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Key Findings

1. Despite a difficult global environment, Indonesia¡¯s economic growth strengthened to 5.3 percent in 2022, supported by positive terms-of-trade led by commodity related exports and a recovery in private consumption. This momentum continued in 2023 with private consumption and exports supporting a 5 percent growth in the first quarter (Q1-23) while there are signs that domestic demand is starting to moderate.
2. The economy is projected to moderate to 4.9 percent in 2023 and stay broadly flat in the medium term. Growth will be supported by private consumption as inflationary pressures subside. In line with weakening domestic demand and investment in 2023, imports will moderate. Exports growth will also experience deceleration as commodity prices soften along with weakening global demand.
3. With policy-related factors in effect, including decline in global oil prices, improved harvest, government intervention at sub-regional level to ease supply bottlenecks notably for food and rice, and the appreciation of the Rupiah currency that lowered the cost of imports, inflation is easing at a faster pace than markets anticipated. Headline inflation edged down, reaching 4 percent yoy in May 2023, a lowest point recorded since it peaked in September 2022.
4. The fiscal stance has normalized reflecting faster fiscal consolidation, anchored by a broad-based rise in revenues and contained public spending. With a fiscal deficit of 2.4 percent of GDP in 2022, the Indonesian Government had returned to its fiscal rule mandate, one year earlier than targeted. The fiscal outcome is persistent so far in 2023 with the surplus reaching 0.6 percent of GDP in Q1-23, up from 0.1 percent of GDP in Q1-22. In line with fiscal consolidation, public debt has gradually declined and now stands at 39.2 percent in March 2023.
5. With robust outcome despite levels of global uncertainty, Indonesia still faces structural constraints to growth that are mainly related to declining productivity. Potential growth is moderating due to reduced labor input, weak human capital formation and slowing productivity growth. Investment and to a lesser extent labor input have been key growth drivers prior to the pandemic, but all growth drivers have now moderated, particularly total factor productivity (TFP).
6. Indonesia experienced steady improvement in many foundational areas, including public sector governance and infrastructure, while implementing a solid macro policy framework. This has led to important gains in poverty reduction including the eradication of extreme poverty.
7. Indonesia¡¯s competitiveness has shown to be lagging compared to its peers as a result of distortions in policy areas such as business regulation, financial sector policies, competition framework and labor market policies. In order to promote Indonesia¡¯s competitiveness, there is a need to address the remaining constraints to competition, such as business regulation and trade openness. Indonesia could achieve its goal of becoming a High-Income Country by 2045 if it can sustain its performance in growth of GNI per capita from the last 10 years.
8. The report also deliberates the results of a recent World Bank study that compares data on Grade 4 student learning before (in 2019) and after (in 2023) in schools in Indonesia that were closed during the COVID-19 pandemic. Because of the pandemic, the Government had to apply mandatory closure of educational institutions for a total of approximately 650 days or more than 21 months.
9. At  the national level, Grade 4 students in Indonesia in 2023 lost 11.2 months equivalent of math skills and 10.8 months equivalent of language skills in comparison with Grade 4 students in 2019. Students from poor households were hit harder with losing 18.1 and 27.2 months of learning in math and language, which led to widened inequity in learning outcomes.  
10. This study highlights the urgency of addressing learning loss by stimulating political commitment for learning recovery and prompting deliberate actions, with adequate resources to complete them.  Recommended actions include increasing learning time, teaching at the right level for students, and tracking students¡¯ performance, as well as addressing inequality in learning by offering targeted support to disadvantaged or underperforming students.