Indonesia launches $1.5 billion economic stimulus package amidst escalating financial concerns
Indonesia is facing a tough economic period, with growth rates lower than anticipated. The economy, known for its exports of nickel, coal, palm oil, and other commodities, is grappling with slowing growth due to pressures from a global trade war and falling commodity prices.
To battle these challenges and spark consumer spending, Indonesia's government is doling out a whopping $1.5bn stimulus package. Starting from Thursday, this package includes discounts on transportation fares, wage subsidies for millions of households for two months, toll road discounts, and additional social aid for the most vulnerable.
Finance minister Sri Mulyani Indrawati believes these measures will encourage travel, lift household consumption, and help maintain economic growth close to 5% in the second quarter. However, whether this goal is achievable remains to be seen.
The Economic Slump
Indonesia was able to sustain an annual growth rate of 5% consistently for a decade, except during the Covid-19 pandemic. In the first quarter of 2025, growth came in at 4.9% - the slowest quarterly figure in more than three years. The ongoing economic uncertainty and job market concerns have left consumers reluctant to spend, further exacerbating the slowdown.
President Prabowo Subianto aims to lift annual growth to 8%. However, his ambitious goals have been met with skepticism, especially as the country's central bank has repeatedly lowered its annual GDP forecast for the year, with the latest growth estimate at 4.6 to 5.4%.
The Free Meals Program and Its Impact
Prabowo's flagship free meals program, expected to cost $28bn a year, is a significant part of the government's efforts to tackle poverty and stimulate economic recovery. The program, launched in January, will be one of the world's largest once fully implemented, reaching over 82mn schoolchildren and pregnant mothers every day.
While the meals program aims to boost local economies and have a ripple effect nationally, doubts linger about its ability to stimulate growth enough to meet the government's targets. Economists predict the program will increase the purchasing power of lower-income households but suspect the impact on overall consumer demand will be relatively moderate.
The Need for Further Action
Experts suggest that more expansionary monetary and fiscal measures will be necessary to support the economy and arrest a decline in growth momentum, particularly with trade expected to weaken in the second half. The latest stimulus package might boost purchasing power, but it may not be enough to achieve the targeted growth of 5%.
Indonesia's economic outlook for 2025 and 2026 paints a picture of slower growth than previously expected, mainly due to sluggish business and consumer confidence and uncertainties over fiscal policy. However, the government's stimulus measures aim to address these challenges and support economic recovery.
Enrichment Insights
To address economic challenges, the Indonesian government has established the Danantara Sovereign Wealth Fund to finance strategic public investments and expanded social programs such as the free meals program. However, additional expansionary monetary and fiscal measures may be required to support the economy and arrest a decline in growth momentum. The economy is vulnerable to external shocks, but Indonesia's relatively low trade dependence on the U.S. might mitigate some impacts. Domestic demand is expected to rebound in the second half of 2025, while inflation is projected to rise to 2.3% in 2025 and 3% in 2026.
- Despite having a stable growth rate of 5% for a decade, the ongoing sluggish growth in the first quarter of 2025, at 4.9%, has raised concerns in Indonesia's economy.
- The Indonesian government's strategy to combat economic slowdown includes its $1.5bn stimulus package and the flagship free meals program, which potentially costs $28bn a year.
- Economists predict that the free meals program will enhance the purchasing power of lower-income households, but expect the impact on overall consumer demand to be moderate.
- To boost economic recovery further, experts suggest that Indonesia might need additional expansionary monetary and fiscal measures, as the latest stimulus package might not be enough to achieve the targeted growth of 5%.
