Analysts: Ambitious Prabowo needs Sri Mulyani to sustain Indonesia’s hard-won fiscal credibility

After holding their breath for nearly eight months, Southeast Asia investors and economists heaved a sigh of relief when Indonesia’s “rock star” economist, Sri Mulyani Indrawati, announced she was asked to stay on as finance minister in the new government.

The Indonesian rupiah and Jakarta Composite Index rose after the finance minister’s  news on Oct. 15, because she’s renowned globally for her domestic economic reforms and tight control of public spending.

Few had expected that new President Prabowo Subianto would choose the no-nonsense Sri Mulyani. The two quarrelled many times while he was defense minister in the previous cabinet – she had disapproved of how he spent money. 

But reappointing her was a necessity and not a choice, because investors spooked by his pricey projects needed reassurance about his government's fiscal prudence, economist Muhammad Andri Perdana indicated. 

Sri Mulyani now faces probably one of the biggest challenges in her career –  ensuring financial stability while her former adversary and current president, who has professed an inclination for debt-led public spending, implements his expensive projects.

“The primary reason for her reappointment, in my view, is market confidence,” Muhammad Andri, who directs research at the Bright Institute, a Jakarta think-tank, told BenarNews.

Investors have approvingly  noted that the finance minister is a pragmatic policymaker, said David Sumual, chief economist at Bank BCA in Jakarta.  

“Throughout Sri Mulyani’s tenure, Indonesia’s fiscal prudence has been notable,” he said.

“She has been meticulous in maintaining the fiscal deficit below 3% of GDP, and safeguarding the nation’s financial and economic stability.”

Under the Joko “Jokowi” Widodo administration, the finance minister kept a rein on the budget deficit even as spending increased for the then-president’s ambitious infrastructure projects.

For Prabowo, his big project is to provide a free breakfast and lunch for all school students.

He hopes the plan will drastically reduce stunting,  a condition affecting one in three Indonesian children, according to government data.

While the idea was popular among voters, economists warn that sustaining it would require careful budget management.

The free lunch program, which has been allocated 71 trillion rupiah (U.S. $4.49 billion) for 2025, could cost anywhere between $12 billion and $28 billion annually when it scales fully.

Golden résumé

Sri Mulyani’s credentials are formidable. 

She held the finance minister post in 2005 for the first time, under former President Susilo Bambang Yudhoyono (SBY), and then again during Jokowi’s two terms starting 2016. She has never belonged to a political party or shown any political ambition. 

She also served as a managing director at the World Bank and executive director at the International Monetary Fund, experiences that have given her a global outlook on economic policy.

Her tenure as finance minister is often credited with steering Indonesia through turbulent times, such as the 2008 global financial crisis and the economic fallout from the COVID-19 pandemic. 

Sri Mulyani got things done, The Interpreter, a website run by Australian think-tank The  Lowy Institute, said in an analysis piece published 2016.

“She has a reputation for being smart, honest, a straight-shooter, and decisive. Some would add that she is ‘strongly opinionated’,” the article said.

Perhaps that’s why the 62-year-old has been dubbed “Rock Star” and “Iron Lady,” and news of her position in government literally moves markets.

The day she resigned as SBY’s finance minister, in 2009, the Jakarta Composite Index closed 3.8% lower, which was at that time the steepest drop in 17 months, reported The Wall Street Journal and Bloomberg. 

Still, Sri Mulyani has her critics.

Jaya Darmawan, an economic researcher, said that Sri Mulyani’s approach lacked equity.

“Rather than targeting super-wealthy individuals or resource companies, her policies have focused on taxing local goods,” Jaya, with the Center of Economic and Law Studies (CELIOS), told BenarNews.

“This is an unjust fiscal policy,” she said, adding that a proposed reduction in corporate taxes to 20% from 25 was being seriously discussed.

Another economist, Yusuf Rendi Manilet, said that under Sri Mulyani, Indonesia’s tax collection had struggled to meet growing financial needs.

“The government’s ability to generate tax revenue has been lacking. [And] the limited capacity … has led to a reliance on debt,” said Yusuf, from the Center of Reform on Economics (CORE). 

“Ideally, the debt-to-GDP ratio should be decreasing, but instead, it’s steadily rising, placing a heavier strain on the economy.”

Indonesia’s debt-to-GDP ratio has risen in recent years, with debt servicing costs such as interest payments now consuming nearly 40% of the national budget. 

And yet, the new president has said more than once – to investors’ and economists’ consternation – that he did not have a problem raising the debt-to-GDP ratio further, to 50%, from the current nearly 40%.

“Prabowo has often spoken about Indonesia’s debt levels as low relative to global norms, though this isn’t accurate,” said Bright Institute’s Muhammad Andri.

A Nov. 8 review by two Indonesia scholars of Prabowo’s early weeks as leader, described the Indonesian president, a former general, as reluctant to delegate authority.

His aim is to achieve economic growth of 8% in his first term, up from the current 5%, but he lacks a clear roadmap, wrote Yanuar Nugroho and Made Supriatma for Fulcrum Analysis on Southeast Asia, a publication of Singapore’s ISEAS-Yusof Ishak Institute.

“Prabowo’s leadership style, which is centralized and militaristic, may be less effective in the collaborative environment required for policy formulation and execution,” they wrote.

And amid such challenges, the “straight-shooter” Sri Mulyani has to ensure Indonesia does not lose its hard-won fiscal credibility, which analysts say her work of more than a decade made possible.