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 277 million, Indonesia is now the fourth-most populous nation in the world and has become the tenth-largest economy in terms of purchasing power parity. Indonesia’s $1.3 trillion GDP is the largest of the region and accounts for 35% of the regional GDP of Southeast Asia.

Over the past two decades, Indonesia has made significant progress in reducing poverty, having lowered its poverty rate by more than 50% since 1999, reaching less than 10% in 2019, prior to the Covid-19 outbreak.

The pandemic, however, weakened Indonesia’s economy, reducing it from an upper middle-income status to a lower middle-income status as of July 2021. Progress in reducing poverty was partially reversed during the pandemic, with the poverty rate increasing from 9.2% in 2019 to 9.7% in 2021.

Corruption and governance are considerable constraints on progress; Indonesia ranks 110th out of 180 countries in Transparency International’s Corruption Perceptions Index. Among Indonesia’s priorities are addressing infrastructure gaps, improving human capital, and enhancing productivity and competitiveness.

Over the 2015–21 period, more than 16,000 projects were implemented by 74 development partners in Indonesia, for a total of more than $69 billion or about $10 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 47% between 2015 and 2021, although the country was still the largest recipient of ODF in the region, accounting for 35% of the regional ODF during this period.

Most of the variation and decline came from significant volatility and a reduction in development loans signed by the Indonesian government, most notably with China and 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 0.61% in 2021. This pattern can be explained by the merging of two factors: a 47% reduction in development support provided to Indonesia, and its economy continuing to grow.

In Indonesia, commitments were generally 19% higher than actual disbursements over the 2015–21 period. With an 81% ratio (spent/commitment), Indonesia sits above the regional average of 64%. Among the top five development partners in the country, only two — the World Bank and Korea — had a ratio above 90% (94% for the Bank, 98% for Korea). The Asian Development Bank (ADB), the top source of multilateral ODF in Indonesia, had a ratio of 78%, while that for Japan was 71%.

Main development partners

China was Indonesia’s largest development partner, disbursing 21% of the country’s total ODF between 2015 and 2021. On average, China disbursed approximately $2.2 billion annually during this period. The World Bank and the Asian Development Bank were the next two major development partners, together accounting for nearly a quarter of Indonesia’s total ODF. Next were Korea and Japan, which provided around $7.6 and $6.1 billion respectively, while Germany and Australia accounted for $4.4 and $3.2 billion.

China’s development financing in Indonesia was principally focused on infrastructure, with energy projects accounting for 45% of Bejing’s total disbursments in the country and 26% in the transport sector. The vast majority of Chinese financing in Indonesia was in the form of non-concessional loans (OOF) financed either through the Export–Import Bank of China (20%) or the China Development Bank (55%). While China was Indonesia’s largest development partner for the period as a whole, its support to the country fell from $3.7 billion in 2015 to $612 million in 2021. On a year-to-year basis, China became its fourth-largest partner in 2021, behind the Asian Development Bank, the World Bank, and Japan.

Among the most notable China-financed projects in the country was the 142-kilometre Jakarta–Bandung High-Speed Railway Idn006-12345, which aims to connect the capital city to the textile hub of Bandung. The project is being developed by PT Kereta Cepat Indonesia China, a joint venture formed in October 2015 between a consortium of Indonesian state-owned companies and China Railway International, a subsidiary of China Railway Group (CREC). Construction began in January 2016 with the initial completion date set for 2018, but a series of complications have delayed the opening, with it now planned to start operating commercially in mid to late 2023. Another large Chinese project was the Java Coal-Fired Power Plant Idn011, a $1.8 billion, 2100MW coal-fired power plant in Banten, Indonesia. Construction commenced in 2016 and the plant began operating commercially in December 2019.

The two largest multilateral development banks (MDBs) of the region, the ADB and the World Bank, accounted for 33% of total development financing to Indonesia between 2015 and 2021. Both multilateral development partners 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 in Indonesia 2012019519 - P130048.IBRD81640.crs1, its largest project in the country. The project aimed to improve the government’s response to potential adverse impacts from volatility in financial markets on its ability to meet its gross fiscal financing needs.

In 2020, the ADB implemented the COVID-19: Active Response and Expenditure Support Program XM-DAC-46004-54139-001-LN3906, worth $1.5 billion, to provide timely support for urgent public health measures and for the expansion of social and economic assistance in Indonesia during the pandemic.

Korea is Indonesia’s fourth-largest development partner and its second-largest bilateral partner, after China. Half of Korea’s development financing is invested in the industry and 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 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 from the Karian Dam, about 50 kilometres away from the capital city. The project, worth $72 million, started at the end of 2015 and was completed in 2020.

Overall, only 27% of the development support provided to Indonesia was concessional by nature, much lower than the regional average. Indeed, Indonesia was, under the World Bank’s country classification, an upper middle-income status economy up to July 2021, when the pandemic forced the Bank to downgrade Indonesia to lower middle-income status.

In terms of implementing partners, the central government of Indonesia has been the major recipient of ODF flows, followed by China Energy Engineering Corporation and 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 were 46% lower than the regional average of 16%.

In the energy sector, the coal-fired electric power plants sub-sector accounted for 32% of disbursements in Indonesia, while electric power transmission and distribution covered 20% of the energy sector. Indeed, large energy projects, such as the Chinese Java 7 Power Station Idn011 mentioned above, or the ADB’s Electricity Grid Strengthening-Sumatra Program XM-DAC-46004-49080-001-LN3339 signed in 2015 and concluded in 2020, 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; for example, the ADB’s Covid-19: Active Response and Expenditure Support Program XM-DAC-46004-54139-001-LN3906 or the German FPEMP Phase 3 — Fiscal and Public Expenditure Management Program 301000710a — through a one-off loan of $500 million.

Although Indonesia undertook significant infrastructure projects, the financing for overall infrastructure development in the country decreased, which was consistent with the trend of total ODF disbursements. However, the situation was different for human development (education and health) projects, which saw an increase during the same period, notably due to disbursements of Covid-related projects in 2020–21. This increase also aligned with Indonesia’s current five-year medium-term plan, the RPJMN (Rencana Pembangunan Jangka Menengah Nasional), which aims to enhance the country’s economy by improving its human capital and competitiveness in the global market.

Climate

The Southeast Asia Aid Map uses an adapted version of the Organisation for Economic Co-operation and Development’s (OECD’s) climate marking system to sort projects into three distinct categories: principal, where climate change mitigation or adaptation is explicitly stated as fundamental to the project; significant, where climate change mitigation or adaptation is explicitly stated but not fundamental; and not climate-related, where climate change is not targeted in any significant way.

Although the level of climate development finance is modest in Indonesia, it constitutes a growing proportion of the overall ODF disbursed in the country. This is due to a decrease in non-climate-related ODF disbursed in Indonesia while climate development finance has grown steadily. Disbursements for “principal” climate projects increased by 55% between 2015 and 2021, while spending on “significant” projects more than doubled over the period. One of the largest climate projects in Indonesia was the Peusangan Hydroelectric Power Plant Construction Project 2007003016 - JICAIP-538, financed by Japan’s International Cooperation Agency. The project, which started in 2007, aimed to improve the power situation in North Sumatra by exploiting hydropower.

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.

Indonesia 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 ID-AHA-2015.

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 intraregional development cooperation has increased, notably during the Covid-19 pandemic. In 2021, the country provided $200,000 in Covid-19 humanitarian assistance to Myanmar Inter-SEA008, and donated cash and Indonesian products (instant noodles, dry food, and processed meat products) to Vietnam Inter-SEA010 to a total value of $15,000.