Rediscovering Fiscal and Monetary Harmony in One Breath

There are times when a nation is not short of ideas, but rather has lost its rhythm. Every institution works, every policy is announced, and every figure is defended with its own reasoning. Yet, somehow, all that effort does not translate into forward movement. Like a boat with two equally strong rowers paddling at different tempos, energy is expended and water is parted, but the destination feels no closer. Perhaps the problem with development does not always lie in a lack of instruments. Often, the issue is the inability of those instruments to speak in one language. More than twenty years ago, I wrote a thesis on the importance of fiscal and monetary coordination in the era of Bank Indonesia’s independence. At that time, the central bank’s independence was a new construct, guarded with great caution. The 1997–1998 crisis had left deep scars: inflation, a weakening rupiah, a collapse of confidence, and fears that monetary policy could once again become an extension of short-term political interests. Therefore, central bank independence was an important historical correction. However, even then, I believed one thing: independence must not be interpreted as solitude. The freedom to determine instruments should not mean a separation in determining direction. After all, the government and the central bank ultimately guard the same house, even if they stand at different windows. Today, that question has found renewed relevance. Indonesia needs more than just stability. It needs a growth leap to create quality jobs, strengthen the middle class, build industry, and escape the middle-income trap. Stability remains the foundation, but a foundation is not built so that a house remains a concrete slab. Above it must stand the spaces of life: investment, productivity, job opportunities, and welfare. This is where the relationship between the government and Bank Indonesia needs to be placed within a more mature framework. Fiscal and monetary policies are not two separate worlds. Government spending affects aggregate demand, liquidity, inflation, and bond yields. Interest rate policy affects the cost of financing the state budget, credit, investment, the exchange rate, and the room for business expansion. When one moves, the other feels the vibration. If the government is accelerating investment but credit transmission is stalled, the fiscal leverage becomes smaller. Conversely, abundant liquidity will not automatically transform into growth if it does not meet viable projects, policy certainty, and a clear development direction. Growth requires a fiscal path that opens the way and a monetary policy that ensures the economic vehicle can move forward without losing control. Indonesia’s legal framework actually provides room for such a relationship. Bank Indonesia is protected from interference in the execution of its duties. However, the inflation target is set by the government in coordination with Bank Indonesia. Bank Indonesia is also given the space to coordinate policies with the government, authorities, and relevant stakeholders. The elucidation of the Financial Sector Development and Strengthening Law (P2SK) even affirms that coordination between the government and Bank Indonesia to mitigate the impact of a crisis, accelerate economic recovery, and maintain financial system stability is not categorised as interference. Thus, our law does not build a wall. It draws a boundary, but simultaneously provides a door. The question is whether that door is only opened when the fire of crisis has grown large, or when the first thin smoke is seen. The experience of several countries shows that institutional closeness between the central bank and the government does not automatically eliminate credibility. The Bank of England is fully owned by the British government. The government sets the framework and inflation target, while the central bank has operational independence in determining the instruments to achieve it. This model shows that government ownership, public accountability, and technocratic freedom can coexist within one institutional structure. Japan offers another variation. Approximately 55% of the Bank of Japan’s capital comes from the government. However, this ownership does not grant the right to control the central bank’s management to the certificate holders. The government is within the ownership structure, but monetary decisions are carried out through a separate legal framework and governance. India presents an interesting bridge between these models. The Reserve Bank of India has been fully owned by the Indian government since nationalisation. Its board of directors is also appointed or nominated by the government under the law. Yet, this institutional and ownership closeness runs alongside a formal and increasingly modern monetary policy framework. The RBI’s mandate does not stop at price stability. Its official formulation places price stability as an important objective while keeping in mind the objective of growth. India’s Monetary Policy Committee consists of six members: three from the RBI and three external members appointed by the central government. India demonstrates that the relationship between the government and the central bank does not have to be read as a contest to determine who is more powerful.