Indonesia

Key development challenges

Indonesia has demonstrated remarkable economic growth since overcoming the Asian financial crisis of the late 1990s. With a population of more than 275 million, Indonesia is now the fourth-most populous nation in the world and has become the seventh-largest economy in terms of purchasing power parity. Indonesia’s $1.3 trillion GDP (2022) is the largest of the region and accounts for 36% of the regional GDP of Southeast Asia.

The pandemic weakened Indonesia’s economy, reducing it from upper middle-income status to lower middle-income status in July 2021. However, Indonesia’s post-pandemic economic recovery enabled it to regain upper middle-income status as of July 2023. Corruption and governance are considerable constraints on progress. Among Indonesia’s priorities are addressing infrastructure gaps, improving human capital, and enhancing productivity and competitiveness.

Over the 2015–22 period, more than 18,000 aid and development projects were implemented by 83 development partners in Indonesia, for a total of more than $87 billion in real terms, or about $11 billion per year on average.

Overview of development finance trends

In real terms, official development finance (ODF) flows to Indonesia — including grants, loans, and other forms of assistance — decreased by 39% between 2015 and 2022, although the country was still the largest recipient of ODF in the region, accounting for 34% of the regional ODF during this period.

Most of the variation and decline came from significant volatility in financing patterns among major development partners and a reduction in development loans signed by the Indonesian government, most notably with China and South Korea, while yearly grant financing provided by international development partners remained stable.

Over the period analysed, the role and significance of ODF relative to the country’s economy decreased significantly, falling from 1.42% of GDP in 2015 to 0.68% in 2022. This pattern can be explained by two factors: a 34% reduction in development support; and the continued growth of Indonesia’s economy.

ODF commitments to Indonesia were 17% higher than actual disbursements over the 2015–22 period. With 74% of projects committed during the 2015–22 period resulting in disbursements, Indonesia sits above the regional average of 67%. Among the top five development partners in the country, only three — China, the World Bank, and South Korea — had a ratio above 90% (91% for China, 98% for the World Bank, 96% for South Korea). The Asian Development Bank (ADB), the top source of multilateral ODF in Indonesia, had a ratio of 84%, while the ratio for Japan was 70%.

Main development partners

China was Indonesia’s largest development partner between 2015 and 2022, disbursing 21% of the country’s total ODF. On average, China dis­bursed approximately $2.3 billion annually during this period. The World Bank and the ADB were next, together accounting for a third of Indonesia’s total ODF, followed by South Korea and Japan, which provided around $8.4 and $7.2 billion respectively over this period. Germany and Australia accounted for $5.6 and $3.6 billion respectively.

China’s development financing in Indonesia was principally focused on infrastructure, with energy projects accounting for 38% of Bejing’s total disbursements, and the transport sector 29%. The vast majority of Chinese financing to Indonesia has been through the China Development Bank (44%) or the Export–Import Bank of China (19%) in the form of non-concessional loans (OOF). While China was Indonesia’s largest development partner for the period as a whole, its support fell from $3.8 billion in 2015 to $866 million in 2022. On a year-to-year basis, China became its fourth-largest partner in 2022, behind the World Bank, ADB, and Germany.

Among the most notable China-financed projects in the country was the 142-kilometre Jakarta–Ban­dung High-Speed Railway, which connects the capital to the textile hub of Bandung. Another large Chinese project was the Java 7 Coal-Fired Power Plant, a $1.8 billion, 2.1GW plant in Banten.

The ADB and the World Bank accounted for 35% of total development financing to Indonesia between 2015 and 2022. Both focused on government and civil society projects. For instance, in 2015, the World Bank — through the International Bank for Reconstruction and Development — implemented the $2 billion Program for Economic Resilience, Investment and Social Assistance, its largest project in Indonesia. In 2020, the ADB implemented the Covid-19 Active Response and Expenditure Support Program, worth $1.5 billion.

South Korea is Indonesia’s fourth-largest development partner and its second-largest bilateral partner, after China. Half of South Korea’s development financing is invested in the industry, mineral resources and mining sub-sectors, financed through non-concessional loans from the Export–Import Bank of Korea. Water and sanitation is another sector in which South Korea has put a significant focus over the years, notably through the financing of the Karian Multipurpose Dam Project, which aimed to supply tap water to Jakarta and nearby areas.

Overall, only 28% of the development support provided to Indonesia was concessional by nature, much lower than the regional average of 46%.

In terms of implementing partners, the Govern­ment of Indonesia has been the major recipient of ODF flows, followed by the Ministry of Finance.

Sectors

ODF in Indonesia was largely consistent with regional trends in terms of sector distribution. The energy sector and the government and civil society sector featured prominently. However, disbursements in Indonesia in the transport sector (11%) were notably lower than the regional average of 16%.

In the energy sector, the coal-fired electric power plants sub-sector accounted for 32% of disbursements, while electric power transmission and distribution covered 22% of the energy sector. Indeed, large energy projects such as the Chinese Java 7 Coal-Fired Power Plant mentioned above, and the ADB’s Electricity Grid Strengthening–Sumatra Program were important projects to support the infrastructure development of Indonesia.

In terms of government and civil society, public finance management programs accounted for more than a third of all projects in this sector, and included the ADB’s Covid-19 Active Response and Expenditure Support Program and the German FPEMP Phase 3 – Fiscal and Public Expenditure Management Program.

Climate

Climate development finance in Indonesia remains at a modest level, with “principal” and “significant” climate projects only accounting for 19% of overall ODF disbursed between 2015 and 2022. Average disbursements for “principal” climate projects between 2015–18 and 2019-22 decreased 32%, while “significant” projects increased by 33%. One of the largest climate projects in Indonesia was the Peusangan Hydroelectric Power Plant Construction Project, financed by Japan International Cooperation Agency.

A quarter of the climate development finance in the country was invested in the energy sector, notably in geothermal energy and hydro-electric power plants. The vast majority of projects were funded through loans rather than grants, and the largest partners were the Asian Development Bank and Japan.

Gender

The level of gender development finance is modest in Indonesia, with “principal” and “significant” gender projects only accounting for 18% of overall ODF disbursed between 2015 and 2022. As a proportion of ODF disbursed, however, gender development finance is growing. Average disbursements for “principal” gender projects between 2015–18 and 2019–22 almost doubled, while “significant” projects increased more than two-fold. One of the largest “principal” gender projects in Indonesia was the $500 million Promoting Innovative Financial Inclusion Program (Subprogram 1) financed by the Asian Development Bank.

Almost half of the gender development finance in the country was invested in the government and civil society sector, notably in public finance man­agement. Projects were mostly loan-financed and Indonesia’s largest partners for gender development finance were the Asian Development Bank and Japan.

Cambodia as an ODF provider

Through its development cooperation program, Indonesia has provided aid and support to its neighbours in areas such as capacity building and disaster response. For instance, Jakarta has continuously supported the Southeast Asian region by contributing directly to the ASEAN Co­ordinating Centre for Humanitarian Assistance on Disaster Management budget.

In October 2019, the Indonesian government established Indonesian AID (Agency for International Development or Lembaga Dana Kerjasama Pemban­gunan Internasional — LDKPI). At the launch, the then vice-president of Indonesia emphasised the importance of implementing “diplomasi tangan di atas” (hands-on diplomacy) as a means of enhancing the country’s position in international development cooperation.

Since then, Indonesia’s intra-regional development cooperation has increased, notably during the Covid-19 pandemic. In 2021, the country provided $200,000 in Covid-19 humanitarian assistance to Myanmar, and donated cash and Indonesian products to Vietnam to a total value of $15,000.