During the first quarter of 2025, the ALFI Institute (Indonesian Logistics and Forwarders Association Institute) observed that Indonesia’s economy continues to face multiple pressures. These pressures come both from external factors, such as uncertainty surrounding the global interest rate cuts by the U.S. Federal Reserve, and internal factors, including the weakening of the Rupiah, high waves of layoffs, low tax absorption, capital outflows from financial markets, and concerns over the government’s limited fiscal space.
Recently, Indonesia has also been affected by a 32% trade tariff imposed by the United States, impacting Indonesian exports to the U.S. Moreover, these tariffs could have cascading effects, including reduced export performance and competitiveness of Indonesian products to the U.S., weaker demand affecting employment and layoffs, and intensified export competition as countries diversify into new markets.
Chairman of the ALFI Institute and Senior Entrepreneur, Yukki Nugrahawan Hanafi, emphasized that 2025 will be a challenging year and may lead to slower national GDP growth. “The trade tariffs imposed by the U.S. on many countries, including Indonesia, will ultimately slow national economic growth, particularly through their effect on exports. Exports to the U.S. account for approximately 10% of Indonesia’s total exports. On top of that, before these tariffs took effect, Indonesia’s economy was already under pressure due to internal factors such as layoffs, currency depreciation, and capital outflows,” said Yukki.
Yukki added that considering these external and domestic pressures, the Indonesian government needs to take strategic measures to strengthen the economy, particularly by boosting domestic consumption, which has historically been the backbone of national economic growth. “Throughout 2025, domestic consumption has been under pressure, as shown by low purchasing power and deflation in January and February compared to the same period last year. Domestic consumption contributes more than 50% to national economic growth,” he added.
Although the government has prepared a negotiation team with the United States, Yukki stressed that comprehensive approaches are essential to protect national economic growth. Some recommended policy measures include:
1. Strengthen Economic Diplomacy
- Strengthen bilateral relations with the U.S. and appoint the Indonesian Ambassador to the United States.
- Open new markets in non-traditional countries to diversify export destinations.
- Promote the conclusion of the Free Trade Agreement with the European Union (EU-CEPA).
- Optimize and strengthen the Regional Comprehensive Economic Partnership (RCEP).
- Leverage Indonesia’s participation in BRICS.
2. Strengthen National Competitiveness
- Deregulate and simplify licensing rules to capture export relocation opportunities from countries facing higher tariffs (e.g., Vietnam, Cambodia, Laos).
- Ensure political stability, labor market stability, and a pro-growth, pro-stability political climate.
3. Fiscal Prudence
- Evaluate and reduce non-essential policies that affect fiscal stability, such as re-evaluating the Makan Bergizi Gratis (MBG) program.
- Provide fiscal stimulus and financing support for sectors directly impacted by U.S. trade tariffs.
- Promote government spending to stimulate demand across sectors.
- Implement social safety nets for low-income, vulnerable, and middle-class households.
4. Attract Investment and Accelerate Downstream Processing
- Prepare structural reforms to attract investment and support downstream processing in strategic sectors beyond minerals and coal, such as plantations, marine and fisheries, and forestry, which can create jobs and strengthen national food security.
5. Maintain Purchasing Power and Boost Domestic Consumption
- Provide stimulus to increase consumer spending, particularly for the middle class.
- Create new jobs through incentives in high-multiplier sectors such as manufacturing, food and beverage, technology, and MSMEs.
- Offer subsidies or income tax incentives for the middle class.
“Given Indonesia’s large domestic market and productive population, the government needs to strengthen purchasing power and domestic consumption to maintain national growth despite external uncertainties. We see that China has also re-oriented its economic policies to rely more on domestic consumption,” concluded Yukki.
—
The article has been published and can be accessed here
