Indonesia’s economy expands in 2025, but debate grows over the quality and sustainability of growth

Indonesia closed 2025 with economic figures that, at first glance, appear reassuring both domestically and internationally. Official data released by Statistics Indonesia (BPS) on 5 February 2026 showed the country sustaining solid growth momentum despite global economic uncertainty, weaker international trade, and fluctuating commodity prices.

Yet, the same data has also sparked renewed debate among economists and civil society organisations over whether Indonesia’s growth is translating into durable improvements in living standards. A response from the International NGO Forum on Indonesian Development (INFID) argues that while headline indicators show progress, structural vulnerabilities remain deeply embedded in the economy.

The discussion reflects a broader policy question confronting Indonesia: can growth alone secure long-term prosperity, or must the country now shift towards deeper economic transformation?

Solid Growth Amid Global Uncertainty

According to BPS, Indonesia’s gross domestic product at current prices reached Rp23,821.1 trillion in 2025, equivalent to roughly USD 1.46 trillion. GDP per capita rose to Rp83.7 million, or approximately USD 5,083 per person, marking continued income gains compared with previous years.

Annual economic growth reached 5.11 per cent, slightly higher than 2024’s 5.03 per cent expansion. In an environment where many economies struggled with slowing trade, geopolitical tensions, and tightening financial conditions, Indonesia’s performance was widely seen as resilient.

Momentum strengthened toward the end of the year. The economy expanded 5.39 per cent year-on-year in the fourth quarter, while quarter-on-quarter growth reached 0.86 per cent, supported by strong domestic activity.

From the production side, sectors linked to services and mobility showed particularly strong performance. Transportation and warehousing services posted the fastest growth in the final quarter, reflecting rising travel demand and increased goods movement.

Across the year, the “Other Services” sector recorded the highest annual expansion at nearly 10 per cent, indicating recovery in tourism, entertainment, and community services after previous pandemic-era disruptions.

Exports and Investment Add Support

External trade also contributed positively. Exports of goods and services grew by more than 7 per cent in 2025, the strongest among expenditure components. While global trade conditions remained uncertain, Indonesia benefited from steady demand for commodities and manufactured exports.

Investment activity also strengthened. Gross Fixed Capital Formation, which measures investment in infrastructure, machinery, and construction, grew robustly, reflecting continued development projects and private sector expansion.

Government spending also played a visible role in maintaining growth momentum. Government consumption surged sharply in the final quarter of the year compared with the previous quarter, partly due to year-end budget disbursement and expanded social programmes.

Domestic demand remained the backbone of the economy. Household consumption and investment together accounted for more than 80 per cent of GDP growth contributions. Household spending alone added over 2.6 percentage points to annual growth.

Java Remains the Economic Core

Spatially, Indonesia’s economy remains heavily concentrated on Java Island, which contributed nearly 57 per cent of national GDP and grew slightly faster than the national average.

While other regions such as Sulawesi recorded faster growth rates, eastern regions continued to lag behind. Maluku and Papua grew far more slowly than the national average, and parts of Papua even experienced economic contraction.

These regional disparities remain one of Indonesia’s enduring development challenges.

Encouraging Signals on Employment and Poverty

Alongside economic expansion, official data also showed improvements in labour market and poverty indicators.

Indonesia’s open unemployment rate declined to 4.74 per cent, among the lowest in a decade. Employment increased by roughly 1.37 million people, bringing total employment close to 148 million.

Poverty also declined. As of September 2025, around 23.36 million Indonesians lived below the poverty line, equivalent to 8.25 per cent of the population. Measures of poverty depth and severity also showed improvement.

From a policy perspective, these figures suggest that growth is generating jobs and helping households maintain purchasing power despite inflationary pressures.

INFID: Beneath the Numbers, Structural Problems Persist

However, INFID argues that these achievements should not obscure deeper structural issues.

In its assessment released on 11 February, the organisation described current economic conditions as appearing positive but still highly vulnerable. According to INFID, Indonesia’s challenge is no longer about sustaining growth alone, but ensuring that growth creates decent employment, reduces inequality, and provides long-term economic security.

Informal Employment Still Dominates

Although unemployment has declined, INFID highlights that job quality remains problematic.

Nearly 58 per cent of Indonesia’s workforce still operates in the informal sector, where workers typically lack contracts, social protection, and income stability. Informal employment often provides only subsistence earnings and limited productivity growth.

Additionally, underemployment remains widespread. Roughly one-third of workers either work part-time involuntarily or do not obtain sufficient working hours, meaning millions are technically employed but still struggle to earn adequate incomes.

Educational attainment compounds the problem. Only a small proportion of workers possess higher education qualifications, limiting opportunities for productivity-driven wage increases.

For INFID, this combination explains why economic growth has not yet translated into significant improvements in labour income.

Poverty Reduction Still Vulnerable to Shocks

INFID also cautions that poverty reduction remains fragile.

Although fewer Indonesians are officially poor, many households remain only marginally above the poverty line. Food prices remain a critical vulnerability because food accounts for nearly three-quarters of poverty expenditure calculations.

Government social assistance programmes have helped lift household consumption, but this also means poverty improvements partly depend on fiscal transfers rather than durable employment gains.

A reduction in assistance or sudden economic shocks could quickly reverse progress.

Inequality Debate Remains Unsettled

The Gini ratio declined slightly in 2025, suggesting narrowing inequality. However, INFID argues this may not fully reflect wealth concentration.

Because inequality calculations rely on consumption data rather than asset ownership, wealth accumulation among richer households may go unnoticed statistically.

At the same time, social assistance programmes can temporarily increase consumption among poorer households, narrowing measured gaps without fundamentally altering wealth distribution.

This gap between statistical improvement and public perception partly explains why inequality continues to feel severe despite improving official numbers.

Fiscal and Structural Risks Ahead

INFID also warns of fiscal sustainability risks. Social assistance spending plays a growing role in stabilising household consumption, but this support represents a permanent budget commitment.

If commodity prices weaken or revenues decline, policymakers may face difficult choices between maintaining assistance, cutting expenditure, or increasing borrowing.

Another concern is the possibility of premature deindustrialisation, where investment focuses on capital-intensive sectors with limited job creation. This could leave Indonesia dependent on consumption and commodity exports rather than developing higher-value manufacturing industries.