In an effort to maintain national fiscal stability, support from all elements of society and the private sector is very crucial. The Indonesian government has implemented various strategic policies to manage state finances more wisely, including controlling the budget deficit and optimizing state revenues.
Minister of Finance Sri Mulyani’s success in implementing responsive fiscal policy during the pandemic has shown positive results. Indonesia’s economy managed to withstand a decline of only minus 2.1 percent in 2020, much better than neighboring countries in ASEAN. This is an achievement that should be appreciated and is clear proof that the right fiscal policy can have a significant positive impact.
In 2021, Indonesia’s economy returned to positive growth of 3.7 percent with real gross domestic product (GDP) value exceeding the 2019 pre-pandemic level. This growth makes Indonesia the fastest country in economic recovery among the five other ASEAN countries.
In the last two years, Indonesia’s economic growth performance has remained strong, always above 5 percent, despite the global economic slowdown. This shows that the fiscal policy taken by the government has succeeded in maintaining economic stability and encouraging sustainable growth.
Collaboration between solid and effective fiscal and monetary policies has also succeeded in controlling inflation at a moderate level. In 2022, Indonesia’s inflation will be recorded at only 6 percent, much lower than the very high global inflation. For comparison, inflation in the United States reached 9.1 percent, Europe 10.6 percent, and the UK 11.1 percent.
Currently, inflation in Indonesia is around 3 percent, a relatively healthy figure for a developing country like Indonesia. This shows that the policies taken have succeeded in controlling the impact of the spike in commodity prices which triggered imported inflation.
Apart from that, efforts to accelerate structural reform through natural resource downstream strategies have also produced real results. The increase in export performance in recent years is clear evidence of the success of this strategy.
In terms of monetary policy, Bank Indonesia (BI) has maintained its benchmark interest rate at 6.25 percent in May 2024, after previously raising interest rates in April by 25 basis points.
This policy was taken as an anticipatory step to keep inflation within the target range of 2.5 percent plus or minus 1 percent until the end of this year and 2025. Pro-growth macroprudential policies and payment systems are also being pursued to support sustainable economic growth.
The Governor of Bank Indonesia, Perry Warjiyo, explained that this decision was consistent with pro-stability monetary policy, namely as a pre-emptive and forward looking step to ensure inflation remained under control within the target. This policy also takes into account global conditions, including the strengthening of the US economy with strong growth rates and maintained inflation.
The strengthening of the US dollar globally and high US Treasury yields are also important considerations in this policy. From the domestic side, the consideration of holding the benchmark interest rate is also based on the importance of maintaining the resilience of economic growth amidst global uncertainty. Economic growth in the first quarter of 2024 was able to grow by 5.11 percent from the fourth quarter of 2023 which was only 5.04 percent.
This trend is supported by domestic demand, improving private and government consumption, as well as good investment growth. Building investment, in particular, is driven by continued infrastructure development.
Apart from that, the Rupiah exchange rate stabilization policy implemented by Bank Indonesia has also succeeded in maintaining economic stability. In May 2024, the Rupiah exchange rate strengthened by 1.66 percent, after previously weakening in April 2024.
Foreign capital inflows, especially to SBN and SRBI, also showed a significant increase. This shows that the policies taken by Bank Indonesia have succeeded in stabilizing the Rupiah exchange rate and reducing inflationary pressures.
In the context of inflation, Consumer Price Index (CPI) inflation in April 2024 was recorded to have decreased from 3.05 percent in March 2024 to 3.00 percent. Low core inflation and administered prices (AP) inflation of 1.82 percent and 1.54 percent respectively indicate that the inflation control policies implemented by Bank Indonesia and the government have been successful.
Volatile food (VF) inflation also decreased in line with the decline in food commodity prices and the continued synergy of inflation control by the Central and Regional Inflation Control Teams.
Fiscal and monetary stability is the key to sustainable economic growth. The success of the fiscal and monetary policies that have been implemented by the government and Bank Indonesia shows that we are on the right track.
However, hard work and support from all elements of society is still needed to ensure that this stability can continue to be maintained. Let us together support the government’s efforts to maintain stable fiscal conditions for a better future for the Indonesian economy.