the mid-1960s and 1996, when Indonesia was under the rule of Suharto's New Order government, the country witnessed a significant decline in poverty - both urban and rural - due to robust economic growth and efficient pro-poor programs. During the Suharto period the number of Indonesians that lived below the poverty line eased from over half of the total population to 11 percent. However, when the Asian Financial Crisis hit in the late 1990s it had a devastating impact on poverty alleviation, causing the poverty rate to slip back from 11 to 19.9 percent in late 1998, meaning that much of the New Order's accomplishments had been reversed.
The following table provides poverty figures - both relative and absolute - for Indonesia's population:

Indonesian Poverty and Inequality Statistics: | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | Relative Poverty
(% of population) | 16.0 | 17.8 | 16.6 | 15.4 | 14.2 | 13.3 | 12.5 | 11.7 | 11.5 | Absolute Poverty
(in millions) | 35 | 39 | 37 | 35 | 33 | 31 | 30 | 29 | 29 | Gini Coefficient/
Gini Ratio | 0.36 | - | 0.35 | 0.35 | 0.37 | 0.38 | 0.41 | 0.41 | 0.41 |
Sources: World Bank and Statistics Indonesia
The table above shows a steady decline in national poverty. However, the Indonesian government applies rather easy terms and conditions regarding the definition of the poverty line, resulting in a more positive picture than reality. In 2013 the Indonesian government defined the poverty line at a monthly per capita income of 292,951 rupiah. This amount equals approximately USD $25 and, thus, indicates a very low standard of living, even for Indonesian standards. But if we apply the poverty threshold as is used by the World Bank, which classifies the percentage of the Indonesian population living on less than USD $1.25 a day as poor, the percentages in the table above will rise by a couple of percentage points. Moreover, according to the World Bank, when taking into account the percentage of the Indonesian population that lives on less than USD $2 a day, the figure for 2009 rises to 50.6 percent of the population. This shows that a large proportion of the Indonesian population is in fact near poor. More recent reports in Indonesian media assert that around a quarter of Indonesians (which translates to around 60 million people) are currently near poor.
In recent years, Indonesian poverty numbers have shown a steady downward trend. It is assumed, however, that in the future this downward trend will continue at a slower pace. Most of the Indonesians that rose out of poverty in recent years, were those that lived just below the poverty line. This means it took less effort to push them out of poverty. But as this group is slowly narrowing in number, it is now the bottom base of Indonesia's poverty that needs to be alleviated. This will be more complicated and thus results in slowing rates of poverty reduction.

Indonesian Poverty and Geographical Distribution

One remarkable characteristic of Indonesian poverty is that there is a major difference in terms of relative and absolute poverty in relation to geographical location. While in absolute terms over half of the total Indonesian poor population lives on the island of Java (located in the more populous western half of Indonesia), in relative terms the provinces of eastern Indonesia show far higher numbers of poverty. The table below shows the top five of Indonesian provinces regarding highest incidences of relative poverty. All these provinces are located outside the more developed western-located islands of Java, Sumatra and Bali.

Indonesian Provinces with Highest Relative Poverty¹

Papua | 31.5% | West Papua | 27.1% | East Nusa Tenggara | 20.2% | Moluccas/Maluku | 19.3% | Gorontalo | 18.3% |
¹ as percentage of total population per province in September 2013
Source: Statistics Indonesia
These eastern provinces, where farmers lead a largely subsistence existence, contain very high rates of rural poverty. In these regions, indigenous communities have been living on the margins of development processes and programs. Migration to urban areas is often the only way to find employment and - thus - escape poverty.
Contrary to relative poverty in eastern Indonesia, the table below shows that absolute poverty in Indonesia is clustered on the islands of Java and Sumatra.

Indonesian Provinces with Highest Absolute Poverty¹

East Java | 4.9 | Central Java | 4.7 | West Java | 4.4 | North Sumatra | 1.4 | Lampung | 1.1 |
¹ in millions in September 2013
Source: Statistics Indonesia

Food price stability (rice in particular) is a vital matter for Indonesia as the country contains a population that spends a large proportion of their disposable incomes on rice. Therefore, inflationary pressures on the price of rice (for example due to bad harvests) can have serious consequences for those that are poor or near poor and significantly raise the percentage of poverty in the country.

Rural and Urban Poverty in Indonesia
Indonesia has experienced a process of rapid and continued increased urbanization. Since the mid-1990s the absolute number of Indonesia's rural population began to decline and today more than half of Indonesia's total population lives in urban environments (20 years ago approximately one-third of Indonesia's population lived in urban societies).
With the exception of a few provinces, the rural populations of Indonesia are relatively poorer than the urban ones. Indonesia's rural poverty rate (percentage of the rural population living below the national rural poverty line) dropped to around 20 percent in the mid-1990s but suffered at the hands of the Asian Financial Crisisthat ravaged the country between 1997 and 1998, causing this number to rise again to 26 percent. After 2006, a significant decline in rural poverty in Indonesia emerged as is visible in the table below:

| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | Rural Poverty
(percentage living below rural poverty line) | 20.0 | 21.8 | 20.4 | 18.9 | 17.4 | 16.6 | 15.7 | 14.3 | 14.4¹ |
¹ as of September 2013
Sources: World Bank and Statistics Indonesia
The urban poverty rate is the percentage of the urban population living below the national urban poverty line. The table below, that indicates urban poverty in Indonesia, shows a similar pattern as Indonesia's rural poverty rate: a continued decrease since 2006.

| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | Urban Poverty
(percentage living below urban poverty line) | 11.7 | 13.5 | 12.5 | 11.6 | 10.7 | 9.9 | 9.2 | 8.4 | 8.5¹ |
¹ as of September 2013
Sources: World Bank and Statistics Indonesia
In the two tables above, a significant increase in poverty is visible between 2005 and 2006. This development is mainly due to massive cuts in fuel subsidies by the Yudhoyono government in late 2005. Rising international oil prices had made the government decide to reduce fuel subsidies in order to relieve the government's budget deficit. This consequently led to a double-digit inflation rate of between 14 and 19 percent (yoy) until October 2006.

Widening Inequality in Indonesia?

The GINI coefficient, which measures income distribution inequality, shows a decreasing trend in Indonesia in recent years. A coefficient of 0 indicates perfect equality, while a coefficient of 1 indicates perfect inequality. However, the methodology of this GINI coefficient can be questioned as it divides the population in five baskets, each containing 20 percent of the population: from the 20 percent richest to the 20 percent poorest. Subsequently, it measures the (in)equality between those baskets. The problem when using this coefficient for Indonesia, however, is that the country is characterized by extreme inequality within each basket, making the outcome of the GINI coefficient less in tune with reality. Hence, Indonesian media often reports that the gap between poor and rich in Indonesia is actually widening.

Unemployment in Indonesia
During the course of Suharto's New Order, economic development added many new jobs to Indonesia's job market, thereby pushing down the national unemployment rate. Particularly the industry and services sectors saw major increases in its employment shares towards national employment, at the expense of the agriculture sector. In the 1980s around 55 percent of Indonesia's working population was concentrated in the agricultural sector but recently this number has been reduced to 40 percent. The Asian Financial Crisis that erupted in the late 1990s, however, reversed these developments temporarily and caused the country's unemployment rate to reach over 20 percent, with underemployment rising equally rapidly. Most of the people that lost their jobs in urban areas went to join the - already large - informal sector in rural areas (particularly inagriculture). Although Indonesia has been experiencing robust macroeconomic growth in recent years and, in many ways, can be regarded as recovered from the crisis, this informal sector - both rural and urban - still plays an exceptionally large role in Indonesia's economy today. Although it is difficult to pinpoint the number exactly, it is estimated that between 55 and 65 percent of employment in Indonesia can be called informal. Today, around 80 percent of this informal employment is concentrated in the rural areas, particularly in the construction and agriculture sectors.
More than a decade of macroeconomic growth has succeeded in pushing Indonesia's unemployment rate into a steady downward trend. But, as around two million Indonesians enter the labor force each year, it will be a challenge for the Indonesian government to stimulate job creation so that the labor market can absorb this group of annual newcomers; youth unemployment (among the freshly graduated) in particular is a cause for concern and action.
With around 240 million people, Indonesia is the fourth most populous country in the world (after China, India and the United States). Moreover, the country has a young population as around half of the total population is below the age of 30 years. Combined, these two features imply that Indonesia currently contains a large labor force; one that will grow larger in the foreseeable future. | 2010 | 2011 | 2012 | 2013 | 2014¹ | Labor Force | 116,527,546 | 119,399,375 | 120,320,000 | 120,170,000 | 125,320,000 | - Working | 108,207,767 | 111,281,744 | 113,010,000 | 112,760,000 | 118,170,000 | - Unemployed | 8,319,779 | 8,117,631 | 7,310,000 | 7,410,000 | 7,150,000 |
¹ data from February 2014
Source: Statistics Indonesia
The table below indicates Indonesia's unemployment rate in recent years. It shows a steady downward trend, in particular regarding female unemployment. Female unemployment has declined rapidly and is reaching the male unemployment rate. However, gender equality, as in most countries, is an issue in Indonesia. Although considerable progress has been made in several key areas (education and health), women are still more likely to work in the informal sector (twice as much as the amount of men), in poorly remunerated occupations and are paid less than men for similar work. | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | Unemployment
(% of total labor force) | 10.3 | 9.1 | 8.4 | 7.9 | 7.1 | 6.6 | 6.1 | 6.2 | 5.7 | Male Unemployment
(% of male labor force) | 8.5 | 8.1 | 7.6 | 7.5 | 6.1 | - | - | - | | Female Unemployment
(% of female labor force) | 13.4 | 10.8 | 9.7 | 8.5 | 8.7 | - | - | - | |
Sources: World Bank and Statistics Indonesia
A characteristic of Indonesia is that the unemployment rate is highest for people between the age of 15 and 24, far above the country's national average. Freshly graduated students from universities, vocational schools and secondary schools have difficulties finding their place in the national workforce. Almost half of Indonesia's total number of workers possess a primary school degree only. The higher the education degree, the lower its share towards Indonesia's workforce. In recent years, however, there is a changing trend visible: the share of higher education degree holders rises, while the share of those that went to primary school only decreases. | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | Male youth unemployment
(percentage of male labor force
15-24 years of age) | 27.7 | 23.8 | 21.8 | 21.6 | 21.1 | 19.3 | Female youth unemployment
(percentage of female labor force
15-24 years of age) | 34.3 | 27.3 | 25.5 | 23.0 | 22.0 | 21.0 |
Source: World Bank
The agriculture sector of Indonesia continues its leading position regarding absorption of Indonesia's workforce. The table below indicates the top four sectors that absorbed Indonesia's workforce in 2011 and beyond. These numbers represent percentages of the total Indonesian workforce. | 2011 | 2012 | 2013 | 2014¹ | Agriculture | 42.5 | 39.9 | 39.2 | 40.8 | Wholesale Trade, Retail Trade,
Restaurants and Hotels | 23.2 | 23.6 | 24.1 | 25.8 | Community, Social and
Personal Services | 17.0 | 17.4 | 18.5 | 18.5 | Manufacturing Industry | 13.7 | 15.6 | 15.0 | 15.4 |
¹ data from February 2014
Source: Statistics Indonesia
Vulnerable employment (unpaid workers and own-account workers) for both men and women is rather high in Indonesia compared to developed countries and its regional peers. For Indonesian men this number reaches around 60 percent of the country's total male employment force during the last decade, while this number is around 70 percent for women. Many that fall in the category of vulnerable employment belong to the informal sector. * Home › * Business › * Business Columns › * Growth in Indonesia’s Manufacturing Sector Revised Down
Growth in Indonesia’s Manufacturing Sector Revised Down

06 December 2014 |Indonesia Investments
Subjects |energy, Food & Beverage Industry, Fuel Subsidies, GDP, Industry, Manufacturing, Manufacturing PMI,Manufacturing PMI Indonesia November 2014, Manufacturing Sector Indonesia
Growth of the manufacturing industry in Indonesia is expected to be significantly weaker in 2015 than initially forecast . Indonesia’s Industry Ministry cut its 2015 forecast for expansion of the country’s manufacturing industry to 6.1 percent (year-on-year) from the previous estimate of 6.8 percent. In tandem with slowing economic growth in Southeast Asia’s largest economy, manufacturing growth has slowed to 4.99 percent (y/y) in Q3-2014. Moreover, the HSBC/Markit PMI contracted to a record low of 48.0 in November 2014.

Contrary to the trend in recent years, growth in Indonesia’s manufacturing sector fell below the national average (GDP slowed to 5.01 percent y/y in Q3-2014) in the third quarter of 2014. However, the Industry Ministry is convinced that this is a temporary phenomenon and that the manufacturing sector will outperform the national average again in the quarters ahead primarily supported by the food, beverage and tobacco segment (which grows strongly due to the large population and rapidly expanding middle class segment) as well as by the continuation of (foreign and domestic) investments in the country’s manufacturing sector. However, in order to make investments more attractive, the government should address various issues such as improving basic infrastructure, securing energy supplies and curtail bureaucracy.
The record low HSBC/Markit PMI in November was caused by the recent subsidized fuel price hike (resulting in higher costs for manufacturers and lower domestic orders), rupiah depreciation (implying more expensive import of raw materials), and weak external demand. Su Sian Lim, Economist at HSBC, expects that Indonesia’s manufacturing sector conditions will remain soft in the months ahead.
The slowdown in manufacturing this year is also caused by the ban on exports of unprocessed minerals introduced in January 2014.
Indonesia’s manufacturing sector has grown strongly in recent years. However, it still relies on industries that have a high percentage of imported raw materials, particularly the automotive and pharmaceutical industries. This provides constant pressures on the current account balance. The food sector, on the other hand, (and which constitutes the main pillar of growth in the non-oil & gas manufacturing industry) is mainly self-sufficient in terms of raw material input.

Growth of the Indonesian Manufacturing Industry 2009-2015: | 2009 | 2010 | 2011 | 2012 | 2013 | 2014¹ | 2015¹ | Manufacturing Industry annual % change | 2.5% | 5.1% | 5.8% | 6.4% | 6.1% | 6.0% | 6.1% | Economic Growth annual % change | 4.6% | 6.1% | 6.5% | 6.2% | 5.8% | 5.1% | 5.5% |
¹ Government projection
Source: Ministry of Industry

* Home › * Culture › * Economy › * General Economic Outline

4. General Economic Outline of Indonesia
Indonesia, currently the 18th-largest economy in the world, is experiencing remarkable economic growth. After the Asian Financial Crisis of the late 1990s halted a booming economy fostered by the Suharto government, Indonesian macroeconomic indicators started to come back on track in the mid 2000s. Although the Asian Financial Crisis had disastrous consequences (especially on the poorer urban segments of society), important lessons have been learned too. The financial system for example, which to a large extent lacked supervision and transparency, was replaced by a system entailing more prudent fiscal policies in line with international economic standards, thus fostering integration with global markets. Moreover, the Asian Financial Crisis has been the catalyst for a process of political democratization and liberalization that continues up to the present.
Prudent financial macroeconomic policy is one reason why Indonesia was resilient to the global financial crisis of 2008-2009. Both public and private debt have fallen sharply (as a percentage of GDP), international reserves have grown fast and inflation has been under control. In combination with relative political stability and certain favorable demographic trends it provides opportunities for strong economic performance over the medium term. Regarding the longer term, the Indonesian government aims to be in the top six of largest global economies by the year 2030.
Another key element that accounts for Indonesia's recent economic growth is domestic consumption. In line with rising per capita GDP and low borrowing costs, Indonesia's private consumption is robust. It accounted for 56 percent of the country's economic activity in 2011 and future projections indicate that it is to grow further.
Despite such positive conditions Indonesia remains a complex country from a business, social and political perspective. We advise those that intend to invest in Indonesia to read our Risks of Investing in Indonesiapage as one should be aware of matters that can negatively influence Indonesia's investment climate.
The table below shows recent results and future forecasts of important macroeconomic indicators. For a more detailed account on these indicators please visit the Macroeconomic Indicators page or click on the links in the table.

Last Update: 10 August 2014

| 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | • Gross Domestic Product (annual percent change) | 4.6 | 6.1 | 6.5 | 6.2 | 5.8 | 5.2¹ | 5.6¹ | • Consumer Price Index (annual percent change) | 4.8 | 5.1 | 5.4 | 4.3 | 8.4 | 5.8¹ | 4.9¹ | • Public Debt (percent of GDP) | 28.6 | 27.4 | 26.6 | 27.3 | 28.7 | | | • Exchange Rate (IDR/USD) | 10,389 | 9,074 | 8,773 | 9,419 | 11,563 | 11,800¹ | 11,800¹ | • Current Account Balance (percent of GDP) | | 0.7 | 0.2 | -2.8 | -3.3 | -2.9¹ | -2.4¹ | • Export Goods and Services (annual percent change) | | 14.9 | 13.6 | 2.0 | 5.6¹ | 5.7¹ | | • Import Goods and Services (annual percent change) | | 17.3 | 13.3 | 6.6 | 2.4¹ | 4.5¹ | | • Population (in millions) | | 241 | 244 | 247 | 250 | 253¹ | 255¹ | • Poverty (percent of population) | 14.2 | 13.3 | 12.5 | 11.7 | 11.5 | 11.3 | | • Unemployment (percent of work force) | 7.9 | 7.1 | 6.6 | 6.1 | 6.3 | 5.7¹ | | • Foreign Exchange Reserves (in billion USD) | 66.1 | 96.2 | 110.1 | 112.8 | 99.4 | 110.5² | |
¹ indicates a forecast ² at end-July 2014
Sources: World Bank, Statistics Indonesia, Bank Indonesia and International Monetary Fund (IMF)

Composition of Indonesia's Economy: the three main sectors
The table below indicates a remarkable development during the last five decades in the percentage shares of the three main economic sectors (to wit agriculture, industry and services) with regard to Indonesia's Gross Domestic Product (GDP). Indonesia changed from being an economy that was highly dependent on agriculture into a more balanced economy in which the percentage share of manufacturing in the country's GDP quickly exceeded that of the agriculture sector. This also indicates that Indonesia lessened its traditional dependency on primary exports, although it still remains relatively high today. It should also be underlined that all of these sectors underwent rapid expansion, despite the fact that its contribution to Indonesia's GDP fell (agriculture) or remained at a similar level throughout the indicated period (the services sector). For a more detailed account please click on one of the sectors in the table below. | 1965 | 1980 | 1996 | 2010 | Agriculture (percent of GDP) | 51 | 24 | 16 | 15 | Industry (percent of GDP) | 13 | 42 | 43 | 47 | Services (percent of GDP) | 36 | 34 | 41 | 37 |
Source: World Bank

Indonesia's Economic Fact Sheet | • Indonesia was an USD $850 billion economy in 2012 | • In 2012 private consumption accounted for about 55 percent of economic activity in Indonesia, partly due to low borrowing costs and rising GDP per capita | • Per Capita GDP rose from USD $780 in 2000 to USD $3,540 in 2011 | • Exports account for around 20 percent of GDP. China, Japan, USA and India are Indonesia's largest export destinations | • Around half of Indonesia's exports consist of commodities (in particular palm oil, coal and rubber) | • In 2012 Foreign Direct Investment (FDI) in Indonesia jumped around 26 percent (to USD $29.5 billion) compared to 2011 | • Mining accounted for around 12 percent of gross domestic product in 2011 |

New Order Miracle of Suharto's Indonesia
Around the mid-1960s Indonesia's economic situation had reached an alarmingly bad condition. The economy suffered from the chaotic political course set out by president Soekarno, Indonesia's first president. Economic matters took a back seat for Soekarno who had spent a lifetime fighting in the political arena. Some examples of his policies that negatively affected the economy were the cutting off of links with the West (thus isolating Indonesia from the world economy and barring the country from receiving much needed foreign aid money) and deficit spending through the printing of money, resulting in an out-of-hand hyperinflation. But after Suharto took over from Soekarno in the mid-1960s economic policies underwent a radical change of course.
Indonesia's economic development during Suharto's New Order government can be divided into three periods, each characterized by specific policies aimed at specific economic contexts. These periods are:

• Economic recovery (1966-1973)
• Rapid economic growth and increasing government intervention (1974-1982)
• Export-led growth and deregulation (1983-1996)
Economic Recovery (1966-1973)
The essential mission of Suharto's New Order government was economic development; the first step being the reintegration of Indonesia back into the world economy by rejoining the International Monetary Fund (IMF), the United Nations (UN) and the World Bank in the second half of the 1960s. This started up the flow of badly needed financial assistance and foreign aid from the Western countries and Japan into Indonesia. Hostilities with Malaysia (Soekarno's confrontation politics) were stopped as well. The second step was curtailing the hyperinflation. Suharto turned to a group of economic technocrats (most of whom were educated in the USA) to come up with a plan for economic recovery. In the late 1960s price stability had been established through a policy which prohibited domestic financing in the form of domestic debt or money creation. Subsequently a free market mechanism was restored by decontrol measures, followed by the implementation of the Foreign Investment Law (1967) and Domestic Investment Law (1968). These laws contained attractive incentives for investors to invest in the country resulting in double-digit economic growth in 1968.
Rapid Economic Growth and Increasing Government Intervention (1974-1982)
Until 1982 rapid annual economic growth of at least five percent was maintained. Not unimportant, Indonesia benefited significantly from two oil booms that emerged in the 1970s. The first one began in 1973/1974 when the Organization of Petroleum-Exporting Countries (OPEC), of which Indonesia was a member, cut its exports drastically, causing a major rise in oil prices. The second oil boom took place in 1978/1979 when the Iranian revolution disrupted oil production causing another massive price increase. Due to these oil booms the New Order's export earnings as well as government revenues rose steeply. This enabled the public sector to play a greater role in the economy by undertaking substantial public investments in regional development, social development, infrastructure and through the establishment of large-scale (basic) industries, among which were the import-substitution industries. Capital goods and raw materials could be imported due to increased foreign exchange earnings, giving rise to a developing manufacturing sector. However, major riots broke out during a visit of Japan's prime minister in 1974 because of the perceived over-presence of foreign investment projects in the country. Indonesians were frustrated that the indigenous people seemed to be excluded from the fruits of the economy. The government was shocked because of this violent event (that became known as the Malari affair) and introduced more restrictive measures on foreign investment and replacing it with preferential policies favouring the indigenous businessmen. Increased government revenue brought on by the first oil boom meant that the government was no longer dependent on foreign investments, therefore an interventionist approach could be started.
Export-Led Growth and Deregulation (1983-1996)
In the early 1980s the price of oil began to fall again and currency realignments in 1985 aggravated Indonesia's foreign debt. The government had to take new measures to restore macroeconomic stability. The rupiah was devalued in 1983 to ease the rising current account deficit, a new tax law was introduced to increase revenue from non-oil taxes and bank deregulation measures were taken (credit ceilings on interest rates were lifted and banks were allowed to set these rates freely). Moreover, the economy had to be redirected from an economy dependent on oil to an economy containing a competitive private sector oriented towards export markets. This implied new deregulation measures to improve the investment climate for private investors. When the oil price fell again in the mid-1980s, the government increased measures to accompany export-led growth (such as the exemption of import duties and another devaluation of the rupiah). These policy changes (in combination with deregulation packages in the 1990s) also affected foreign investments in Indonesia. Especially export-oriented foreign investments were welcomed.
Another sector that was affected by far-reaching deregulation measures was the Indonesian financial sector. New private banks were allowed to be established, existing banks could open up branches across the country and foreign banks were free to operate outside Jakarta. These financial reforms would later turn out to be a problem that intensified the crisis in Indonesia in the late 1990s. But in the meantime, however, these rigorous measures had a positive impact on Indonesia's economy. Manufactured exports began to become the engine of the Indonesian economy. Between 1988 and 1991 Indonesia's Gross Domestic Product grew by an average of nine percent per year, slowing down to an average of 'just' 7.3 percent during the period of 1991 to 1994 and rising again in the following two years.
Problems at the Horizon
The text above paints a rather positive picture of the economy during the New Order. Indeed the economy grew rapidly and with it came improvements in its social development (although at a slower pace). In particular the reduction in absolute poverty was a remarkable achievement of the government. In the mid-1960s over half of the Indonesian population lived below the poverty line but by 1996 this number had been reduced to 11 percent of the total Indonesian population. However, the style of rule of the New Order government entailed a couple of dangerous consequences that would come to a climax during the Asian Financial Crisis in the late 1990s.
First of all the essence of the New Order's government's nature. It was a military-backed authoritarian regime that did not respect human rights. During its course for over three decades the government seemed to become more and more out of tune with its citizens. Politics and economics were basically taken away from the public and kept within a small elite around Suharto. But as Indonesians became more educated due to increasing social developments, its educated circles naturally wanted to let their voices heard and participate in politics as well as the economy. Suharto, however, was not in favour of this and reacted by placing more restrictions on Indonesian society (for example the confinement of student demonstrations to university campuses only). This political standstill caused a lot of frustration in a large part of Indonesia's population.
Secondly - and related to the previous paragraph - the New Order was based on a system of nepotism and corruption in which a small group around Suharto benefited tremendously from the economic fruits of the country. This group consisted mainly of ethnic Chinese business partners (fueling ethnic sentiments) and was later joined by Suharto's children. Promises of openness and transparency of government policy were never complied with. Moreover, corruption prevents an economy from functioning effectively. This would be exposed during the Asian Crisis that emerged in 1997.
Thirdly - again related to the previous paragraphs - the financial system had begun to run out of control after the deregulation measures in the banking sector in the late 1980s. With little restrictions to open banks and branches it became more and more difficult to monitor the money flows within the Indonesian banking system. A serious lack of financial data, a weak regulatory and legal framework and illegal money flows all contributed to the fact that Indonesia would be hit hardest during the Asian Financial Crisis.
Read a detailed account about the Asian Financial Crisis.

* Home › * Culture › * Economy › * Asian Financial Crisis
Asian Financial Crisis in Indonesia
The Asian Financial Crisis started on 2 July 1997 when the Thai government, burdened with a huge foreign debt, decided to float its baht after currency speculators had been attacking the country's foreign exchange reserves. This monetary shift was aimed at stimulating export revenues but proved to be in vain. It soon led to a contagion effect in other Asian countries as foreign investors - who had been pouring money into the 'Asian Economic Miracle countries' since a decade prior to 1997 - lost confidence in Asian markets and dumped Asian currencies and assets as quickly as possible.

The Indonesian Crisis Begins
Although the Asian region showed worrying signs, foreign investors initially kept confidence in the Indonesian technocrats' ability to weather the financial storm (as they had done before in the 1970s and 1980s). But this time, however, Indonesia would not get off scot-free. It became the hardest-hit country because the crisis not only had economic but also significant and far-reaching political and social implications.
When pressures on the Indonesian rupiah became too strong, the currency was set to float freely starting from August 1997. Soon it began depreciating significantly. By 1 January 1998, the rupiah's nominal value was only 30 percent of what it had been in June 1997. In the years prior to 1997 many private Indonesian companies had obtained unhedged, short-term offshore loans in dollars, and this enormous private-sector debt turned out to be a time bomb waiting to explode. The continuing depreciation of the rupiah only worsened the situation drastically. Indonesian companies rushed to buy dollars, thus putting more downward pressure on the rupiah and exacerbating the companies' debt situation. It was certain that Indonesian companies (including banks; some of which were known to be very weak) would suffer huge losses. New foreign exchange supplies were scarce as new loans for Indonesian companies were not granted by foreign creditors. As the government of Indonesia was unable to cope with this crisis it decided to seek financial assistance from the International Monetary Fund (IMF) in October 1997.

The IMF Arrives and Chaos Continues
The IMF arrived in Indonesia with a bailout package totaling USD $43 billion to restore market confidence in the Indonesian rupiah. In return it demanded some fundamental financial reform measures: the closure of 16 privately-owned banks, the winding down of food and energy subsidies, and it advised the Indonesian Central Bank (Bank Indonesia) to raise interest rates. But this reform package turned out to be a failure. The closure of the 16 banks (some controlled by Suharto's cronies) triggered a run on other banks. Billions of rupiah were withdrawn from saving accounts, restricting the banks' ability to lend and forcing the Central Bank to provide large credits to the remaining banks to avert a complete banking crisis. Moreover, the IMF did not try to curb Suharto's system of patronage that was damaging the country's economy and undermining the IMF accord. This patronage system was Suharto's tool to maintain power; in exchange for political and financial support, he gave powerful positions to his family, friends and enemies (thus becoming cronies). Other developments that were negatively impacting on Indonesia towards the end of 1997 were a serious El-Nino drought (causing forest fires and bad harvests) and increased speculation about Suharto's deteriorating health (causing political uncertainties). Gradually, Indonesia was heading towards a political crisis.
A second agreement with the IMF was needed as the economy was continuing its downward spiral. In January 1998 the rupiah lost half of its value within the time-span of five days only, causing Indonesians to hoard food. This second IMF agreement contained a detailed 50-point reform program, including provisions for a social safety net, a gradual phasing out of certain public subsidies and the tackling of Suharto's patronage system by ending monopolies of a number of his cronies. However, reluctance of Suharto to implement this structural reform program faithfully, meant that the situation did not improve. Critics of the IMF, however, point out that the institution pushed for too much reform within too little time, thereby worsening the Indonesian economy. The IMF indeed made errors in its initial approach to the Indonesian crisis but it did come to realize that the key in overcoming this crisis was to restart private capital flows to Indonesia. In order for this to happen the patronage system had to be broken down.

Indonesian GDP and Inflation 1996-1998: | 1996 | 1997 | 1998 | GDP growth (annual percent change) | 8.0 | 4.7 | -13.6 | Inflation growth (annual percent change) | 6.5 | 11.6 | 65.0 |
Source: Hill, H. (2000). The Indonesian Economy, p. 264
A third agreement with the IMF was signed in April 1998. The Indonesian economy and social indicators were still showing worrying signs. But this time, however, the IMF was more flexible in its demands than on previous occasions. For instance, large food subsidies for low-income households were granted and the budget deficit was allowed to widen. But the IMF also called for the privatization of state-owned companies, faster action on bank restructuring, a new bankruptcy law and a new court to handle bankruptcy cases. It also insisted on a closer monitoring of its implementation as recent experiences had shown that the Indonesian government was not fully committed to the reform agenda.

The Crisis Hits its Climax
In the meantime, major social forces were at work as well. Demonstrations and criticism directed towards the government of Suharto intensified severely after he was re-elected and formed a new cabinet in March 1998. This provocative new cabinet contained a number of members from his crony-group and therefore did little to restore confidence in the Indonesian market. After the government decided to reduce the subsidies on fuel in early May, large-scale riots broke out in Medan, Jakarta and Solo. Although the IMF had given Suharto time until October to reduce these subsidies gradually, he decided to do it all at once, probably underestimating its impact or overestimating his own position. The tense atmosphere came to a climax when four Indonesian students were killed during a protest at a local university in Jakarta. It is suspected that an army unit of the special forces was behind these shootings ('Trisakti shootings'). The next couple of days Jakarta was plagued by the worst riots ever. As had happened before, the ethnic Chinese - disliked for their assumed wealth - were often target during these violent riots. Chinese stores and houses were burned to the ground and Chinese women brutally raped. When the riots calmed down, over one thousand people had lost their lives and thousands of buildings were destroyed. On 14 May 1998 Suharto stepped down from the presidency when all politicians refused to join a new reorganized cabinet. The financial crisis had fully grown into a social and political one.

A New Political System and the Start of Recovery
Bacharuddin Jusuf Habibie, vice-president in Suharto's last cabinet and thus - by law - replacing Suharto as Indonesia's next president, turned to the economic technocrats to deal with the ongoing financial crisis. This resulted in a fourth agreement with the IMF. It was signed in June 1998 and allowed the budget deficit to widen further while new funds were pumped into the economy. Within the timespan of a couple of months there were some signs of recovery. The rupiah began to strengthen from mid-June 1998 (when it had fallen to 16,000 rupiah per dollar) to 8,000 rupiah per dollar in October 1998, inflation eased drastically, the Jakarta stock exchange started to rise and non-oil exports started to revive towards the end of the year. The banking sector (center of the crisis) remained fragile as the number of non-performing loans were high and banks were very hesitant to loan money. Moreover, the banking sector had caused a sharp increase in government debt as this debt was primarily due to the issuance of bank restructuring bonds. But, albeit fragile, the country's economy improved gradually through 1999, partly due to an improving international environment which caused a rise in export revenues.

Lessons Learned from the Asian Financial Crisis
It is interesting to question what chances are of such a crisis occurring again in Indonesia in the foreseeable future. Most likely chances are small. First of all it needs to be stressed that the Asian Financial Crisis hit Indonesia hardest of all involved countries because it was not just an economic crisis. It started out as an economic crisis but became severely aggravated because it was accompanied by a deep political and social crisis in which the government was not willing to implement much needed economic reforms but instead was trying to cling on to their hold of power. As an orderly and conducive political climate is of vital importance for investor confidence, the uncertainties and tensions in Indonesian politics made many investors turn their back to the country. Also after Suharto's fall, political uncertainties put off many investors (foreign and domestic) to (re)enter the Indonesian market. Today, however, Indonesia is well on its way towards full democracy, albeit its a process that is accompanied by growing pains. Decades of authoritarian rule have depoliticized the people and political institutions to a considerable extent. It will take time before the country can leave behind the rank of 'flawed democracy' as measured by Economist Intelligence Unit for its Democracy Index. But fair and free elections make sure that there has been more popular support for the governments during the Reformation period than ever before. The decision to have the president directly elected by the people is an important one, psychologically. Nonetheless, it should be underlined that the Indonesian political climate is more volatile than long-established democracies due to many dissenting forces looking to establish their position in the young democracy. For a detailed account on this topic please visit our Reformation section.
Another important factor that seriously aggravated the financial crisis in Indonesia was the terrible state of the Indonesian financial sector. This was caused by a culture of patronage and corruption which lacked a decent supervision model. Even the Central Bank had no idea about the flows of money (and resulting huge short-term private debt) which entered Indonesia and caused a 'bubble economy'. The culture of patronage and corruption (and lack of legal certainty) seriously hampered the functioning of an efficient economy and was a time bomb waiting to explode. Since the end of the crisis, however, Indonesian governments have made prudent financial measures to make sure a similar crisis cannot happen. Supervision on liquidity of the banking sector is strict and transparent, 'hot money' is more carefully handled (for example by halting short-term debts), and the government's debt-to-GDP is lower (around 25 percent and showing a decreasing trend) than most economic advanced countries. When the 2008 crisis hit, Indonesia saw a large outflow of money again but was able to guarantee a stable economy due to good economic fundamentals. Even during this 2008-2009 crisis Indonesia showed robust growth with 4.6 percent GDP growth, mainly due to domestic consumption.
Graft scandals, however, still fill the pages of Indonesian newspapers almost on a daily basis. Corruption and the clustering of capital in a small elite are still serious problems in the country and hamper the economy from being efficient and righteous. In particular political corruption is widespread and often used for benefit in the nation's business sector.
Read more about Corruption in Indonesia.

Unemployment in Indonesia
During the course of Suharto's New Order, economic development added many new jobs to Indonesia's job market, thereby pushing down the national unemployment rate. Particularly the industry and services sectors saw major increases in its employment shares towards national employment, at the expense of the agriculture sector. In the 1980s around 55 percent of Indonesia's working population was concentrated in the agricultural sector but recently this number has been reduced to 40 percent. The Asian Financial Crisis that erupted in the late 1990s, however, reversed these developments temporarily and caused the country's unemployment rate to reach over 20 percent, with underemployment rising equally rapidly. Most of the people that lost their jobs in urban areas went to join the - already large - informal sector in rural areas (particularly inagriculture). Although Indonesia has been experiencing robust macroeconomic growth in recent years and, in many ways, can be regarded as recovered from the crisis, this informal sector - both rural and urban - still plays an exceptionally large role in Indonesia's economy today. Although it is difficult to pinpoint the number exactly, it is estimated that between 55 and 65 percent of employment in Indonesia can be called informal. Today, around 80 percent of this informal employment is concentrated in the rural areas, particularly in the construction and agriculture sectors.
More than a decade of macroeconomic growth has succeeded in pushing Indonesia's unemployment rate into a steady downward trend. But, as around two million Indonesians enter the labor force each year, it will be a challenge for the Indonesian government to stimulate job creation so that the labor market can absorb this group of annual newcomers; youth unemployment (among the freshly graduated) in particular is a cause for concern and action.
With around 240 million people, Indonesia is the fourth most populous country in the world (after China, India and the United States). Moreover, the country has a young population as around half of the total population is below the age of 30 years. Combined, these two features imply that Indonesia currently contains a large labor force; one that will grow larger in the foreseeable future. | 2010 | 2011 | 2012 | 2013 | 2014¹ | Labor Force | 116,527,546 | 119,399,375 | 120,320,000 | 120,170,000 | 125,320,000 | - Working | 108,207,767 | 111,281,744 | 113,010,000 | 112,760,000 | 118,170,000 | - Unemployed | 8,319,779 | 8,117,631 | 7,310,000 | 7,410,000 | 7,150,000 |
¹ data from February 2014
Source: Statistics Indonesia
The table below indicates Indonesia's unemployment rate in recent years. It shows a steady downward trend, in particular regarding female unemployment. Female unemployment has declined rapidly and is reaching the male unemployment rate. However, gender equality, as in most countries, is an issue in Indonesia. Although considerable progress has been made in several key areas (education and health), women are still more likely to work in the informal sector (twice as much as the amount of men), in poorly remunerated occupations and are paid less than men for similar work. | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | Unemployment
(% of total labor force) | 10.3 | 9.1 | 8.4 | 7.9 | 7.1 | 6.6 | 6.1 | 6.2 | 5.7 | Male Unemployment
(% of male labor force) | 8.5 | 8.1 | 7.6 | 7.5 | 6.1 | - | - | - | | Female Unemployment
(% of female labor force) | 13.4 | 10.8 | 9.7 | 8.5 | 8.7 | - | - | - | |
Sources: World Bank and Statistics Indonesia
A characteristic of Indonesia is that the unemployment rate is highest for people between the age of 15 and 24, far above the country's national average. Freshly graduated students from universities, vocational schools and secondary schools have difficulties finding their place in the national workforce. Almost half of Indonesia's total number of workers possess a primary school degree only. The higher the education degree, the lower its share towards Indonesia's workforce. In recent years, however, there is a changing trend visible: the share of higher education degree holders rises, while the share of those that went to primary school only decreases. | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | Male youth unemployment
(percentage of male labor force
15-24 years of age) | 27.7 | 23.8 | 21.8 | 21.6 | 21.1 | 19.3 | Female youth unemployment
(percentage of female labor force
15-24 years of age) | 34.3 | 27.3 | 25.5 | 23.0 | 22.0 | 21.0 |
Source: World Bank
The agriculture sector of Indonesia continues its leading position regarding absorption of Indonesia's workforce. The table below indicates the top four sectors that absorbed Indonesia's workforce in 2011 and beyond. These numbers represent percentages of the total Indonesian workforce. | 2011 | 2012 | 2013 | 2014¹ | Agriculture | 42.5 | 39.9 | 39.2 | 40.8 | Wholesale Trade, Retail Trade,
Restaurants and Hotels | 23.2 | 23.6 | 24.1 | 25.8 | Community, Social and
Personal Services | 17.0 | 17.4 | 18.5 | 18.5 | Manufacturing Industry | 13.7 | 15.6 | 15.0 | 15.4 |
¹ data from February 2014
Source: Statistics Indonesia
Vulnerable employment (unpaid workers and own-account workers) for both men and women is rather high in Indonesia compared to developed countries and its regional peers. For Indonesian men this number reaches around 60 percent of the country's total male employment force during the last decade, while this number is around 70 percent for women. Many that fall in the category of vulnerable employment belong to the informal sector.

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Inflation in Indonesia (Consumer Price Index)
The level and volatility of Indonesia's inflation rate have historically been higher than in some peer emerging nations. Whereas these other emerging countries shared inflationary rates of between three and five percent during the period 2005 to 2013, Indonesia contained an average annual inflation rate of around 8.5 percent in the same period.

Peaks in Indonesia's inflation volatility correlate with administered price adjustments. Energy prices (fuel and electricity) are set by the government and therefore do not float according to market conditions, meaning that the resulting deficit has to be absorbed by subsidies. This puts serious pressure on the government's annual budget deficit and also limits public spending in more long-term productive matters, such as infrastructure and social expenditures. Moreover, re-arranging energy subsidies implies political risks as social unrest emerges inflicted by inflationary pressures. One characteristic of Indonesia is that a large quantity of its population is clustered just above the poverty line, meaning that a relatively minor inflationary shock can push them below that line. When the Susilo Bambang Yudhoyono administration decided to reduce its massive fuel subsidies in late 2005 due to the rising international oil price, it soon led to double-digit inflation rates of between 14 and 19 percent (year on year) until October 2006. Furthermore, the country's core inflation - which excludes items that are vulnerable to temporary price volatility - has been volatile as well because of second round effects of energy price adjustments that pass through to the broader economy (for example through rising transportation costs).
Reduction of energy subsidies remain a top priority on the government's agenda. In early 2012, the government proposed a fuel price increase but social unrest and political opposition in parliament made a sudden increase impossible. Eventually in June 2013, gasoline was raised by 44 percent to IDR 6,500 (USD $0.66) and diesel by 22 percent to IDR 5,500 (USD $0.56) per liter. But despite the 2013 price hike, a significant portion of Indonesia's fuel prices remain subsidized and therefore various international organizations (including the World Bank and International Monetary Fund/IMF) as well as domestic institutions (such as Indonesia's Chamber of Commerce and Industry/Kadin) support further subsidy reductions. In 2013 and 2014, the government has also reduced subsidies for electricity - both for households (although exempting the poorer segments of society) and industries.
Indonesia's inflation outlook is highly influenced by the decision to further reduce these subsidies. The World Bank estimates that a IDR 2,000 increase in fuel prices can add about three percentage points to the level of headline inflation and can add over one percentage point to core inflation. Electricity price hikes, however, are estimated to have a smaller impact (< 1 percent) on the pace of inflation. As an illustration, the central bank of Indonesia (Bank Indonesia) initially targeted an inflation rate of 4.5 percent in 2013. However, after the fuel and electricity price hikes, inflation accelerated to 8.37 percent (yoy) by the year-end.

Inflation of Indonesia 2008-2015: | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | Inflation
(annual percent change) | 9.8 | 4.8 | 5.1 | 5.4 | 4.3 | 8.4 | - | - | Bank Indonesia Target
(annual percent change) | 5.0 | 4.5 | 5.0 | 5.0 | 4.5 | 4.5 | 4.5 | 4.0 |
Sources: World Bank and Bank Indonesia

Indonesia's characteristic volatile inflation rate causes a traditionally larger deviation from the annual inflation projections of Bank Indonesia. The consequence of such inflationary uncertainty is that it creates economic costs, such as the country's higher (domestic and international) borrowing costs compared to its emerging market peers. When a good track record of meeting annual inflation targets is established, greater monetary policy credibility will follow.
The lack of quantity and quality of Indonesia's infrastructure also entails robust economic costs. This hampers connectivity in the archipelago, thereby increasing transportation costs for services and products. Distribution disturbances due to infrastructure-related issues are frequently reported and made the government realize the importance of more investments in the country's infrastructure. Infrastructure has been labelled a top priority in the Masterplan for Acceleration and Expansion of Indonesia's Economic Development (abbreviated MP3EI); an ambitious long-term government development plan which is yet to bear fruit.
Food prices are traditionally highly volatile in Indonesia and subsequently impose a big burden on the poorer households who live under or just above the poverty line. These households spend more than half of their total expenditure on food items. Higher food prices therefore cause serious poverty basket inflation which may lead to increases in the level of poverty. Failing harvests in combination with a slow reaction of the government to substitute food products with food imports are causes for inflation peaks.

Traditional Peaks of Inflation in Indonesia
Discarding administered price adjustments, there are two traditional annual peaks of inflation in Indonesia. The December-January period always brings higher prices due to Christmas and New Year celebrations, while the traditional floods in January (amid a peak of the rainy season) results in disrupted distribution channels in several regions and cities, thus causing higher logistics costs. The second peak comes in the July-August period. Inflationary pressures in these two months emerge as a result of the holiday period, the holy Muslim fasting month (Ramadan), Idul Fitri celebrations and the arrival of the new school year. A marked increase is detectable in spending on food and other consumables, accompanied by retailers adjusting prices upwards.

Monetary Policy and the BI Rate
With annual GDP growth close to six percent, the economy of Indonesia has been rapidly expanding in recent years, characterized by surging domestic demand (domestic consumption accounts for around two-thirds of the country's economic growth), robust private sector credit growth and increased business access to credit. Moreover, public sector wages have increased due to administrative reforms and private sector wage growth has accelerated (Indonesia's regional minimum wages were raised significantly in 2012 and 2013). As robust economic growth brings along inflationary pressures, recent monetary policies (in 2013 and 2014) were aimed at safeguarding financial stability, particularly after inflation surged due to the 2013 fuel prices hike and amid the looming end of the Federal Reserve's quantitative easing program (which led to large capital outflows from emerging markets, including Indonesia), at the expense of further economic growth.
Bank Indonesia (BI), Indonesia's central bank, has as main objective to ensure rupiah stability. It uses a wide range of instruments to stem mounting inflationary pressures in the country. Its bank rate policy is adjusted when inflation targets are not met. Between February 2012 and June 2013, the country's benchmark interest rate (BI rate) had been set at a historic low of 5.75 percent. After this period, inflationary pressures increased due to higher fuel prices and global uncertainty about the US quantitative easing program. Subsequent capital outflows resulted in sharp rupiah depreciation. Therefore, Bank Indonesia adjusted its BI rate upwards. Another measure to tighten monetary policy was the raising of the reserve requirements on both local and foreign currency deposits at Indonesian banks. Lastly, BI curtailed foreign investors' demand for Central Bank bills (SBIs) by extending the required holding period from one to six months, stretching the maturity of SBI issues to nine months and by introducing longer maturity non-tradable term deposits (which are available to banks only). These measures aimed at mitigating the flow of 'hot money' into Indonesia.

Benchmark Interest Rate of Indonesia 2008-2013: | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | Bank Indonesia Rate
(percent at year-end) | 9.25 | 6.50 | 6.50 | 6.00 | 5.75 | 7.50 |
Source: Bank Indonesia

Indonesian Inflation in Global Perspective
The table below puts Indonesia's recent inflation performance (annual percent change) in global perspective by comparing it to inflation figures from the United States (USA) and China. | 2009 | 2010 | 2011 | 2012 | 2013 | USA | -0.4 | 1.6 | 3.0 | 1.7 | 1.5 | China | -0.7 | 3.3 | 5.4 | 2.6 | 2.6 | Indonesia | 4.8 | 5.1 | 5.4 | 4.3 | 8.4 |
¹ indicates prognosis
Source: World Bank