Economist views World Bank's projection as a reminder to strengthen the economic engine

This is a ‘warning’ that the conventional growth engine is running out of fuel, requiring new stimuli or strengthened purchasing power among the populace.

Jakarta (ANTARA) - Universitas Airlangga Professor Rahma Gafmi views the World Bank’s trimming of Indonesia’s economic growth projection from 4.8 per cent to 4.7 per cent as a reminder to bolster the economic growth engine.

“The World Bank’s trimming of Indonesia’s economic growth projection to 4.7 per cent is a fairly serious ‘yellow’ signal, but it needs to be viewed in a broader context. This prediction indeed reflects some bitter realities currently facing the domestic economy. Especially with the escalation of Iran-Israel-US geopolitics,” Rahma told ANTARA in Jakarta on Sunday.

She explained that the slowdown in household consumption is one of the factors influencing the projection.

Consumption, which contributes more than 50 per cent to gross domestic product (GDP), is now under pressure, particularly from the purchasing power of the middle class.

According to her, this condition is reflected in stagnant retail sales and motor vehicle sales, amid rising prices of basic necessities that are not fully offset by increases in real wages.

On the other hand, tight monetary policy is also affecting economic activity.

Relatively high interest rates to maintain exchange rate stability are impacting the high cost of borrowing, both for business credit and housing, so business actors and investors tend to be more cautious.

“The 4.7 per cent (economic growth) figure is closer to the current psychological and on-the-ground reality than the optimistic target of over 5 per cent. Although macro inflation appears controlled, at the micro level many business sectors, especially manufacturing and textiles, are experiencing difficulties,” she clarified.

Rahma added that external factors are also at play, including the global economic slowdown and weakening demand from major trading partners like China, which impacts the performance of Indonesia’s commodity exports.

“This trimming is a ‘warning’ to the government that the conventional growth engine is running out of fuel, and new stimuli or strengthening of the purchasing power of the lower and middle classes are needed to return to the 5 per cent track.

“So, if you feel your wallet is thinner or your business is quieter even though the news says the economy is ‘safe’, this World Bank projection validates that feeling,” she added.

Nevertheless, Rahma believes that an economic growth target above 5 per cent can still be pursued by optimising various sectors simultaneously.

The first sector, she emphasised the importance of strengthening the processing industry sector as the main GDP contributor through downstreaming, including processing commodities like nickel, copper, and bauxite into high-value-added products as well as developing the battery and vehicle industry supply chain.

“This sector is the largest GDP contributor (around 19-20 per cent). To achieve the 5 per cent target, manufacturing must grow above the national economic growth,” she stated.

The second sector, agriculture is seen as having potential as a new growth engine, especially with support for increasing productivity, simplifying fertiliser distribution, and strengthening food security programmes to maintain price stability.

“Agriculture is currently viewed as a new growth engine. In 2025, this sector recorded growth above 5 per cent, reversing the previous trend of below 2 per cent,” she said.

The third sector, Rahma highlighted the important role of household consumption, which accounts for around 54 per cent of GDP. According to her, maintaining people’s purchasing power is key, among others through food price stability, accelerating government spending, and job creation through investment.

The fourth sector, the entry of foreign direct investment (FDI) will provide multiplier effects on formal job creation and increased community income.

“Accelerating budget execution from the first quarter to stimulate money circulation in society with infrastructure projects, for example irrigation, reservoirs, and retention basins for El-Nino Godzilla mitigation (prolonged dry season), building bridges that broke due to disasters, damaged roads, this also increases labour-intensive works, so people have income to boost purchasing power,” Rahma explained.

The fifth sector is green energy and the digital economy, which are seen as having strong growth prospects ahead. Programmes such as biodiesel development and investment in technology are opportunities to drive efficiency and sustainable growth.

“Projects like the B50 Biodiesel scheduled to start in July 2026 are projected to save up to Rp48 trillion in the budget, so there must be priority scaling. Encouraging investment in technology and the digital economy which have exponential growth potential,” she concluded.