Indonesia finance chief wants faster growth before easing limits
Purbaya’s early moves have unsettled some investors worried about a coordinated fiscal-monetary shift
[JAKARTA] Indonesia’s new finance minister said that he would not consider easing long-standing fiscal restraints until he could prove that South-east Asia’s largest economy could grow faster by spending more efficiently.
The US$1.3 trillion economy will keep its fiscal guardrails in place to reassure investors while demonstrating it could boost growth, Purbaya Yudhi Sadewa said on Tuesday (Sep 30). “When we have grown faster, then we will see what is right for us,” he said, referring to budget deficit and debt ratio limits.
For now, there’s also “no point” in widening the deficit if the government could not spend effectively. If it improves, then loosening the 3 per cent deficit-to-GDP cap – a hallmark of fiscal policy since the Asian financial crisis of the late 1990s – “should be fine”, he said. “But right now, I have no plans to do that.”
Purbaya’s appointment to the finance ministry in early September came as President Prabowo Subianto was seeking greater alignment for his goal to boost economic growth in a nation of 284 million people to levels not seen in a generation, while also contending with a weakening currency, rising costs of living and growing discontent over inequality.
The abrupt reshuffle, which followed the country’s most violent protests in years, has sharpened investor focus on whether Prabowo’s government may eventually relax fiscal rules that have underpinned the country’s stability for more than two decades. Purbaya’s early moves, including channelling US$12 billion of government funds into banks to spur lending, alongside surprise rate cuts at Bank Indonesia, have unsettled some investors worried about a coordinated fiscal-monetary shift.
Purbaya, a technocrat known for his admiration of Milton Friedman, downplayed fears that central bank independence was under threat. Bank Indonesia is focused on its duties in accordance with the law, and a “burden sharing” arrangement introduced this year, under which the central bank helps cover debt costs for Prabowo’s priority programmes, should remain temporary, he said.
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Keeping it in place for too long would risk perceptions of monetising fiscal debt, “which is prohibited in the world of monetary policy”, he said.
The minister said that better tax collection and customs reforms could boost state revenue significantly, reducing reliance on central bank support. “From there, we can see what the future holds for burden sharing with the central bank.”
Purbaya projected growth could accelerate to 6 per cent in the near term, well above the roughly 5 per cent pace over much of the past decade, helped by more efficient government spending and ample liquidity. It’s not “spend, baby, spend” but “efficiency, baby, efficiency”, he said.
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Getting closer to Prabowo’s 8 per cent growth goal, last reached in the mid-1990s, would require more private investment. There are no extraordinary policies on that front, but rather a need to reduce bottlenecks that have stalled thousands of investment plans from neighbouring countries, he said.
On Indonesia’s fiscal limits, he said: “Investors want to know two things: is a country able to pay? Is a country willing to pay?” At current debt and deficit levels, “we are still very prudent”, he said.
Still, he called those restrictions “arbitrary”, adding: “All countries in the world have violated them.” BLOOMBERG
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