DIGIVESTASI - World Bank Projects Indonesia's Economic Growth at 5.1% Until 2026. The World Bank forecasts that Indonesia's economic growth trend will average 5.1% from this year until 2026, but it faces risks of weakening due to sluggish trade performance and the normalization of domestic demand. This was revealed in the June 2024 edition of the Indonesia Economic Prospects (IEP) report.

The World Bank stated that private consumption would remain the main driver of economic growth, despite obstacles from inflationary pressures affecting household purchasing power. "Household consumption growth will reflect the increase in civil servant salaries in 2024, further supported by new social spending programs from the incoming administration," the World Bank said on Wednesday (26/6/2024).

Investment is expected to gain momentum thanks to previous reforms and new government projects, including the accelerated development of the new capital city. Meanwhile, exports and imports are projected to grow more slowly due to high base effects and global demand uncertainty.

Inflation is expected to remain within Bank Indonesia's (BI) target range, despite pressures from global food and energy prices. "Headline inflation is projected to remain relatively stable, averaging 3% in 2024 and around 2.9% thereafter in 2025-2026. This figure is still within BI's inflation target range of 2.5 +/- 1%," the World Bank stated.

The World Bank also expects core inflation to remain controlled as the output gap closes in 2025 and domestic demand normalizes. However, global energy and food prices are expected to exert further pressure on inflation, especially following various armed conflicts and climate shocks that disrupt global supply chains, as well as OPEC+ production cuts that increase oil prices.

Externally, the World Bank sees continued challenges from weak global trade and financing. The current account deficit is projected to gradually widen to 1.6% of GDP by 2026, influenced by weakening commodity prices and global uncertainties hampering exports.

Foreign direct investment (FDI) will remain the largest source of external funding, driven by competitiveness reforms, industrial downstreaming, and the development of the new capital city attracting new projects. The World Bank believes BI's monetary policy will continue to focus on preventing rapid and excessive capital outflows, although monetary policy will not be overly loose due to stricter inflation targets and high interest rates in advanced economies. BI is expected to lower its policy interest rate in 2025, albeit at a slower pace and in line with the normalization of US monetary policy.

In the fiscal sector, the World Bank sees increased social spending and public investment in the new administration's era, but the deficit cap remains at 3%. The World Bank projects subsidies to remain stable throughout the forecast period in line with weakening commodity prices. The state budget deficit is expected to stabilize at around 2.5% after gradually increasing to accommodate upcoming government programs, including those related to public investment and infrastructure.

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