Indonesian Finance Minister Sri Mulyani Faces A Mounting Economic Storm

In early March, Indonesia's President-elect Prabowo Subianto spoke of the 'good, prudent economic and fiscal management' that has brought growth and stability during President Joko' Jokowi' Widodo's two terms in power since 2014.

Prabowo, the serving Defence Minister, has pledged to maintain this positive trajectory. He will be inaugurated in October of this year, but plans are already underway for the first hundred days of his administration.

However, one key question yet to be answered is what the future holds for Sri Mulyani, Indonesia's Finance Minister since 2016 and a former managing director at the World Bank.

Known for her iron-like grip on the country's public finances, doubts have emerged recently as the rupiah slides against the dollar and her customs reforms come under attack from Indonesian importers and exporters alike.

Mulyani is, in many ways, the consummate technocrat. She cut her teeth at USAID before stints at the IMF and World Bank. She served as Finance Minister first under Susilo Bambang Yudhoyono (SBY) between 2005 and 2010, winning international plaudits for her focus on restraining public spending to reduce Indonesia's debt.

Having entered the last months of her tenure, Mulyani must face two policy predicaments.
In recent weeks, Indonesia's Customs and Excise office, which is responsible for the finance ministry, has been mocked on social media after it was revealed that several braille keyboards imported from South Korea had been held at Jakarta's Soekarno-Hatta International Airport for more than two years.

The reason? Because their intended recipient, a school for visually impaired children in South Jakarta, had been unable to pay the customs office a tax of Rp 100 million (USD 6,200). Mulyani reversed course and ordered the release of the keyboards only when the injustice went viral.

Critics say that under Mulyani's tenure, the finance ministry has empowered the Customs and Excise office to intimidate – even bully – Indonesian businesses and charitable organisations in its quest to boost revenues.

These harsh measures are considered unjust, given that tax evasion by those with the means to do so is still rife in Indonesia. At the same time, small-time importers face the finance ministry's full force for minor regulation breaches.

As Indonesia attempts to grow its tourism sector, which currently constitutes less than 3% of the economy, many argue that such a heavy-handed approach will deter foreign nationals from coming to Indonesia for business and pleasure. In turn, the finance minister is being asked to think again.

While the social media storm rages, Mulyani also wrestles with the fallout of an emerging currency crisis.

In early May, she had to confirm that the rupiah has depreciated by 2.89% against the US dollar in the year-to-date, pushing her ministry to resort to market interventions (so-called 'monetary instruments') to prop up the currency's value.

There are fears that an ever-weakening rupiah will further stoke inflation as exports purchased with dollars become more expensive. Indeed, Reuters reported in late March that Indonesia's annual inflation had accelerated by more than expected to 3.05%, the most significant jump since August 2023.

Import inflation will further undermine the purchasing power of the poorest Indonesians, who spend a far greater proportion of their household budgets on food and fuel. Food prices have been up by more than 10% since March 2023, with the surging price of rice a particular concern for consumers.

Mulyani and the Indonesian Central Bank are, therefore, facing calls to hold off on interest rate cuts, with inflation heading in the wrong direction. A toxic mix of high interest rates and high prices certainly threatens to diminish Indonesia's hard-won international credibility.

Suppose Mulyani can turn the situation around, safeguarding the rupiah and reforming Indonesia's rigid customs system. In that case, she stands a greater chance of continuing in her post under Prabowo. If not, she will leave her successor with a very difficult in-tray.