Overview
The Indonesian economy was adversely affected by the Asian financial crisis that hit the region in 1997-1998. In 1998, the Indonesian economy contracted by 13.1 percent. In the following years the Indonesian economy managed to grow. Nevertheless, the growth rates were far below those prior to the crisis. In 1999, for example, the economy only grew by 0.8 percent.
To improve the economic conditions, the Indonesian government has taken drastic measures to improve the sustainability of its fiscal policy. In so doing, among other things, the Indonesian government has prevented the state budget deficit from ballooning. The state budget was reduced significantly from 3.2 percent of GDP in 2000, to 1.2 percent of GDP in 2004 and 1.3 percent of GDP in 2006. It is expected to decline to 1.1 percent in 2007 and further in the upcoming years. And by 2009, the deficits of the Indonesian state budget are expected to fall to only 0.2 percent of GDP.
Meanwhile, the Indonesian central bank has also taken a more hawkish stance against inflation. As a result, inflationary pressure is now more under control than before. In 2001, for example, inflation was as high as 12.5 percent. In the following year, however, the inflation figure dropped to 6.6 percent in 2006 and it is expected to drop to 5.8 percent in 2007. With the central bank's hawkish stance against inflation, Indonesia is not likely to have a double-digit inflationary figure going forward. In the long term, inflation is expected to hover around 5 percent. As a result, the central bank should be able to maintain the 1-month SBI interest rate at a relatively low level over the foreseeable future.
The joint efforts of the Indonesian government and the Indonesian central bank have started to show some results. Prudence in fiscal policy has helped regain confidence toward Indonesia, pushing up Indonesia's sovereign ratings, which, in turn, boosted investor confidence toward the country. Both foreign portion and direct investments have increased recently. Meanwhile, lower interest rates mean a cheaper cost of money, which has resulted in higher consumer spending and higher investment activities. In addition, the economy has also benefited from firm global economy, since it also means global demand for Indonesian products has also increased.
Against this backdrop, the growth momentum has returned to the country. The Indonesian economic growth has increased steadily since 2002. The Indonesian economic growth rate has increased from 4.4% in 2002 to 4.7% in 2003 and to 5.5% in 2006. The Indonesian economy is expanding, and is likely to continue to expand in the foreseeable future. The economy increased by 5.5% in 2005 and is expected to grow at an annual rate around 6% from 2006 to 2009.
As the economic conditions improved, the welfare of the population improved as well. GDP per capita fell sharply from US$1,192 in 1998, but it has risen since then. By 2004, GDP per capita had increased to US$1,180, still slightly below the pre crisis level. In 2006, however, the GDP per capita will reach US$1,663, exceeding the pre crisis level. And going forward, GDP per capita is expected to increase further.
In short, the Indonesian economy is now out of the crisis. Going forward, the prospects of the Indonesian economy are bright. The economy is on the expansion phase of its business cycle and is expected to grow healthily over the foreseeable future.
Additional Facts and statistics:
|
Print Version
