Indonesian Economy: Discipline Amidst Pressure

Indonesian Economy: Discipline Amidst Pressure

Indonesia's economy continues to show on-track performance amidst pressure. At least two reports published on October 12, 2026, highlight the challenges currently facing the Indonesian economy. Reuters highlighted the assertion by Bank Indonesia Governor Destry Damayanti that the central bank retains full authority in determining interest rates, amidst investor concerns regarding potential political intervention. Meanwhile, The Star reported the restriction of several ministry and agency expenditures by the Ministry of Finance, even though the government stated that the execution of the State Revenue and Expenditure Budget (APBN) is still running according to plan.

Both issues certainly deserve attention. Central bank independence is the foundation of trust in monetary policy, while fiscal discipline determines a state's ability to finance sustainable development. However, these two developments should not be read in isolation, let alone immediately concluded as signs of a weakening Indonesian economy.

Expenditure tightening can be a response to increasing fiscal risks. Coordination between the government and the central bank can also serve as an instrument to maintain macroeconomic stability, provided it does not eliminate the independence of monetary decision-making. The more important question is not simply why the government is cutting the budget or why BI must assert its independence, but rather whether both policies can maintain trust without sacrificing economic growth.

BI Independence: Between Investor Concerns and Institutional Evidence

Concerns regarding the independence of Bank Indonesia cannot be ignored. Reuters noted that investors are questioning the possibility of political intervention, especially following the change in BI leadership and changes that broadened the central bank's mandate to emphasize economic growth. The depreciation of the rupiah is also part of the context for these concerns (Reuters, 2026).

However, there is a fundamental difference between perceived risks and evidence of actual intervention. Investor concerns provide crucial information for policymakers, but they are not in themselves proof that the monetary authority has lost its independence.

Legally, Bank Indonesia holds the status of an independent state institution. Law Number 23 of 1999 concerning Bank Indonesia, along with its amendments, grants BI the authority to establish and implement monetary policy. This authority includes the management of interest rates, liquidity, and exchange rates in order to maintain the stability of the rupiah and support sustainable economic growth (Republic of Indonesia, 1999, as amended).

Within this framework, coordination between BI and the government is not inherently contradictory to independence. The government is responsible for fiscal policy, while BI holds a monetary mandate and the authority to use the necessary instruments. Both institutions need to understand the same economic conditions, but they do not have to use identical instruments or always make decisions based on the same short-term considerations.

For example, when the government faces development financing needs, it may have an interest in keeping borrowing costs under control. However, BI must still consider inflation, exchange rate pressures, and financial stability before deciding on interest rate changes. Independence is precisely what is essential to ensure that monetary decisions do not solely follow the government's financing needs.

Therefore, Destry's assertion that BI remains independent should be viewed as an institutional commitment that must be proven through policy consistency. Investor confidence cannot be restored solely through statements, but it is also inaccurate to assume that independence has been lost just because the government and the central bank are increasing coordination.

The most relevant measure is the quality of decisions, transparency, consistency with economic data, and BI's ability to maintain its authority when price and exchange rate stability demand decisions that may not always align with the government's preferences.

Expenditure Tightening is Not Always a Sign of Fiscal Crisis

The second issue concerns the Ministry of Finance's decision to limit several government expenditures in the fourth quarter of 2026. Based on reports from The Star, ministries and agencies were asked to reduce their remaining official travel budgets by 30 percent, postpone the procurement of new vehicles, and limit the construction and renovation of official buildings or residences not related to the president's priorities (The Star, 2026).

This policy needs to be read in conjunction with the actual condition of the State Budget (APBN).

According to the Ministry of Finance, as of the end of September 2026, state revenues reached Rp2,341.5 trillion, or 74.2 percent of the annual target. State expenditure reached Rp2,660.5 trillion, or 69.2 percent of the ceiling, while the deficit was recorded at Rp319 trillion, or 1.24 percent of GDP. Tax revenue grew by 24.1 percent compared to the same period the previous year, while state expenditure grew by 19 percent (Ministry of Finance RI, 2026).

These figures provide a more complete picture than mere reports of budget cuts. At the end of September, the government still recorded substantial growth in revenue and expenditure realization. The deficit that has formed is part of the execution of the State Budget, which is indeed designed to finance expenditures exceeding state revenues while continuing to maintain the applicable fiscal limits.

Nevertheless, the end-of-September deficit cannot be used to conclude that the entire fiscal year will end without pressure. Reuters reported that the government's estimated deficit for the end of 2026 reaches 2.85 percent of GDP, higher than the initial target of 2.68 percent, but still below the 3 percent of GDP limit (Reuters, 2026).

This context explains why the government can state that the implementation of the State Budget is still running according to plan while simultaneously implementing austerity measures. The two are not necessarily contradictory. The government may assess that budget realization is still under control, but the risks for the remainder of the year are significant enough to require preventive action.

Global oil price pressures and the increasing need for energy subsidies and compensation are important factors. The Star reported that the realization of energy subsidies and compensation reached Rp376.8 trillion by the end of September, higher than the Rp244.6 trillion in the same period the previous year. Changes in payment patterns to state-owned enterprises also affect the timing of recording these expenditures (The Star, 2026).

Thus, expenditure tightening can be read as an effort to maintain fiscal space amidst increasing uncertainty. However, austerity must not become an end. Spending reductions should increase efficiency, not just improve the appearance of deficit figures.

Cutting non-urgent official travel, procurement of new vehicles, or renovations of bureaucratic facilities can be rational choices if these expenditures do not provide public benefits commensurate with their costs. Conversely, reducing spending on health, education, productive infrastructure, or social protection programs can have far greater economic consequences.

The government needs to distinguish between expenditures that merely consume the budget and those that build economic capacity. Good fiscal discipline is not the ability to spend as little as possible, but rather the ability to use every rupiah to generate public benefits that are equal to or greater than its costs.

Foreign Exchange Reserves and External Resilience: A Cushion, Not a Guarantee

Amidst pressure on the rupiah, the development of Indonesia's foreign exchange reserves provides an additional perspective that needs to be considered. Bank Indonesia reported that foreign exchange reserves reached US$146.3 billion at the end of September 2026. This amount is equivalent to 5.3 months of imports or 5.2 months of imports and servicing of the government's external debt, exceeding the international adequacy benchmark of about three months of imports (Bank Indonesia, 2026).

Foreign exchange reserves are not the sole indicator that can determine the health of the entire economy. However, their position is critical because they provide room for the central bank to face external pressures, stabilize exchange rates, and maintain confidence in Indonesia's ability to meet foreign currency needs.

Reuters also reported that trade and investment transactions using local currencies with several of Indonesia's partners reached US$49.42 billion through August 2026, compared to US$25.74 billion throughout 2025 (Reuters, 2026). This development indicates an increasing use of transaction settlement mechanisms that do not rely entirely on the US dollar.

The increase in local currency transactions does not mean that Indonesia can eliminate its reliance on the dollar in a short time. Its effectiveness depends on trade structures, external financing needs, the liquidity of partner currency markets, and the willingness of businesses to use these mechanisms. Nevertheless, diversifying payment instruments is one way to expand options in managing external risks.

These facts do not erase the problem of a weakening rupiah or investor concerns. Strong foreign exchange reserves do not guarantee that the exchange rate will always be stable, and local currency transactions cannot replace credible monetary policy. However, both indicate that assessing Indonesia's external resilience requires considering more than just daily exchange rate movements.

The challenge facing Indonesia is maintaining confidence in domestic policies while global financial conditions remain uncertain. To achieve this, fiscal policy consistency, BI's independence, government transparency, and financial market deepening must run in tandem.

Fiscal Discipline and Growth Need Not Be Pit Against Each Other

The debate over expenditure tightening often gets trapped in two opposing positions. One side views austerity as proof that the government is losing its ability to finance its development agenda. The other side views any reduction in spending as evidence of good fiscal discipline. Both oversimplify the issue.

In fiscal policy theory, government spending can function as an instrument for economic stabilization. When private demand weakens, productive spending can sustain economic activity, preserve jobs, and encourage investment. However, when spending is inefficient or financing needs increase excessively, budget adjustments can help maintain fiscal sustainability and lower economic risks.

The issue lies in the composition, timing, and impact of spending. Savings directed at low-benefit administrative activities can improve the quality of the State Budget without necessarily reducing support for growth. Conversely, excessively broad cuts can hamper domestic demand, slow down productive projects, or degrade the quality of public services.

In the Indonesian context, the most rational approach is to maintain spending that has a strong economic and social impact, while reducing lower-priority expenditures. The government also needs to sustainably improve state revenues, broaden the tax base while still considering the capacity of the public and the business sector, and enhance the quality of expenditure oversight.

With this approach, budget tightening is not the enemy of development. It can serve as an instrument to direct limited resources toward priorities that yield greater results.

However, the success of this strategy must be proven through data. The government needs to demonstrate the types of expenditures being reduced, the value of the savings realized, and their impact on the deficit and the execution of priority programs. Without such transparency, austerity policies run the risk of becoming mere political messaging about discipline, lacking substantive change in spending quality.

Economic Credibility is Built Through Consistency

Ultimately, these two reports show that Indonesia's economic challenges cannot be resolved through a single policy. Central bank independence, State Budget management, rupiah stability, and economic growth are all interconnected, but each requires different instruments and measures of success.

BI needs to maintain its independence in monetary decisions while also explaining its policies transparently. The government needs to keep the deficit under control without blindly slashing productive spending. At the same time, policies that support investment, productivity, exports, and state revenues need to strengthen the economic foundation in the medium term.

Indonesia possesses several relevant buffers, including relatively adequate foreign exchange reserves and state revenues that grew through September 2026. However, these buffers are not an excuse to ignore existing pressures. On the contrary, the availability of policy space must be utilized to adjust before risks develop into larger problems.