Safeguarding the Rupiah, Safeguarding Growth

After strengthening for several days following Bank Indonesia’s decision to raise the BI-rate to 5.75%, the rupiah’s exchange rate against the US dollar has again weakened to around Rp17,950. This raises the question of whether Bank Indonesia has been aggressive enough in its monetary policy. However, a more important question is whether we are trying to treat the cause of the problem or merely alleviating the symptoms. In recent months, Bank Indonesia has taken various steps. The benchmark interest rate was raised, yields on Bank Indonesia Rupiah Securities were made more attractive, and various monetary instruments were deployed to maintain rupiah stability. This policy is being implemented amidst an unfriendly global situation. The strengthening of the US dollar, geopolitical uncertainty, and shifts in the monetary policy direction of developed countries’ central banks are exerting significant pressure on nearly all emerging market countries. Although these measures have managed to curb short-term pressure and maintain market confidence, the rupiah’s depreciation has not completely halted. We must be bold enough to examine the more fundamental issues. If the rupiah continuously requires the ‘pain relief’ of ever-higher interest rates, the main problem may no longer lie within the realm of monetary policy. Exchange rates are ultimately determined by the supply and demand for foreign currency. When the need for US dollars grows faster than a country’s ability to generate them, pressure on the domestic currency is almost unavoidable. In such a situation, an interest rate hike can slow the depreciation, but it does not change the root cause. The pressure on the rupiah today largely reflects Indonesia’s structural economic problems. The Structural Problem So, what exactly is this structural problem? This is where the discussion on the exchange rate can no longer be adequately explained by monetary policy alone. Indonesia’s economic structure remains heavily dependent on imports of raw materials, capital goods, and energy. Meanwhile, the growth of value-added exports has not been able to match the increasing demand for foreign currency. Furthermore, foreign direct investment (FDI) has not grown as strongly as expected and has even shown a weakening trend since the third quarter of 2025. Additionally, some domestic funds are already seeking investment opportunities abroad. All these conditions mean that demand for the US dollar far exceeds its supply, causing continuous pressure on the rupiah. This means we are facing a problem with the economy’s capacity to generate foreign exchange sustainably. Such an issue cannot be resolved solely through monetary instruments, let alone by merely raising interest rates. The Consequences of Monetary Policy Monetary policy always has consequences. The higher the yields on Bank Indonesia instruments, the more funds are absorbed by the central bank. For the banking sector, these instruments become an attractive choice because they offer competitive returns with very low risk. As a result, liquidity tightens, and the incentive to channel credit to the real sector diminishes. This dilemma must be managed carefully. We must ensure that the policy to maintain exchange rate stability is implemented in tandem with sustaining economic growth. Therefore, the policy intended to protect the rupiah should not constrict the financing space for the real sector. I believe Indonesia’s current challenge is not choosing between stability or growth. The challenge is ensuring both can proceed hand in hand. The Importance of Policy Synergy To achieve both stability and growth, Bank Indonesia and the government need to synergise. Bank Indonesia must remain focused on maintaining monetary stability and controlling market expectations. At the same time, the government needs to accelerate structural reforms that genuinely enhance the national economy’s capacity to generate foreign exchange. Downstreaming policies must produce greater added value, not merely relocate processing sites. Investment needs to be directed towards sectors that strengthen national industry and create quality jobs. Foreign exchange earnings from exports must increasingly circulate within the domestic economy. Export-oriented manufacturing must once again become a primary engine of economic growth. In other words, the rupiah’s strength cannot depend on portfolio capital flows, which are highly sensitive to changes in global sentiment. Indonesia needs a more permanent source of strength: productivity, quality investment, and value-added exports. I believe Indonesia has all the prerequisites to achieve higher growth. Our economic fundamentals are relatively sound, fiscal space is maintained, inflation remains under control, and the potential of the domestic market is enormous. This entire foundation must be followed by the courage to undertake structural reforms. Indonesia’s policy challenge is not choosing between exchange rate stability and economic growth, but rather shifting the source of the rupiah’s strength from dependence on interest-rate-sensitive portfolio capital flows towards a more permanent supply of foreign exchange from value-added exports, quality FDI, and a surplus in external transactions. As long as this structural transformation remains unachieved, monetary policy will continue to be forced to work harder than it should, while fiscal and real-sector policies have yet to fully take on their role as the fundamental pillars of the exchange rate.