BI Under New Leadership: What is the Fate of the Rupiah?

The leadership of Bank Indonesia has changed. A new leader will serve as the central bank’s captain for the next five years. The question remains: will this change in leadership be able to make the rupiah more stable and stronger than before?

The answer is not easy, and tends towards the pessimistic. Over the next five years, the rupiah is expected to remain under pressure and potentially continue to weaken. A change in Bank Indonesia’s leadership does not automatically alter the economic structures that have been a source of exchange rate fragility for decades. The new leadership is likely to continue following conventional monetary policy paths, while the primary obstacles actually lie beyond the central bank’s reach.

Therefore, the change in Bank Indonesia’s leadership is more of an institutional cycle than a fundamental turning point for the rupiah. Whoever leads Bank Indonesia will face the same economic structure: a weak external sector, limited export competitiveness, high dependence on imports, volatile foreign capital flows, and foreign exchange reserves that are not yet strong enough to support an economy as large as Indonesia’s.

Indonesia has indeed become one of the largest economies in the world. Its domestic market is vast, the population approaches 300 million, and household consumption is the main pillar of economic growth. However, a large domestic market does not automatically result in a strong currency.

The rupiah has never truly possessed a solid external foundation because Indonesia’s economic structure relies heavily on domestic activities. The economy can grow due to public consumption, infrastructure development, government spending, credit, and the expansion of various domestic business sectors. However, most of these activities only create the circulation of the rupiah. Economic growth that is not accompanied by an increase in foreign exchange earnings will continue to leave pressure on the exchange rate.

Bank Indonesia can certainly strive to maintain the stability of the rupiah. When pressure on the exchange rate increases, the central bank can raise interest rates, intervene in the foreign exchange market, manage liquidity, or issue various monetary instruments to attract capital flows. Higher interest rates are expected to make Indonesian financial assets more attractive by offering greater returns to investors.

However, such policies carry consequences. High interest rates increase the cost of capital for businesses, suppress credit expansion, increase the burden of mortgage repayments, and hinder domestic investment. Conversely, if interest rates are lowered too quickly while global uncertainty remains high, investors may move their funds to dollar-denominated assets, which are considered safer.

Bank Indonesia is ultimately trapped in a recurring dilemma. Interest rates must be high enough to maintain the rupiah, but also low enough to encourage investment and economic growth. A change in governor will not eliminate this dilemma.

Exchange rates cannot be strengthened solely by manipulating interest rates or relying on monetary intervention. Monetary policy can only manage symptoms and dampen volatility in the short term. It cannot, on its own, resolve structural diseases such as weak competitiveness, low productivity, legal uncertainty, corruption, complex bureaucracy, and high transaction costs.

In such a situation, the rupiah does not require a major crisis to weaken. An imbalance between the demand for and supply of foreign exchange is enough to gradually pressure the exchange rate. Indonesia continuously requires dollars to pay for raw material imports, capital goods, energy, international services, foreign debt instalments, and various cross-border transactions. At the same time, the ability to generate foreign exchange through exports, foreign investment, tourism, and other international economic activities has not developed as quickly as these needs.

As long as foreign exchange inflows are smaller or more fragile than the demand for dollars, the rupiah will remain under pressure. This is not solely the fault of Bank Indonesia, but a consequence of national economic policies that have long ignored the strengthening of the external sector.

Trapped in an Inward-Looking Orientation

One of the fundamental weaknesses of the Indonesian economy is its overly strong inward-looking orientation. With a very large domestic market, entrepreneurs can grow and profit without having to compete in the international market. The domestic market has become a comfort zone for many national companies.

In the 1980s and 1990s, Indonesia attempted to strengthen outward-looking policies. Industrialisation was directed towards increasing exports, expanding markets, and generating foreign exchange. However, as development progressed, many business players returned to using the domestic market as their primary mainstay.

An inward-looking orientation can indeed create jobs, corporate profits, tax revenue, and gross domestic product growth. However, these activities do not always bring in foreign exchange. In fact, if the production process depends on imported machinery, technology, raw materials, and components, domestic market growth can actually increase the demand for dollars.

This is the paradox of the Indonesian economy. The domestic market grows, consumption increases, companies book profits, and the economy continues to develop, but at the same time, import needs increase and the rupiah continues to weaken. Economic growth that is hungry for imports without a comparable export capability will exacerbate pressure on the exchange rate.

Therefore, Indonesia must return to building an outward-looking orientation. We need more companies that achieve…