This Country Program Evaluation assesses the World Bank Group’s support to Indonesia between FY 2013 and FY23. The evaluation period included three country strategies: the FY13–15 Country Partnership Strategy (CPS), the FY16–20 Country Partnership Framework (CPF), and the ongoing FY21–25 CPF. Specifically, the evaluation investigates the Bank Group’s relevance, effectiveness, and coherence in four areas that are critical for the country to achieve its development vision of reaching high-income status by 2045. These areas include (i) more efficient public finances, (ii) stronger human capital, (iii) financial sector strengthening, and (iv) resilient urbanization. The evaluation findings will inform the next CPF.

The evaluation finds that the Bank Group’s support for Indonesia’s development challenges has been relevant and partially effective. The World Bank applied a strategic mix of lending, analytics, and technical assistance to achieve extensive capacity and institution building, and it advanced the country’s reform agenda, which included reducing energy subsidies, stabilizing the economy, expanding social protection, improving financial inclusion, and rebuilding after disasters, among other goals. The Bank Group’s adaptive approaches over the course of long-term engagement with strong relationship building and continued substantial trust fund support contributed to these successes. Nonetheless, the World Bank faced challenges in supporting additional deeper tax and domestic revenue mobilization (DRM) reforms, education improvements, financial sector efficiency, and local government capacity development. These challenges arose from limited political space for reforms and lack of reform consensus or from instruments that were not well suited to Indonesia’s capacity and delivery systems.

The report is organized into seven chapters. The remainder of chapter 1 outlines Indonesia’s development context and traces the evolution of the government’s priorities over the evaluation period. It also summarizes the evaluation’s design and methodology. Chapter 2 presents an overview of the relevance and effectiveness of the Bank Group’s portfolio in Indonesia. Chapter 3 examines the World Bank’s contribution to fiscal management and public financial management (PFM). Chapter 4 evaluates the relevance and effectiveness of the World Bank’s support for human capital. Chapters 5 and 6 assess the Bank Group’s efforts in deepening the financial sector and developing urban resilience in the country. Chapter 7 provides concluding remarks and draws lessons to inform the Bank Group’s future support to Indonesia.

Country Context

Indonesia undertook wide-ranging—and at times economically painful—reforms in response to the Asian financial crisis. In 1997 and 1998, the country’s GDP per capita growth fell by 40 percent,1 its currency dropped to one-sixth of its value, inflation soared to 60 percent, and the banking system collapsed. In the immediate aftermath, the government prioritized fiscal discipline, reduced external debt, adopted a floating exchange rate, and enacted strict financial measures to prevent future crises. Structural reforms focused on improving the investment climate by privatizing state-owned assets and reforming the tax and labor systems. These economic reforms were accompanied by profound political changes. Indonesia responded to demands for greater local autonomy by decentralizing much of its governance system and development planning to regional and local governments.

Indonesia rebounded from the crisis with strong growth and poverty reduction. Indonesia’s economy recovered from the crisis, growing by an average of 5.7 percent annually between 2003 and 2013 and maintaining 5 percent growth over the evaluation period, with only a brief interruption in 2020–21 during the COVID-19 pandemic (figure 1.1). Indonesia’s economy rose to become the eighth largest globally in 2024, from the eleventh largest in 2013 (IMF 2024a), reaching $4.33 trillion in purchasing power parity GDP (2023). The country’s poverty rates also dropped sharply—from 23 percent in 1999 to 9.4 percent in 2023—with extreme poverty nearly eradicated.

The Golden Indonesia 2045 Vision—the National Long-Term Development Plan for the 2025–45 period—aims for the country to achieve high-income status by its independence centennial in 2045. The vision lays out five targets: (i) raising gross national income per capita to $30,300, (ii) eliminating poverty and reducing inequality to a Gini index score of 0.29, (iii) reaching the top 15 in the Global Power Index, (iv) achieving a Human Development Index score of 0.73, and (v) reducing greenhouse gas emissions by 93.5 percent. The vision includes four successive five-year development plans. The first phase (2025–30) focuses on improving access to health care, education, and social protection; developing downstream industries and boosting labor productivity; and building a more transparent and merit-based governance system. The vision recognizes that reaching its goals would require the continued transformation from an agriculture- and commodity-based economy to an advanced industrial and service-based nation through innovation, advanced digital technology, and enhanced human capital.

Figure 1.1. GDP Growth

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Figure 1.1. GDP Growth

Source: World Bank Open Data database.

Development Gaps

Public Finance

The high costs of energy subsidies reduced the country’s fiscal space. Poorly targeted energy subsidies have accounted for as much as one-fifth of the federal government’s budget. In response, Indonesia reformed its energy subsidies in 2014 by adopting automatic fuel price adjustments, but implementation has been inconsistent and fuel prices have not been adjusted since 2017 (Ihsan et al. 2024).

Low domestic resource mobilization added to budget pressures. Indonesia has one of the lowest revenue-to-GDP and tax-to-GDP ratios among emerging market economies. Between 2001 and 2019, revenue declined from 17.2 percent of the GDP to 12.4 percent, placing Indonesia’s revenue mobilization at less than half the emerging market average of 27 percent of the GDP. A large share of tax revenue has come from natural resources, but this is subject to sharp commodity price volatility. Tax revenue was 9.1 percent of the GDP in 2021, about 7 percentage points below its estimated tax potential. The revenue gap is driven by low compliance among taxpayers in many sectors and a tax policy filled with exemptions and thresholds. In October 2021, Indonesia passed the Tax Harmonization Law, which reformed personal and corporate income tax policy and the value-added tax (VAT) and announced a future carbon tax.

Indonesia’s spending needs to become more efficient. Planning and budgeting are often disconnected, spending units are fragmented, and procurement processes are cumbersome. Following decentralization, provincial units are charged with implementing most of the country’s budget increases for infrastructure, but low budget execution capacity has reduced spending efficiency and increased opportunities for corruption. As a result, execution of the government’s capital budget is low, with only about 85 percent of allocated capital budget being spent each year (Montfaucon et al. 2021). Moreover, capital is unevenly spent over the fiscal year, with most occurring in the last quarter.

Human Capital

Underinvestment has limited Indonesia’s human capital. The country’s slow improvement in the Human Capital Index (from 0.50 in 2010 to 0.54 in 2020) reflects continued underinvestment in health, nutrition, and education. This score lags behind the regional average for East Asia and Pacific and other middle-income countries. The score means that a child born in Indonesia could be nearly twice as productive if they have a complete education and access to high-quality health care and nutrition (World Bank 2020c). Under-five child mortality stands at 21 deaths per 1,000 births, one of the highest rates in the region (UNICEF 2022). Nearly 22 percent of children experienced stunted growth in 2022. The Indonesian economy loses approximately $3.7 billion per year, or 2.3 percent of the GDP, from stunted growth (Murthi 2022).

Indonesia’s large human capital disparities run along income lines. Indonesia’s human capital challenge reflects its inequality challenge. Poor people face greater risks of stunted growth, reduced cognitive development, lower learning and educational attainment, and decreased wages and productivity. In addition, Indonesia is highly exposed to shocks. The INFORM Risk Index ranks Indonesia in the top quarter of countries worldwide at risk from crises and natural disasters (European Commission, n.d.).

Financial Sector

Indonesia’s financial sector is shallow and highly concentrated. The country’s credit-to-GDP ratio stands at just 31.4 percent, which is largely unchanged since 2010 and lags behind regional peers such as Thailand (149.9 percent), Malaysia (126.1 percent), and the Philippines (56.2 percent). The sector is dominated by a few large state-owned banks, with the 4 largest holding 43 percent of total banking assets and the 10 largest accounting for 66 percent. Capital markets are shallow, limiting long-term local currency financing (Strobbe et al. 2023). According to the 2024 Financial Sector Assessment Program, the government securities markets are relatively well developed, but the corporate bond and equity markets remain shallow. These systemic constraints continue to hinder the financial sector’s capacity to mobilize and allocate capital effectively, ultimately undermining productivity and inclusive economic growth.

Financial inclusion remains limited because of limited competition, geographic dispersion, and high intermediation costs. Nonbank financial institutions—including pension funds, fintech firms, and insurance companies—are small relative to the size of the economy and underused as alternative sources of financing.

Urbanization

Indonesia’s urban areas are challenged by extreme weather events and poor infrastructure. Today, about 151 million people—over half of Indonesians—live in cities and towns, and by 2045, this number is expected to increase to 70 percent of Indonesians. However, connectivity within metropolitan regions and between metropolitan and nonmetropolitan areas is hampered by underinvestment in transport infrastructure and challenges in metropolitan coordination. Additionally, 20 percent of urban Indonesians live in slums with inadequate water, sanitation, and solid waste management infrastructure (World Bank 2019e). Pollution also adversely affects urban livability. Moreover, city dwellers are increasingly vulnerable to natural hazards, particularly heavy rainfall, which has contributed to the government developing a new capital, Nusantara on Kalimantan Island, instead of flood-prone Jakarta.

Scope and Methods

This evaluation focused on four questions. These questions were strategically relevant to the Bank Group’s engagement over the evaluation period and to Indonesia’s Golden Vision. The Independent Evaluation Group (IEG) refined the evaluation subquestions and cross-sectional lenses based on discussions with the Indonesia country team and Indonesia’s thematic challenges.

• Evaluation question 1: How effectively did the World Bank design and adapt its support toward ensuring Indonesia’s spending adequacy and sustainability?
• Evaluation question 2: How relevant and effective have the World Bank’s efforts been in overcoming obstacles to human capital?
• Evaluation question 3: How relevant and effective have the Bank Group’s efforts been in deepening the financial sector while maintaining financial stability and building institutions?
• Evaluation question 4: How relevant and effective has the World Bank Group been in addressing Indonesia’s rapid urbanization to ensure resilient cities to disasters?

The evaluation adopted a mixed methods approach to answer the evaluation questions. The evaluation analyzed Indonesia’s development context and relevant indicators. The content and portfolio analysis helped define the major development constraints facing Indonesia within each development theme and the areas the Bank Group sought to influence. The team used a theory-based approach to trace the Bank Group’s influence on intended outcomes. It focused on strategy, diagnostics, and analytics to assess relevance and coherence. The evaluation also explored how the Bank Group’s work shaped policy dialogue, catalyzed support from stakeholders, and delivered its program effectively and efficiently. The evaluation used geospatial analysis to assess the Bank Group and other partners’ operational or regional targeting and to attain insights on the effectiveness of World Bank support.

The evaluation drew on several main documentation sources from the evaluation period. These sources included (i) Bank Group portfolio documentation (advisory services and analytics [ASA] outputs, Project Appraisal Documents, Implementation Completion and Results Reports, Implementation Completion and Results Report Reviews, Implementation Status and Results Reports, restructuring documents, Project Completion Reports, aide-mémoire, meeting minutes, and project-related communication); (ii) International Finance Corporation (IFC) portfolio documentation (Board of Executive Directors approval documents, supervision reports, Expanded Project Supervision Report Evaluative Notes, and Evaluative Notes of IFC advisory services [project completion reviews]); (iii) internal and external diagnostic analytical work; (iv) formal Bank Group strategies (FY13–15 CPS, FY16–20 CPF and its accompanying Performance and Learning Review, and FY21–25 CPF); and (v) evaluations from external partners, including the Asian Development Bank. The evaluation complemented these sources with interviews with Bank Group staff and country program stakeholders, including the government, development partners, and IFC clients. However, the evaluation faced difficulties in obtaining subnational data for further analysis. Leadership transitions in Indonesia over the past 10 years did not always allow access to officials with the institutional memory on the government side. Finally, while the evaluation considered important Bank Group work of the pre-evaluation period, it focused on FY13–23. The evaluation designed and executed several risk mitigation measures to address these challenges, as detailed in appendix A.