Jakarta, IO – Bank Indonesia (BI) Board of Governors meeting on April 23-24 came to a decision to increase its benchmark interest rate, simply known as “BI rate”, by 25 basis points (bps), thus rising to 6.25 percent. The policy was made partially in response to the rapid depreciation of the Indonesian Rupiah against the US dollar, which has breached the psychological level of Rp16,000 per USD, since April 16. Indeed, it was a highly dilemmatic decision amid efforts to promote economic growth – a bitter but necessary pill to swallow in a bid to maintain the stability of the Rupiah exchange rate, especially against the US dollar as the world’s reserve currency.
The outbreak of a direct Iran-Israel conflict on April 1, after Israel’s attack on the Iranian consulate in Damascus, Syria, added to the negative sentiment that had beset financial markets. The open conflict also risked destabilizing the Middle East and plunging the strategically important region into bloody wars, making the geopolitical situation increasingly fraught. Therefore, it became critical that BI and the government anticipate and mitigate the Rupiah depreciation through synergistic and well-targeted policies. One such measure is BI’s interest rate hike, aimed at reducing the volatility caused by the Rupiah slide. Of course, both BI and the government should not stop here. It needs to be followed up by other monetary and fiscal policy measures.
The urgency of Rupiah stabilization
Stability is a prerequisite to realize high and sustainable economic growth. Therefore, in such a highly uncertain global economic situation, in the wake of the Israel-Iran conflict, efforts to stabilize the economy have taken precedence over strategies to accelerate economic growth. In fact, this has actually been a difficult choice, as it seems as if the economic growth target is being sacrificed in the pursuit of economic stability. However, in reality it should be noted that there will be no high and sustainable economic growth without economic stability – particularly monetary stability. Amid a persistent global economic slump and increasingly tense geopolitics, stability is an absolute prerequisite to maintain economic growth.
One of the major indicators of economic stability is the currency exchange rate; in this case, we are talking about the Rupiah versus the US dollar. If we look at the trend, the Rupiah exchange rate has been on a steady downward slope since the beginning of 2024. This is not surprising, given that Indonesia’s economy is facing a number of challenges, both fundamental- and sentiment-wise. Fundamentally, a narrowing trade surplus has eroded economic actors’ confidence toward the strength of the Rupiah, especially for foreign investors who are inclined to move their investment portfolios to developed countries, as opposed to increasing their investment in Indonesia. Meanwhile, in terms of sentiment, Indonesia held crucial elections on February 14 – and domestic political temperature would normally heat up during the election season. This explains the Rupiah volatility.
The economic growth rate is another key indicator. Without robust growth, optimism among economic actors, especially domestic and foreign investors in various economic sectors, will dim. Therefore, it is very important that the government ensures its economic growth target is met or even exceeded. However, it is equally important to ensure that robust economic growth is the rule rather than the exception.
The achievement of stable and high economic growth must be sustained over a lengthy period, so it can serve as a track record and reference for investors. Of course, maintaining high economic growth is not easy, because it requires monetary stability. This means that growth and stability are two sides of the same coin that must be simultaneously maintained. In fact, it could be said that there can be no growth without underlying stability, because it will be difficult to accelerate the economy since the focus of all policies will be directed toward keeping monetary indicators stable at a desired level.
Strategies to spur economic growth and efforts to maintain monetary stability should ideally receive equal attention in policymaking. However, because sustained economic growth can only be achieved if there is a certain degree of monetary stability, it can be said that stability is a prerequisite for growth. It will be difficult for Indonesia to foster economic growth in the medium and long terms if it cannot ensure short-term monetary stability. This is why the recent Rupiah stabilization measure is of such urgency.
The costs of Rupiah stabilization
Rupiah stabilization will certainly incur “costs”, the biggest of which is the correction of the economic growth target that has been set forth by the government. This is because a monetary stabilization policy is generally carried out by adjusting interest rates, which in turn restricts the government’s maneuvering space to take necessary economic acceleration measures and achieve its target.
A weak 2024 global economy will surely impact Indonesia’s economy, which has in fact been buffeted by global uncertainty since the beginning of the year. A number of the country’s foreign trade partners, from the US, EU, China, to neighboring Asean countries, are all suffering economic slowdowns, at various levels. This situation certainly impairs the ability of the international trade sector to generate much-needed foreign exchange earnings. Moreover, the Rupiah exchange rate in Budget (APBN) 2024 macro assumptions was set at an optimistic level, namely, Rp15,000 per US dollar. Thus, even though BI did not specifically target the currency exchange rate, when the Rupiah slid further from the APBN benchmark in the first quarter of the year, it was forced to intervene in order to defend and stabilize it.