Indonesia’s economy in 2016 continues to register strong growth, thanks in large part to solid economic policies and increased household consumption. Indonesia's gross domestic product (GDP) expanded 5.02 percent year-on-year (y/y) in full-year 2016 and remains among the highest in large emerging market economies. Household consumption—one of the main drivers of growth for Indonesia—is strengthening due to people's improving purchasing power amid low inflation and a stronger rupiah.
Indonesia has maintained macroeconomic stability, while adjusting well to recent shifts in the external environment. A prudent mix of macroeconomic policies and the launch of structural reforms has helped the economy weather slow global growth, the commodity down-cycle, and several episodes of financial turbulence affecting emerging market economies. Inflation has eased and the external position has improved. A gradual fiscal consolidation has begun. There has been major progress on the financial stability framework, and gaps related to the crisis management framework are being addressed. Structural reforms that began in 2015 have improved the business environment. Positive sentiment has been reflected in supportive capital inflows in 2016, which buoyed financial markets before undergoing some corrections starting in October.
The government has already started to implement reforms to improve the investment climate and boost growth. These include expanding investment in public infrastructure, reducing the layers of government regulations, and opening up new areas of the economy to private investment. The government’s strategy to strengthen tax collection and broaden the tax base through tax reform will also generate additional revenues to pay for priority government investment.
Indonesia’s youthful workforce has the potential to be one of the country’s most powerful economic levers. Reforms that can help narrow the skills gaps between what employers need and what employees have—such as expanding vocational training opportunities—can help strengthen the economy’s productivity.