ADB approves $500million loan to help Indonesia improve human capital

An annual growth rate of at least 7% is needed for Indonesia to realize its aspiration to become a high-income country by 2045.

The Asian Development Bank (ADB) has approved a $500 million policy-based loan to help Indonesia improve human capital, increase labor productivity, and implement reforms in education, skills development, health, and social protection.

“The new program will help boost human capital development, which is the cornerstone of the Indonesian government’s strategy to achieve higher economic growth in the long term,” said ADB Director of Human and Social Development for Southeast Asia Ayako Inagaki. “The program will support key reforms to help the government reach the health and education targets of the UN’s Sustainable Development Goals (SDGs); enhance education and skills training; boost employment among youth, including university graduates; expand the social safety net, and reduce childhood stunting.”

An annual growth rate of at least 7% is needed for Indonesia to realize its aspiration to become a high-income country by 2045. A skilled workforce is a key to Indonesia’s transition to high-tech manufacturing and higher value-added exports.

The Indonesian government has taken steps to accelerate human capital development. The country’s human capital index rose to 54% in 2020 from 50% in 2010. While an Indonesian child today can expect to complete 12.3 years of school by their 18th birthday, weak learning outcomes have left young people unprepared for the labor market.

The coronavirus disease (COVID-19) pandemic has had a negative impact on learning outcomes due to extended school closures, which could have a lasting impact on young children. The pandemic has also hurt immunization rates for children under 5 years old, as non-COVID-19 health care became more difficult to access. As the pandemic continues to suppress demand and slow down job creation, long-term unemployment can lead to skills erosion, particularly among young people.

“By addressing the human capital deficit, the program will help boost Indonesia’s recovery from the global pandemic,” said ADB Director of Public Management, Financial Sector, and Trade for Southeast Asia Jose Antonio Tan III. “Creating an enabling framework for SDG implementation at the local level will help ensure that benefits from human capital development reforms are widely shared among all Indonesians.”

Human development is identified as a key driver of economic growth in the government’s Vision 2045 and National Medium-Term Development Plan, 2020–2024.

The new loan finances the first of three subprograms under the Boosting Productivity through Human Capital Development Program. The program combines policy-based loans with technical assistance and knowledge support. By focusing on health, education, and social protection, the program aims to help Indonesia lift its human capital index to 59% in 2026, on par with regional and global averages. Promoting a skilled and healthy labor force through technical and vocational education and training and higher education will encourage companies to invest in Indonesia, benefitting private sector development.