In Pursuit of 8% Growth
Commentary by Wayne Forrest
The recent resignation of Perry Warjiyo, Governor of Bank Indonesia, two years before the end his term,underscored the impatience of President Prabowo to achieve his goal of 8% GDP growth. It also reflected an accumulated disconnect between fiscal and monetary policy, and possibly, the loss of central bank independence.
Indonesia has averaged 5-5.5% growth for 20 years (except for the COVID period) and has not had 6% growth since 2007. This record of success belies what is not achieved, formal employment for much of the population and a middle class that seems to have stopped growing. 5% growth cannot absorb enough of Indonesia’s high school graduates. But It’s a good headline number, keeping Indonesia in the game for needed international investment. However, a former Coordinating Minister for Economic Affairs, the economist Dorodjatun Kuntoro-Jakti, used to say that 3% of Indonesia’s growth was purely due to population growth. That comment has always stuck with me. If that’s true, the government’s efforts add just a mere 2% to the nation’s GDP. The cynic in me says it demonstrates the ineffectiveness of government but on the other hand one must consider that much of the country’s economic activity may not readily appear on the “radar screen” given an estimated 60% of Indonesians are not formally employed. So, perhaps 5% is too low a number.
Notwithstanding how elusive GDP growth numbers may be, Indonesia’s current administration is clearly impatient with the “steady 5%” and wants to move the needle to 8% by 2029 (end of President Prabowo’s term). Since it took office in 2024 it has moved toward a command economy through essentially making the state much more of a player in the economy. Its state-owned enterprises, managed by the newly created Danantara, as well as the fiscal policies of a more activist Finance Ministry, have moved to create new sources of economic growth through vehicles such as the Free Meals Program, Red/White Village Cooperatives, and state-led downstreaming in mining and other commodities.
Funding these new initiatives has presented a major liquidity challenge to Finance Minister Purbaya. He is more aligned with the office of the President than his predecessor, Sri Mulyani, who could say “no” when asked to fund initiatives that would break the budget or incur steep borrowing costs.
Since 2024 Bank Indonesia (BI), overseer of Indonesia’s monetary affairs, became entangled in these fiscal efforts to get to 8%, and when asked to shoulder some of the burden, may have basically said “if you want us to protect Indonesia’s currency and inflation, our statutory mandate, please leave us alone”. In its mind, perhaps, was the 20-year period of 5% GDP growth that was accompanied by a steady depreciation in the rupiah’s value from 9,164 to its current level close to 18,000, including a 7.6% decline since January. Warjiyo is rumored to have been forced out after BI auctioned over $40 billion in 6 month rupiah securities (offering a coupon 2% above prime) since the beginning of the year to defend the rupiah. These notes (SRBI) attracted both foreign and local funds, especially from state-owned banks. However, these same banks were tasked with providing credit to the 80,000 new Red/White village cooperatives. The banks simply did not have sufficient funds. As reported by Tempo Magazine, President Prabowo was angered during a July meeting to discuss the program when Finance Minister Purbaya directly tied BI’s policies to the lack of sufficient budget. The decision to dismiss Warjiyo and better integrate BI’s policies with those of the government’s fiscal priorities ensued. To get him to resign, several parliamentarians are reported to have told Warjiyo that the government was prepared to resurrect a corruption case involving misuse of BI corporate social responsibility funds. Even if Tempo’s reporting is speculative, it is still disconcerting to read that the Finance Minister and the President ousted a highly respected technocrat years before the end of his term, someone who had earned the trust of international businesses and investors. The President has chosen wisely in nominating the Senior BI Governor Destry Damayanti, currently the Acting Governor, to replace Warjiyo but one wonders why this was necessary. Was BI really to blame for the state banks lack of funds or for broader liquidity issues? The banks or the finance ministry itself can float their own securities if they need funds. In fact, the banks often buy high yielding bonds, I’ve been told, because its a quicker and easier way to earn returns than lending. Only a month before Warjiyo’ s ouster Purbaya pulled back funds that had been transferred from Bank Indonesia to state banks because they were not lent out quickly enough.
Although everyone involved is making “nice” publicly, this does seem like a power play to gain more control over Bank Indonesia. If so, we could see a blurring of the boundary between fiscal and monetary policy under the banner of “integration” which would not surprise anyone who has followed the President. He has centralized more aspects of Indonesia’s economy than any President since Suharto. It would be in his nature to sacrifice central bank independence for higher growth.
I am not suggesting that Indonesia will now go the way of Turkey and Argentina, where political imperatives for growth kept monetary policy too loose and leading to disastrous hyper-inflation. Japan worked its way out of a funding crisis through coordinated fiscal and monetary actions but, unlike Indonesia, its debt was mostly in yen. With its financial markets so dependent on foreign investment, confidence in macroprudential policy is enormously important. Further signs that the central bank is not independent—such as tolerating further rupiah depreciation, forcing a rate drop, or the bank purchasing government bonds– would incur a debt that will have to be paid at some point. Markets have not been kind to nations that have chosen this path
For now, Destry’s appointment has calmed markets. She seems—at least publicly—to be accommodating concerns for liquidity, urging banks to lend more, and has not signaled a drop in interest rates. The President also just released the outlines of his 2027 budget that are prudent.
But what happens if there’s another run on the rupiah or rise in inflation triggered by a further loss of confidence in the government’s real debt position. Will BI be able to act independently? Having observed the fate of Perry Warjiyo I am not so sure.
AICC gave Warjiyo (and Bank Indonesia) its Distinguished Service award in 2024.
(The above remarks are the author’s and may not reflect the views of AICC or its members.)