Prabowo Eyes Indonesia Central Bank Chief Aligned With His Goals

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Damayanti cut short a work trip to Bali to return to Indonesia’s capital. She and Bank Indonesia’s other deputy governors met on Sunday to discuss the leadership transition before holding a small gathering with Warjiyo, eight years in the job, as a farewell.

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After news of Warjiyo’s resignation broke on Monday, Bank Indonesia sought to reassure markets that it was business as usual. Still, the central bank’s credibility ultimately rests on its perceived independence, and any suggestion that it is being undermined is likely to unsettle investors.

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“Investors don’t object to Bank Indonesia and the government talking to each other,” Harry Baskoro, a senior fellow at the Center for Indonesian Policy Studies and a former economist at the central bank, said. “What worries them is when Bank Indonesia’s decisions start looking predictable because they’re politically convenient rather than because they follow a clear and credible policy framework.”

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Adam Ahmad Samdin, an economist at Oxford Economics, said that even if the new appointee “verbally commits to maintaining Bank Indonesia’s operational autonomy, perceptions of reduced central bank independence alone could be sufficient to weigh on confidence and contribute to renewed weakness in the rupiah.”

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Until now, Bank Indonesia has remained one of the few major economic institutions that Prabowo has limited influence over. Last September, he notably replaced internationally respected Sri Mulyani Indrawati as finance minister in favor of Purbaya Yudhi Sadewa to bring the finance ministry under his fiscal policy objectives.

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Purbaya, 62, is another possible candidate for the central bank’s top job. The finance minister has repeatedly argued that Bank Indonesia’s efforts to stabilize the rupiah are making it harder for the government to boost growth. His concerns have centered on the cumulative impact of higher interest rates and tighter liquidity in the financial system that he feels have hindered lending and consumption.

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The Finance Ministry declined to comment, including on questions for Purbaya.

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Those disagreements became a recurring source of tension between Purbaya and Warjiyo, the people familiar said. Purbaya also raised these concerns with Prabowo in the week leading up to the resignation, according to the people, a development said to have contributed to Warjiyo’s resignation.

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People familiar with Purbaya’s thinking say he’s longed coveted the central bank chief role, even more so than his current finance minister job. Purbaya, who has been finance minister for close to a year, believes money supply is key to influencing economic activity and inflation. 

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Purbaya is often asked whether he will move to the central bank. Speaking to reporters last week, he dismissed it as “just the same old rumor.” “It pops up here and there but it’s never actually come true,” he said.

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Whoever takes over will inherit the same bind that constrained Warjiyo. Easing too quickly could revive capital outflows and worsen the rupiah’s weakness, while keeping policy tight would continue to weigh on growth and government financing costs. The next governor may find they have less political room to prioritize stability when those objectives collide.

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That much was also foreshadowed in a newspaper column that ran a few hours after Warjiyo stepped down. In it, Fithra Faisal Hastiadi, a University of Indonesia economist who serves as a senior expert at the Government Communications Agency, wrote that the central bank’s independence has been interpreted too rigidly.

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“Like a boat with two rowers of equal strength but rowing at different tempos, energy has been expended but the destination doesn’t seem to be getting any closer,” Hastiadi said. “Perhaps the problem with development isn’t always a lack of instruments. Often, the problem is the inability of these instruments to speak a single language.”

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—With assistance from Ben Otto.

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