This Country Program Evaluation assessed 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, the FY16–20 Country Partnership Framework (CPF), and the ongoing FY21–25 CPF. Specifically, it investigated 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 included (i) more efficient public finances, (ii) stronger human capital, (iii) financial sector strengthening, and (iv) resilient urbanization. The evaluation’s 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 Bank Group applied a strategic mix of financial support, analytics, and technical assistance to achieve extensive capacity and institution building and advance the country’s reform agenda, which included reducing energy subsidies, stabilizing the economy, expanding social protection, improving financial inclusion, and rebuilding after disasters, among others. 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 Bank Group faced challenges in supporting additional deeper tax and domestic revenue mobilization 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 World Bank Group’s Uniquely Large and Influential Program in Indonesia

The Bank Group has had a large and long-standing engagement in Indonesia that is unmatched by most other country programs. The International Bank for Reconstruction and Development reestablished ties with Indonesia in 1967 and the International Finance Corporation (IFC) in 1968—providing policy advice, technical expertise, and financial assistance—making the country the second-largest borrower of Bank Group funds in the world (after India). Indonesia is a founding member of the Multilateral Investment Guarantee Agency, one of the original 29 signatories when the Multilateral Investment Guarantee Agency was established in 1988. Indonesia was also among the Bank Group’s first decentralized country offices, which raised its field presence and led to Jakarta being the Bank Group’s largest country office, with more than 500 staff and consultants. Consequently, the Bank Group is the country’s largest development partner, accounting for 40 percent of its external financing.

That close partnership with the government persisted over the past decade and has contributed to the Bank Group building an extensive portfolio in Indonesia. During the evaluation period, several individuals moved between senior roles in both institutions. For example, Indonesia’s former finance minister previously served as a World Bank managing director and chief operating officer. Her intimate knowledge of how World Bank tools could benefit Indonesia led her to personally champion World Bank–aligned public finance reforms and prompted the ministry to request direct World Bank support. More broadly, the close partnership between the World Bank and the Indonesian government contributed to the World Bank’s large $25 billion commitment through more than 100 approved lending operations during the evaluation period.

The World Bank leveraged trust funds at a globally unparalleled scale and breadth to sustain policy dialogue that helped maximize its knowledge work and spur lending. Eighty-four percent of the World Bank’s nearly 300 advisory services and analytics (ASA) were financed by $245 million in trust funds during FY13–23. The World Bank strategically used ASA as precursors to lending operations or stand-alone vehicles for influencing complex policy reforms. The World Bank’s support to public financial management reforms exemplifies this approach—40 distinct ASA initiatives totaling $50 million informed public financial management reforms, while the public financial management multidonor trust fund provided an additional $60 million to support implementation through targeted analytics and capacity building. Trust-funded ASA also helped sustain policy dialogue early in the evaluation period when the government limited its health sector borrowing. Trust funds further supported knowledge sharing and technical inputs. For example, the Global Financing Facility funded technical assistance under the nutrition Program-for-Results (PforR) investment project financing component.

The Bank Group extended its influence in the country by successfully convening bilateral and multilateral partners to address areas of strategic importance for the country. Of the World Bank’s total commitment, $479 million was in cofinancing across 38 operations during the evaluation period. The World Bank’s use of cofinancing and convening power reinforced its position as a trusted partner in a crowded development landscape. The World Bank collaborated with partners such as the Asian Infrastructure Investment Bank and the Islamic Development Bank to support large-scale government programs in slum upgrading, the Japan International Cooperation Agency in disaster recovery, and Australia’s Department of Foreign Affairs and Trade in the water sector. In the financial sector, the Bank Group’s collaboration with the International Monetary Fund, the Asian Development Bank, and the Swiss government supported macrofinancial reforms and sustainable finance, while the restructured advisory platform (Indonesia Financial Sector Technical Assistance programmatic ASA) enhanced coherence among partners. In health, the Australia–World Bank Indonesia Partnership contributed to strengthening service delivery, and collaboration with the Global Fund to Fight AIDS, Tuberculosis, and Malaria enabled the innovative tuberculosis buy-down mechanism.

Relevance of the World Bank Group’s Adaptive Engagement to Indonesia’s Development Vision

Bank Group strategies remained relevant during the evaluation period by maintaining a focus on institution building while adjusting to emerging development challenges. The FY09–20 Country Assistance Strategy stated that weak institutions, not the lack of financial resources, were the main constraint to achieving development outcomes in Indonesia. Consequently, the FY13–15 Country Partnership Strategy centered on institution building. In 2012, Indonesia’s public infrastructure spending reached a low of 3.6 percent of the GDP, well below East Asia’s 2014 average of 7.7 percent. Partially in response, the FY16–20 CPF emphasized building core infrastructure that could mobilize productive investment and ensure that economic opportunities and income-enhancing assets were broadly shared. The FY21–25 CPF prioritized recovery from the COVID-19 pandemic and the resilience of health, economic, and social protection systems. In particular, the World Bank’s PforR instrument helped Indonesia institutionalize delivery systems capable of withstanding shocks and responding flexibly to health and social protection needs. These strategies were relevant to the Golden Indonesia 2045 Vision, the country’s long-term development plan, which aims for the country to achieve high-income status, in part, by reversing underinvestment in health, infrastructure, and social protection.

The Bank Group adopted a flexible approach to determine the most effective instruments for supporting its engagement. The World Bank applied an iterative approach to its fiscal agenda as it became more complex and expanded into new reform areas. For the financial sector, IFC deployed a range of financing instruments to expand credit access in Indonesia. For example, in 2018, IFC invested $150 million in a private bank in Indonesia, which included the country’s first private sector social bond to support lending to women-owned micro, small, and medium enterprises. In the area of human development, the World Bank recalibrated its tools to maintain effective engagement, particularly through flexible and outcome-oriented modalities such as PforR. PforR projects incentivized vertical and horizontal coordination across government levels and ministries by linking disbursement to specific results, thereby improving local capacity and fostering regional equity. On resilient urban development, the World Bank used emergency projects and broadened and adapted its lending focus from primarily infrastructure and community-driven development projects to encompass disaster-resilient urban development.

The World Bank’s approaches did not always match Indonesia’s absorptive capacity, including in procurement. Several investment projects were delayed or canceled because government counterparts were either unfamiliar with World Bank procurement rules or reluctant to take on the perceived audit risks of large contracts. For example, the government abandoned procurement under the World Bank’s Tax Administration Reform Project after six years, despite the World Bank’s no-objection. In retrospect, the World Bank might have avoided such a result by supplementing the procurement committee with the technical and procurement expertise, or adjusting the procurement designs, such as breaking large contracts into smaller packages. The World Bank underestimated how subnational capacity constraints would limit implementation, and its early efforts to strengthen local capacity delivered mixed results—with the notable exception of the National Urban Water Supply Project, which provided tailored technical support and allocated funds based on performance. While achievements were made in building capacity at the community level, at the subnational level, success was only partial.

Strengthening Public Finance

The World Bank was successful in helping build core fiscal competencies and institutions for strong fiscal controls in Indonesia. The World Bank’s early support for establishing a financial management information system and strengthening the Treasury Single Account laid the foundation for effective public finance. Public Expenditure and Financial Accountability assessments verified that the financial management system improved budget transparency, budget execution predictability, and accounting and reporting processes. The World Bank’s direct support to Indonesia’s Fiscal Policy Agency (Badan Kebijakan Fiskal) built the country’s capacity for macrofiscal forecasting and realistic budgeting, both of which are necessary for establishing effective fiscal controls.

This long-standing support enabled the World Bank to effectively advance politically difficult energy subsidy reforms, freeing space for other spending priorities. The World Bank’s enduring support to the Fiscal Policy Agency improved data and technical capabilities for exploring reform options, allowing the government to act quickly when opportunities arose to advance energy reforms. The World Bank contributed to improving the design, targeting, and implementation of social assistance schemes, including pilots for unconditional and conditional cash transfers, which mitigated the impact of energy reforms on low-income households and increased the public’s acceptance of the subsidy reform agenda. Ultimately, Indonesia’s 2014–15 energy subsidy reforms cut subsidy spending by 2 percent of the GDP, freeing fiscal space for other spending priorities in health, infrastructure, and social assistance.

However, the World Bank’s supported tax system reforms were not implemented because of political sensitivities. After the cancellation of the procurement of the core tax system central to the World Bank’s Project for Indonesian Tax Administration Reform by the Ministry of Finance in 2012, the World Bank made no further attempts to secure this core tax system. However, the World Bank reengaged in domestic revenue mobilization through the Indonesia Fiscal Reform Development Policy Loan series in FY16. Yet, the government dropped several triggers, limiting the operation’s line of sight to outcomes. In both cases, the World Bank was unable to overcome the challenging political climate surrounding tax reforms or safeguard reform momentum.

Overcoming Obstacles to Human Capital

The government successfully adopted the World Bank’s proposed approach and leveraged multiple financing instruments to dramatically reduce stunted growth of children. Indonesia’s flagship Investing in Nutrition and Early Years program used a convergence approach that secured high-level government commitment and employed a multisectoral, cross-government strategy that integrated 21 nutrition-specific and 12 nutrition-sensitive interventions. The World Bank facilitated South-South learning exchanges with Peru to expose Indonesian planners to the approach. The World Bank leveraged a full range of financing instruments to support the program, including a PforR that promoted cross-ministerial accountability, vertical alignment across government levels, and outcome orientation in nutrition. Complementary investment financing strengthened implementation capacity, while a development policy loan clarified institutional mandates. Consequently, stunting rates dropped from 37 percent in 2013 to 21 percent in 2022, with the largest gains after the model’s adoption in 2018.

The World Bank strategically sequenced its support to effectively expand its health and social protection engagement—starting with core diagnostics and analytics and then lending. The sequencing was enabled by trust fund support and coordinated government engagement. This approach worked: diagnostics identified key issues, 43 percent of ASA informed national strategies, and more than 50 percent of ASA led directly to lending. This lending, in turn, used accreditation to improve the availability of quality health care, supported reforms to the national health insurance scheme to expand access to health services, and expanded the coverage of the conditional cash assistance program. As a result, health coverage reached 98 percent of the population, and the conditional cash transfer program expanded to include 10 million families.

In education, World Bank support—both in terms of analytics and lending—declined over the evaluation period. Country strategies highlighted stagnating learning outcomes and regional education disparities as key obstacles to development. Based on its own diagnostic, the World Bank advocated for early childhood education. While the ministry pursued these priorities, it preferred working largely without multilateral development financing. During the evaluation period, five lending operations with the Ministry of Education, Culture, Research, and Technology of different instrument types worth $860 million were dropped. However, the World Bank continued its engagement with the Ministry of Religious Affairs. Other partners, such as Australia’s Department of Foreign Affairs and Trade, continued to support the Ministry of Education, Culture, Research, and Technology’s education reform agenda with grants. Overall, the downsizing of the World Bank’s education portfolio affected the presence of the in-country education team and its ability for dialogue and relationship building.

Strengthening the Financial Sector

The Bank Group helped establish Indonesia’s core financial institutions and improve financial stability and inclusion. Institutions that contributed to financial stability included the Financial Services Authority (Otoritas Jasa Keuangan), the Indonesia Deposit Insurance Corporation (Lembaga Penjamin Simpanan), and the Financial System Stability Committee (Komite Stabilitas Sistem Keuangan). The World Bank also promoted financial conglomerate supervision and resolution frameworks, laying a strong foundation for enhanced oversight and crisis preparedness. The Bank Group supported reforms to expand financial access through agent banking expansion, mobile payments, and the growth of digital financial services. IFC complemented these financial inclusion efforts through investments in the financial technology sector.

The effectiveness of Bank Group efforts in deepening financial markets and improving efficiency was uneven despite its robust engagement. The Bank Group helped lay important groundwork for capital market development and insurance and pension reforms, but progress stalled because of limited implementation of key reforms, such as those under the Financial Sector Omnibus Law. Deep-rooted structural issues, including the dominance of state-owned enterprises and limited banking competition, constrained progress on enhancing market depth and lowering intermediation costs. Efforts to promote politically sensitive reforms—such as redefining the role of state-owned enterprises in financial intermediation—faced resistance and did not gain traction. Coordination between the World Bank and IFC produced tangible results in select areas, but in others it relied more on ad hoc efforts than on a systematic institutional approach. Moreover, IFC’s advisory role was affected by internal restructuring and business model changes, which at times reduced its flexibility to respond to market needs.

The Bank Group helped position Indonesia as a regional leader in sustainable finance—a space with stronger market incentives and fewer public-sector distortions. IFC and the World Bank supported the country’s first sustainable finance road map; mandatory environmental, social, and governance disclosures; and a national green taxonomy. By the second half of the evaluation period, 35 percent of IFC’s advisory projects focused on green lending and sustainable finance, aligning with Indonesia’s climate goals. IFC’s work in sustainable finance benefited from its integration with World Bank policy operations, which enhanced its influence on regulatory reforms.

Making Cities Resilient

The World Bank’s quick response to the 2018 Central Sulawesi earthquake and tsunami led to increased lending in resilient urbanization. The World Bank approved two emergency projects, one in 2019 and another in 2020, that addressed reconstruction and systemic disaster resilience. The 2022 National Urban Flood Resilience Project combined infrastructure, urban planning, and institutional coordination. These and other follow-on operations helped shift the World Bank’s urban program toward disaster risk–informed development with support from the Indonesia Sustainable Urbanization multidonor trust fund, financed by the Swiss State Secretariat for Economic Affairs. This shift contributed to a 60 percent increase in urban resilience lending over the evaluation period.

The World Bank’s support for disaster-resilient building standards during disaster reconstruction and community-driven development contributed to the successes in improving access to urban infrastructure. The World Bank played a key role in enforcing building codes and resilience standards during disaster reconstruction in the Central Sulawesi region, reconstructing 3,639 houses and 30 public buildings. Effective urban support built on the World Bank’s community-driven development support in target areas, which helped shape project design and strengthen local capacity. For example, the World Bank’s National Slum Upgrading Project drew on the institutional capacity established by its predecessor operations and became one of the largest and most ambitious urban upgrading programs in World Bank history that contributed to improved infrastructure in slums. Several trust funds provided flexibility to evaluate innovations and fill financing gaps.

The World Bank’s impact on resilient urbanization was constrained by land acquisition challenges and alternative subsidized government lending. Several projects faced land acquisition challenges, particularly a shortage of unoccupied land without ongoing legal disputes. This led to delays and the cancellation of key components—as in the World Bank’s Improvement of Solid Waste Management to Support Regional and Metropolitan Cities Project. In addition, the availability of government-subsidized lending programs limited the World Bank’s ability to scale infrastructure financing and nondistortive housing subsidies, as cheaper domestic alternatives made World Bank funding less attractive for subnational governments and financial intermediaries and housing developers.

Lessons

This evaluation offers three lessons:

1. The Bank Group sustained knowledge engagements and built institutions based on a long-term partnership, which was facilitated by substantial trust funds. The Bank Group’s ability to support Indonesia’s extensive and complex reform agenda was made possible by continual technical assistance, diagnostics, and analysis. These efforts strengthened the government’s institutional capacity and enhanced the influence and effectiveness of the Bank Group’s financial support. The availability of expansive and flexible trust funds helped sustain these engagements.
2. The Bank Group’s strong alignment with government priorities ensured enhanced program effectiveness and impact of reforms. The Bank Group was most effective in Indonesia in sectors where it could build strong institutional relations and align with the priorities of the country’s ministries. Regular communication and a swift adaptation to reform openings in areas such as public financial management and nutrition helped ensure effective implementation and sustained reforms.
3. The Bank Group’s complementary multisectoral lending created the right incentives for implementing agencies and different levels of government. The Bank Group’s complementary use of development policy lending, results-based lending, and investment project financing helped address structural challenges at different levels of government. It was especially effective in meeting the complex needs of institution building in public financial management or for multisectoral challenges, such as addressing malnutrition. In urbanization, the World Bank’s overreliance on investment financing instruments limited multisectoral collaboration and local government capacity building. Support to critical policy reforms, such as housing subsidy reforms and incentivizing public-private partnerships, proved insufficient.