The Economy of Indonesia

Share:

Introduction

Indonesia’s economy is the biggest in Southeast Asia and is among the emerging market economies. As an upper-middle-income country and a member of the G20, Indonesia is classified as a newly industrialized country.

What Are the Major sectors of Indonesia’s Economy Today?

1. Agriculture

Indonesia is among the world’s biggest producers and exporters of agricultural products, supplying essential commodities including; rice, palm oil, natural rubber, coffee, cocoa, and spices to the other countries. Over the years, the agricultural industry is also the biggest employment sector in Indonesia. In 2021, around 37.13 million people were employed in the agricultural, forestry, hunting, and fisheries sector. This was the largest sector for employment in Indonesia in that year.

However, the contribution of the agricultural sector to the country’s GDP has declined because Indonesia is shifting towards industrialization.

As of January 2022, the 24-hour wage of agricultural labourers in Indonesia equalled to 52.54 thousand Indonesian rupiahs. Indonesia’s agricultural sector made up the largest share of workers in Indonesia. But, the workers in the agricultural sector still received one of the lowest wages in the country.

Emerging markets such as Indonesia are growing a progressive and vibrant AgriTech ecosystem in 5 major business models including; peer-to-peer lending, farmers advisory, traceability, mechanization, and digital marketplaces. More investment in agriculture to modernize food systems and make them more efficient is vital to improving the country’s food production. This will also enable smallholder farmers to boost productivity and earn more income.

Promoting agricultural digital transformation to drive food security

Agriculture is Indonesia’s least digitized sector, and as such, productivity gains and development opportunities are left unexploited. The digital transformation entails the adoption of digital technologies including; artificial intelligence, mobile/internet connectivity, machine learning, cloud computing, the Internet of Things, and blockchain/Distributed Ledger Technology to facilitate new business standards, which can help advance agricultural produce, efficiency, incomes, and gains.

Moreover, it will necessitate an innovation culture mindset shift to entice a new generation of farmers and entrepreneurs. To operationalize and take complete advantage, a digital agricultural ecosystem must be created to include the following;

• Digital infrastructure, like agricultural data encompassing farmer registries, weather, soil maps, pest and disease surveillance, agronomy. Digital hardware encompassing drone technology, and soil diagnostic tools, satellite/GIS, sensors. Digital software encompassing data capture tools, field agent management tools, and blockchain platforms.

• Digital application areas include the following;

Advisory services. These entail the dissemination of information to improve farming techniques and boost new technology.

Market linkages. These facilitate sales between buyers and farmers.

Financial access. Aimed to provide finance to increase farm productivity or profitability.

Supply chain management. Aimed at tracking and managing supply chains to boost profitability through certification and traceability.

Macro agri-intelligence. These are aimed at formingand/or distributing macro raw facts to stakeholders.

To expand the digital agriculture ecosystem, three vital factors are necessary; data, innovation, and partnerships between various stakeholders in the public and private sectors. The agricultural digital transformation will support institutional innovation to favour cross-fertilization of knowledge and prosperous partnerships, inducing data sharing, and the experimentation and testing of disruptive technologies.

The agricultural digital transformation will scale proven solutions through national-level engagements for an efficient, equitable, and an environmentally sustainable food system.

The digital transformation of agricultural sectors in other emerging markets can provide vital lessons, which Indonesia can adapt to its local context. A transformation in agriculture is necessary where data can result in better, timely, and actionable knowledge. The influence of weather, soil, crop reaction to conditions, and small production plots make it hard to come up with universal agricultural solutions.

2. Seafood. Indonesia participates in the Seafood Expo North America/Seafood Processing North America (SENA) every year to induct Indonesian Marine and fishery commodities, strengthen Indonesia’s branding in the global market, and expand the export market to prospective and potential markets.

In 2021, Indonesia successfully exported around USD 5.7 billion of Indonesian fishery products. Indonesia’s major export destinations include the following;

• The United States of America valued at around USD 2.5 billion (44.3%).

• China at a value of USD 890 million (15.5%).

• Japan at a value of USD 621 million (10.9%).

• ASEAN at a value of USD 539 million (9.4%).

• European Union at a value of USD 328 million (5.7%).

Some of the major seafood products exported such as lobster, shrimp, tuna, seaweed, crab, and squid are largely favoured in ASEAN countries and Europe. The activity expects to largely kick in increasing exports of Indonesian fishery products viatransaction proceeds, which occur amid and after the implementation of exhibition participation.

3. Oil and gas. Indonesia is among the largest producers of oil and gas worldwide.

Overall, Indonesia’s oil production is reducing by 11% each year because of the ageing oil fields and the lack of new oil field exploration. Indonesia’s production of crude oil was at a level of 616.06 thousand barrels per day in January 2022, down from 651.68 thousand barrels per day in the previous month. This was a change of 5.46%.

A large component of Indonesia’s gas output is exported since the nation’s gas production is overshadowed by foreign companies, which are exclusively prepared to invest if allowed to export gas. The government of Indonesia intends to constraint the country’s gas exports to support domestic items while elevating the usage of natural gas as a source of fuel for industrial and personal consumption.

Indonesia’s oil and gas sector is regulated by Law 22/2001 regarding Oil and Natural Gas, as amended by Law 11/2020 regarding Job Creation (collectively, the ‘Oil and Gas Law’).

The oil and gas sector constitutes upstream and downstream activities, which are governed and separately organized. Upstream activities include exploration and exploitation and are regulated under Government Regulation 35/2004 relating to Upstream Oil and Natural Gas Business Activities, as last amended by Government Regulation 55/2009.

The upstream sector is managed and supervised by SKK Migas. Because of the special territorial arrangement of the archipelagic state of Indonesia, upstream oil operations may be ventured in onshore and offshore areas. Work places for onshore and offshore efforts are established by the MEMR based on consultations with and recommendations from the respective regional governments.

The Job Creation Law requires business actors in the upstream sector to access at least a Business Identification Number and a business license from the central government prior to conducting business activities. Government Regulation 5/2021 on the Implementation of Risk-Based Business Licensing clarifies that the business license for upstream oil and gas endeavours is in the form of a PSC and NIB.

Downstream activities involve processing, transportation, storage and trading, and are regulated under the Oil and Gas Law and Government Regulation 36/2004 concerning Downstream Oil and Natural Gas Business Activities, as amended by Government Regulation 30/2009.

Downstream operations are categorized under the auspices of the MEMR and the Downstream Oil and Gas Regulatory Agency (BPH Migas).

The Job Creation Law eliminates the several business licensing pre-requisites for downstream oil and gas business activities such as processing, transportation, storage, and or trading under the Oil and Gas Law. It puts in place a single integrated business license, which is applicable for all of the foregoing business activities.

The business license will be processed through an online system managed by the central government of Indonesia. Only business entities incorporated in Indonesia are qualified to get a downstream business license, subduedto the relevant foreign shareholding restriction specifiedin the Positive Investment List under Presidential Regulation 10/2021 concerning Investment Business Activities.

The Positive Investment List is Indonesia’s new investment array of business lines, which are open or restricted to foreign investment.

4. Manufacturing. Productivity in the manufacturing industry sector of Indonesia continues to grow in line with new demand in the ever-growing market. This expansion phase is based on the results of the S&P Global survey through the Indonesian Manufacturing Purchasing Manager’s Index (PMI) data in April of 2022, which was at the level of 51.9. This was an increase in comparison to March, which reached the position of 51.3.

The PMI is an index of the prevailing direction of economic trends in the manufacturing and service sectors of a country.

In response to the outcomes of the Indonesian manufacturing Purchasing Manager’s Index survey in April, Jingyi Pan the Economics Associate Director of HIS Markit added that the improvement in Indonesia’s economic conditions was witnessed by the increase in demand and production in the manufacturing sector, which was growing stronger.

“In addition, there was an increase in purchasing activity, and most importantly a solid expansion in the number of workers who also continued to show confidence from several companies in the near future,” Jingy Pan explained.

Indonesia’s manufacturing PMI in April surpassed the manufacturing PMI of China, Russia, Malaysia, Taiwan, and Vietnam.

5. Renewable energy. By 2025, Indonesia is expected to raise its use of renewable energy by up to 23% as the national energy source. Here’s why investing in Indonesia’s green energy sector provides a promising opportunity;

Energy demands will increase together with economic development and population growth. As a fastdeveloping country and ASEAN’s biggest country, Indonesia is responsible for 40% of the region’s energy usage. Additionally, the demand is forecasted to increase by 80% whereas the need for electricity could rise by three folds between 2015 and 2030.

Indonesia’s energy sector has been identified as the 2ndmain contributor of emissions after agriculture, forestry, and other land uses. With around 8.5 million motor vehicles added to Indonesia’s roads each year, high energy demands from large industries and heavy dependence on domestic coal, and imported petroleum products, Indonesia thoroughly recognizes that it must upgrade its renewable energy transitions. Mainly, considering its objective to realize 23% of renewable energy use by 2025.

Currently, Indonesia’s renewable energy contribution holds at 12%. Around 80% of Indonesia’s national power volume is still collected from fossil fuels. But, it’s only by switching energy investment convergent renewable resources that it can hit its target.

6. Automotive industry. The Automotive industry in Indonesia plays a vital role in the economic expansion of the nation contributing 10.16% of the GDP. Many of the vehicles built in Indonesia are produced by foreign brands, notably Japanese and are built in Indonesia through a joint venture plant with a local partner or a fully owned plant.

Whereas full manufacturing with a high percentage of local components sourced in Indonesia is usually preferred by car manufacturers and also encouraged by the government of Indonesia, various car plants in the country formed a CKD. Completely Knocked Down (CKD) is a typical practice in the automotive, bus, heavy truck, and rail vehicle industries besides electronics, furniture, and other products.

A CKD kit is an acronym for kits of the loose parts necessary to assemble a complete vehicle in a customer’s plant. Customers use the CKD methodology because of the following;

• To access better customs import conditions as compared to those of complete vehicles.

• To empower the policies of the government by employing local manpower in Indonesia.

• To reduce the logistics and transport expenses incurred by completed vehicles compared to those for kits of loose car parts.

On average, the selling price of a vehicle assembled in Indonesia is lower than that of an imported complete vehicle. The percentage cost reduction varies from one market to another, even with limited quantities.

The assembly of cars with the help of CKD methodology allows companies in emerging markets like Indonesia to obtain expertise in different sectors and therefore to support the country’s industrial development while also enabling world manufacturers to expand into new markets, which would otherwise be inaccessible due to the high customs duties incurred by Completely Built-Up (CBU) vehicles. CBU vehicles are referred to as imported vehicles, which are directly bought and ready in shape for sale. The finished car must be booked and an order must be placed for you to buy it. CBU vehicles are charged more fees.

Sometimes, to obtain more privileges, the vehicle manufacturers contact local companies in Indonesia to localize the production of components and or lightening of particular parts. It’s also viable to supply car plants in Indonesia with kits, which are exclusively allotted into assemblies and vital car parts, and these are referred to as Semi Knocked Down kits (SKD).

7. Finance, real estate and business.

8. Mining

9. Others.

Conclusion

The economy of Indonesia is the largest in Southeast Asia and is among the world’s emerging market economies. This economy has a mixed system, which includes various private participation freedom that’s combined with centralized economic planning and government regulation.