Economists worried about the state of central bank independence are almost linearly focused on the Federal Reserve in Washington. Yet recent events in Jakarta may be even more troubling.<\/p>\n
The vast majority of Bank Indonesia watchers were shocked by this week\u2019s surprise interest rate cut<\/a>. BI was almost universally expected to stand pat amid uncertainty about the trajectory of the global economy.<\/p>\n BI was seen taking a wait-and-see approach, given the abrupt firing of globally respected Finance Minister Sri Mulyani Indrawati. This came as President Prabowo Subianto sets his sights on 8% growth by 2029, a rate not seen since just before the 1997-98 Asian financial crisis.<\/p>\n \u201cHer removal \u2026 raises investor concerns about fiscal discipline as Prabowo pushes for ambitious growth targets,\u201d warned advisory firm Bower Group Asia.<\/p>\n On September 8, Sri Mulyani, long seen as the key guardrail against a return of fiscal-policy overreach, was quickly replaced by Prabowo loyalist Purbaya Yudhi Sadewa. Purbaya wasted no time in pumping roughly $12 billion into the economy to spur lending.<\/p>\n The new finance minister is hitting the ground running on Prabowo\u2019s controversial \u201cburden sharing<\/a>\u201d plan to prod BI to loosen monetary policy as the finance ministry hits the fiscal gas.<\/p>\n In a joint statement, the finance ministry and BI assured global investors that the arrangement will be conducted \u201ctransparently, accountably and with strong governance.\u201d<\/p>\n They claimed the \u201csynergy continues to refer to the principles of prudent fiscal and monetary policies, while maintaining market discipline and integrity.\u201d<\/p>\n Economists, though, worry BI is about to become a tool of the president\u2019s growth strategy. On September 9, Capital Economics wrote: \u201cConcerns about the independence of Bank Indonesia have grown following the announcement of a fresh \u2018burden-sharing\u2019 agreement with the government and, most recently, the removal of respected finance minister Sri Mulyani from her post. <\/p>\n \u201cThe experience from other EMs shows that an erosion of central bank independence typically leads to higher inflation<\/a> and inflation expectations. A prolonged period of high real interest rates would, eventually, be needed to get inflation back down.\u201d<\/p>\n Paramadina University economist Wijayanto Samirin told Reuters the scheme has \u201cthe potential to damage BI\u2019s reputation as an independent institution. Several things BI is doing are odd. They get too deep and detailed into fiscal matters and this disrupts our monetary policy ecosystem.\u201d<\/p>\n This gambit comes as US President Donald Trump is endeavoring to neuter the US Fed\u2019s independence. He\u2019s angling to fire Fed Chair Jerome Powell, remove Governor Lisa Cook and load the policy board with loyalists like White House economist Stephen Miran.<\/p>\n On Wednesday, Miran, at his first Fed meeting, was the only dissenting vote in favor of a cut bigger than the 25 basis points Powell & Co. announced. Trump, though, is hardly done with trying to commandeer the Fed\u2019s decision-making.<\/p>\n In the meantime, Miran brings a MAGA voice into Fed deliberations. Last year, he co-authored a\u00a0Manhattan Institute report<\/a>\u00a0calling the Fed\u2019s autonomy an outdated \u201cshibboleth.\u201d<\/p>\n Miran favors, among other things, shorter terms for Fed governors, giving Congress greater say over the Fed\u2019s budget and making it easier to fire governors.<\/p>\n \u201cCentral bank independence has long been considered an essential element for successful monetary policy,\u201d the report Miran co-authored said. \u201cBut central banks are creations of political exigency, and pure independence exists only in textbooks. It can also bestow power without accountability.\u201d<\/p>\n In BI\u2019s case, the timing of this week\u2019s 25-basis-point rate cut to 4.75% made for terrible optics, given the politics surrounding the decision.<\/p>\n The same goes for Governor Perry Warjiyo, saying BI\u2019s monetary policy is \u201call-out pro-growth, while maintaining stability<\/a>.\u201d Though he assured markets the central bank would be \u201cprudent and measured,\u201d worries abound.<\/p>\n \u201cBI officials are caught between a rock and a hard place right now,\u201d said Capital Economics\u2019 Jason Tuvey. \u201cYou\u2019d like to think that, given the concerns about independence and also that fiscal policy might become more supportive, officials would refrain from a third consecutive cut. But that would clearly run the risk of proving unpopular with the government.\u201d<\/p>\n Context matters. All this is happening as former military bigwig Prabowo sidelines allies of former President Joko Widodo, who helped him get elected. The goal is to clear the way for a surge in government spending<\/a> on giant infrastructure projects and populist social welfare handouts.<\/p>\n Prabowo\u2019s efforts to reduce the central bank\u2019s independence and launch budget-busting populist spending policies suggest he understands little about the forces that brought on Indonesia\u2019s 1997-98 crash.<\/p>\n His strong-arm tactics toward international companies like\u00a0Apple<\/a>\u00a0suggest Prabowo\u2019s government is more interested in control than competitiveness in the globe\u2019s most dynamic economic region.<\/p>\n That\u2019s not to say Prabowo\u2019s government has turned completely inward. Last week, the central banks of Indonesia and China launched a local currency settlement framework for bilateral transactions. The plan is to increase the use of local currencies in bilateral trade and investment.<\/p>\n Previously, bilateral payment links between the People\u2019s Bank of China and BI were limited to current account transactions and direct investment. It could signal the beginning of a pivot by Southeast Asian economies to peg currencies to the yuan rather than the dollar.<\/p>\n Yet, so much of what Prabowo\u2019s government is doing seems to ignore lessons from Asia\u2019s not-so-distant past.<\/p>\n Apparently, the\u00a01Malaysia Development Berhad<\/a>\u00a0(1MDB) debacle didn\u2019t stop Prabowo from setting up a sovereign wealth fund called\u00a0Danantara<\/a>\u00a0and championing runaway security and defense spending.<\/p>\n All this represents more of the Chinafication of Indonesia than a serious effort to take the economy upmarket 27 years after the Asian financial crisis.<\/p>\n Last month, Prabowo vowed to fight \u201cthose who relentlessly pursue maximum profit, deceive and exploit our people, and carry those profits out of the Republic of Indonesia.\u201d\u00a0<\/p>\n Yet the return of violent protests in Jakarta, extreme currency volatility and the sudden sacking of high-level cabinet officials carry an air of deja vu.<\/p>\n \u201cThe piecemeal response falls far short of the reforms needed to put the economy back on track,\u201d said economist Priyanka Kishore at Asia Decoded. \u201cIn fact, replacing Sri Mulyani, who is widely respected in the investor community, with the untested Purbaya, could end up exacerbating the government challenges as we discuss later.\u201d<\/p>\n Kishore added that recent \u201cprotests have highlighted the tension between the narrative of a stable economy anchored around 5% GDP growth<\/a>, and the reality of a shrinking Indonesian middle class with limited employment prospects, which has been evident in the bottom-up data for a while.\u201d<\/p>\n Perhaps sensing the sour public mood, Prabowo is setting his sights on Indonesia\u2019s billionaires. Convinced the tycoons are flying too high and exerting too much influence on politics, Prabowo\u2019s team is looking for ways to seize alleged ill-gotten gains. That\u2019s having a chilling effect on investment.<\/p>\n Prabowo will have to go much further than that to narrow the wealth gap. For the last six quarters, Kishore explained, private consumption has grown by 4.9%-5% year on year.<\/p>\n But average monthly vehicle sales have been on a downtrend for the last two years, and retail sales have contracted over the past four months. Consumer confidence<\/a> has slumped, driven by weakening employment expectations.<\/p>\n According to the Manpower Ministry, 42,835 workers were laid off in the first half of 2025, mostly in manufacturing. This is a 32% jump over the same period last year, and yet it doesn\u2019t fully account for the informal jobs that represent 60% of total employment and are more vulnerable to downturns.<\/p>\n \u201cPrabowo\u2019s plan to address these concerns by stepping up public expenditure, as articulated by Purbaya, risks fueling debt without resolving the structural issues holding back investment and job creation,\u201d Kishore warned. \u201cTo the growing strains on the economy, we can now add heightened risks of fiscal instability.\u201d<\/p>\n Indonesia is far from the only key Asian economy in which politics has become a wild card.<\/p>\n \u201cProtests in Malaysia tied to cost-of-living concerns, unrest in Indonesia over economic inequality and political elitism, a leadership shake-up<\/a> in Thailand and the resignation of Japanese Prime Minister Shigeru Ishiba have created pockets of instability,\u201d said Stefan Angrick, an economist at Moody\u2019s Analytics.<\/p>\n Angrick added that \u201cpolicy drift is becoming a concern just as the region faces one of its toughest macroeconomic environments in years. All told, the APAC region is at a critical juncture. With the front-loading boost behind us and external demand under siege, the region\u2019s long-favored growth model is under pressure. <\/p>\n \u201cLooser monetary policy may soften the blow, but it cannot offset the structural challenge a more hostile global trade order poses. How the region adapts will shape its trajectory for years to come.\u201d<\/p>\n