Indonesia: Weakened by the pandemic, but solid enough to handle new shocks

The Covid-19 pandemic weakened Indonesia’s economy. Two years after the crisis, real GDP has returned to 2019 levels, but the labour market is still weak, the poverty rate is higher than before the crisis and investment remains subdued. According to the World Bank, the pandemic’s lasting impact on education and the labour market will cost the country 0.1 points of its long-term growth potential.

Today, Indonesia must deal with a new unfavourable economic environment as commodity prices have dramatically increased due to the conflict in Ukraine and sanctions against Russia. Although growth is bound to be squeezed by the Ukrainian conflict, Indonesia’s external accounts should remain healthy and inflationary pressures should remain moderate. As a net commodity exporter, the country should benefit from higher prices for its export products. Moreover, to contain the impact of rising international prices on domestic prices, the government has already increased energy price subsidies and maintained pump price controls.

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