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Indonesia’s parliament is considering expanding the central bank mandate to support economic growth as President Prabowo Subianto increases efforts to meet ambitious growth targets.
The draft bill governing the running of the Bank Indonesia would also give parliament the power to remove the central bank governor or other board members after a parliamentary evaluation of their supervisory functions. Currently, officials can only be removed if they commit a criminal act or are incapacitated.
Prabowo, who took office last year, has maintained that he can raise annual growth to 8 per cent — something Indonesia has not achieved for almost three decades.
The country’s central bank has a sole objective of maintaining the stability of the rupiah, the currency, and the financial system — a key mandate for almost all central banks.
The proposed revision being discussed in parliament, which is controlled by parties loyal to Prabowo in a broad coalition, would add a second objective to emphasise the central bank’s role in supporting economic growth.
The draft asks the central bank to implement “policies . . . that can create a conducive economic environment for real sector growth and job creation”, according to a copy dated September 8 seen by the Financial Times.
The central bank on Wednesday unexpectedly cut interest rates to 4.75 per cent, citing efforts to boost growth. The rate cut, its third consecutive such move, came despite a weaker rupiah in recent weeks.
Mohamad Hekal, a lawmaker in Prabowo’s party who sits on the parliamentary commission examining the proposal, confirmed there were discussions regarding the central bank’s role but vowed the institution’s independence would not be compromised.
“Don’t worry about BI’s independence; it will not be interfered with,” he told the FT.
The proposal has added to concerns among investors and economists that Prabowo is trying to bring the country’s governing institutions more firmly under his control.
This month, Bank Indonesia and president’s administration signed an agreement under which the central bank agreed to bear some of the government’s interest costs for welfare programmes such as public housing and village co-operatives.
The bank has said the cost sharing would be carried out by providing additional interest to government accounts held at Bank Indonesia.
Welfare programmes — including a free meals programme for schoolchildren nationwide that is estimated to cost $28bn annually — are the cornerstone of Prabowo’s presidency. But economists worry his expansive spending could weigh on Indonesia’s fiscal discipline, which has upheld investor confidence in south-east Asia’s largest economy.
Last week, Prabowo also abruptly removed long-serving finance minister Sri Mulyani Indrawati, who was seen as a champion of fiscal stability under three Indonesian presidents. He installed the more growth-focused Purbaya Yudhi Sadewa in her place.
The consecutive rate cuts, the agreement to share interest costs and the proposed new mandate “point to a worrying direction” regarding BI independence, said Capital Economics’ senior Asia economist Gareth Leather.
“The fact that they are all happening at about the same time, and coming hot on the heels of the finance minister being sacked, paints a picture that they are looking to change things up and boost the economy, even if it might cause concerns about inflation further down the line,” he said.
“The government and central bank’s clear pivot towards growth-supportive measures risks undermining confidence in policymaking,” he added.
Despite Prabowo’s lofty growth ambitions, Indonesia’s economy is struggling, with many Indonesians grappling with weaker purchasing power, a shrinking middle class and mass lay-offs in the industrial sector.
Late last month, Indonesia saw some of its deadliest protests in decades, as outrage over lavish housing allowances for lawmakers erupted into unrest over economic discontent.
Additional reporting by Diana Mariska in Jakarta
