The leadership of Bank Indonesia has changed. A new leader will serve\nas the central bank\u2019s captain for the next five years. The question\nremains: will this change in leadership be able to make the rupiah more\nstable and stronger than before?<\/p>\n
The answer is not easy, and tends towards the pessimistic. Over the\nnext five years, the rupiah is expected to remain under pressure and\npotentially continue to weaken. A change in Bank Indonesia\u2019s leadership\ndoes not automatically alter the economic structures that have been a\nsource of exchange rate fragility for decades. The new leadership is\nlikely to continue following conventional monetary policy paths, while\nthe primary obstacles actually lie beyond the central bank\u2019s reach.<\/p>\n
Therefore, the change in Bank Indonesia\u2019s leadership is more of an\ninstitutional cycle than a fundamental turning point for the rupiah.\nWhoever leads Bank Indonesia will face the same economic structure: a\nweak external sector, limited export competitiveness, high dependence on\nimports, volatile foreign capital flows, and foreign exchange reserves\nthat are not yet strong enough to support an economy as large as\nIndonesia\u2019s.<\/p>\n
Indonesia has indeed become one of the largest economies in the\nworld. Its domestic market is vast, the population approaches 300\nmillion, and household consumption is the main pillar of economic\ngrowth. However, a large domestic market does not automatically result\nin a strong currency.<\/p>\n
The rupiah has never truly possessed a solid external foundation\nbecause Indonesia\u2019s economic structure relies heavily on domestic\nactivities. The economy can grow due to public consumption,\ninfrastructure development, government spending, credit, and the\nexpansion of various domestic business sectors. However, most of these\nactivities only create the circulation of the rupiah. Economic growth\nthat is not accompanied by an increase in foreign exchange earnings will\ncontinue to leave pressure on the exchange rate.<\/p>\n
Bank Indonesia can certainly strive to maintain the stability of the\nrupiah. When pressure on the exchange rate increases, the central bank\ncan raise interest rates, intervene in the foreign exchange market,\nmanage liquidity, or issue various monetary instruments to attract\ncapital flows. Higher interest rates are expected to make Indonesian\nfinancial assets more attractive by offering greater returns to\ninvestors.<\/p>\n
However, such policies carry consequences. High interest rates\nincrease the cost of capital for businesses, suppress credit expansion,\nincrease the burden of mortgage repayments, and hinder domestic\ninvestment. Conversely, if interest rates are lowered too quickly while\nglobal uncertainty remains high, investors may move their funds to\ndollar-denominated assets, which are considered safer.<\/p>\n
Bank Indonesia is ultimately trapped in a recurring dilemma. Interest\nrates must be high enough to maintain the rupiah, but also low enough to\nencourage investment and economic growth. A change in governor will not\neliminate this dilemma.<\/p>\n
Exchange rates cannot be strengthened solely by manipulating interest\nrates or relying on monetary intervention. Monetary policy can only\nmanage symptoms and dampen volatility in the short term. It cannot, on\nits own, resolve structural diseases such as weak competitiveness, low\nproductivity, legal uncertainty, corruption, complex bureaucracy, and\nhigh transaction costs.<\/p>\n
In such a situation, the rupiah does not require a major crisis to\nweaken. An imbalance between the demand for and supply of foreign\nexchange is enough to gradually pressure the exchange rate. Indonesia\ncontinuously requires dollars to pay for raw material imports, capital\ngoods, energy, international services, foreign debt instalments, and\nvarious cross-border transactions. At the same time, the ability to\ngenerate foreign exchange through exports, foreign investment, tourism,\nand other international economic activities has not developed as quickly\nas these needs.<\/p>\n
As long as foreign exchange inflows are smaller or more fragile than\nthe demand for dollars, the rupiah will remain under pressure. This is\nnot solely the fault of Bank Indonesia, but a consequence of national\neconomic policies that have long ignored the strengthening of the\nexternal sector.<\/p>\n
Trapped in an Inward-Looking Orientation<\/p>\n
One of the fundamental weaknesses of the Indonesian economy is its\noverly strong inward-looking orientation. With a very large domestic\nmarket, entrepreneurs can grow and profit without having to compete in\nthe international market. The domestic market has become a comfort zone\nfor many national companies.<\/p>\n
In the 1980s and 1990s, Indonesia attempted to strengthen\noutward-looking policies. Industrialisation was directed towards\nincreasing exports, expanding markets, and generating foreign exchange.\nHowever, as development progressed, many business players returned to\nusing the domestic market as their primary mainstay.<\/p>\n
An inward-looking orientation can indeed create jobs, corporate\nprofits, tax revenue, and gross domestic product growth. However, these\nactivities do not always bring in foreign exchange. In fact, if the\nproduction process depends on imported machinery, technology, raw\nmaterials, and components, domestic market growth can actually increase\nthe demand for dollars.<\/p>\n
This is the paradox of the Indonesian economy. The domestic market\ngrows, consumption increases, companies book profits, and the economy\ncontinues to develop, but at the same time, import needs increase and\nthe rupiah continues to weaken. Economic growth that is hungry for\nimports without a comparable export capability will exacerbate pressure\non the exchange rate.<\/p>\n
Therefore, Indonesia must return to building an outward-looking\norientation. We need more companies that achieve\u2026<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/bi-under-new-leadership-what-is-the-fate-of-the-rupiah-1788108730", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }