Post-Sri Mulyani, Indonesia’s Unrestrained Growth Ambitions Carry Serious Risks

The sudden ouster of Finance Minister Sri Mulyani Indrawati in September marks a turning point for Indonesia’s economic policy. Known for her fiscal prudence and credibility, Sri Mulyani anchored Indonesia’s public finances for nearly two decades. Her unceremonious exit after the violent protests in August has raised concerns about the direction of fiscal policy under her successor, Purbaya Yudhi Sadewa.

Prabowo’s populist programmes were initiated under Sri Mulyani’s tenure, but his insistence on continuing such policies underscores Indonesia’s need for a steady and credible hand like hers. Sri Mulyani’s presence in Prabowo’s Cabinet would have helped bolster investors’ confidence amidst Prabowo’s questionable policy choices and top-down governance style.

Indonesia is grappling with widespread job insecurity and a declining middle class, partly due to its sluggish economic growth. President Prabowo Subianto’s populist programmes, such as free nutritious meals (Makan Bergizi Gratis or MBG) and red-and-white cooperatives, aim to boost growth and jobs, but at most will generate narrowly-focused rather than broad-based economic activity and welfare benefits. In the meantime, the huge spending on these populist programmes risks seriously misallocating the budget. Frustrations over the rising cost of living and stagnant real wages have amplified public discontent. Against this backdrop, Minister Purbaya inherits a complex challenge of restoring public trust in government fiscal management and ensuring market confidence.

The August protests were a reminder that public frustration runs deeper than short-term economic gains; people want jobs, affordable cost of living, and clarity about how public money is being used. Rebuilding that trust will require more transparency in the state budget and clearer communication of policy priorities.

Purbaya, in contrast with Sri Mulyani’s known conservative fiscal management, has adopted a more expansionary tone, promising to inject more liquidity into the economy to achieve higher growth. His approach appears to support President Prabowo’s ambition to turbocharge growth to 8 per cent, far exceeding the long-term trend of 5 per cent.

The most immediate move by Purbaya was transferring IDR 200 trillion (US$12 billion) of government cash reserves, or 62.5 per cent of the total contingency funds, from Bank Indonesia (the central bank) to five state-owned banks to accelerate lending and spur economic activity. Banks are instructed to use the funds strictly for credit, not to buy government bonds — which the central bank has also been asked not to sell. Yet, it is unclear how state banks transmit the extra liquidity into real lending to businesses and individuals in a climate where the private sector remains cautious and consumer’s appetite for credit remains sluggish. In fact, despite Bank Indonesia having eased its policy rate since September 2024, credit growth remains weak (Figure 1). This diverges from previous experiences when lowering the policy rate was followed by a spike in the credit growth (2015-16 and 2020).

Figure 1: Unlike the Historical Trend, Lower Policy Rate Since September 2024 Has Not Led to Higher Credit Growth

With high political pressure to lend, the additional funds injected into the banking system could potentially flow into risky loans, raising the risk of non-performing loans. 

In addition to using its reserve account in the central bank, the government is also increasing its spending posture. According to the 2026 budget, which was formulated under Sri Mulyani and finalised and approved under Purbaya, fiscal policy is set to be expansionary to supposedly support employment, consumer demand, business activities, and overall economic growth next year via Prabowo’s priorities, such as MBG, red-and-white village cooperatives and the three million housing programme (Table 1). 

Table 1: Indonesia’s Budget Allocations and Prabowo’s Priorities (IDR Trillion)

	Type of expenditure	2025 Budget	Share (%)	2026 Budget	Share (%)	Growth 2025-26 (%)
1	Education	723	20	769	20	5
2	Social protection	505	14	508	13	1
3	Defence	373	10	425	11	14
4	Energy security	422	12	402	10	-5
5	MBG*	171	5	335	9	96
6	Health	198	5	244	6	23
7	Food security	155	4	164	4	6
8	Village cooperatives	16	0	83	2	419
9	Housing	40	1	58**	2	43
	Total	3,621	100	3,843	100	6

At the same time, the budget revenue outlook remains weak. Indonesia’s tax-to-GDP ratio fell to 8.42 per cent in the first half of 2025, down from 9.49 per cent in the same period last year. Diversion of state-owned enterprise dividends to newly-formed sovereign wealth fund Danantara and low global commodity prices will put additional strains on state revenue. Consequently, the government projected a higher deficit of 2.68 per cent of GDP in 2026 compared to 2.53 per cent for 2025 and 2.29 per cent for 2024.

With limited fiscal space, funding for populist programmes, such as MBG, is not only costly but also at risk of not being absorbed because of a lack of institutional readiness to implement. With only three months left, MBG has used less than one-third of the budget allocated.

The government has planned to increase debt closer to the constitutional limit to support spending needs. However, borrowing more does not necessarily lead to an increase in fiscal space, unless government revenue grows faster than debt service, which currently stands at a hefty 35 per cent of revenues. In fact, borrowing more to finance new expenses may lead to unsustainable debt structure. Incorporating SOEs debt into total government debt would raise current total public sector debt to GDP to 77 per cent, which far exceeds the 60 per cent constitutional limit for the total-government-debt-to-GDP ratio (Figure 2). The true debt situation is difficult to ascertain because SOEs debt may hide government’s overall debt burden, especially since the government uses them for off-budget financing.

Figure 2: Public Corporation & Government Debt to GDP Ratio

Another policy risk to watch is Bank Indonesia (BI) “burden-sharing” deal with the Ministry of Finance. The scheme has two components: 1) BI purchases government bonds in the secondary market to inject liquidity and to support national programmes; 2) BI shares part of bond coupon payments or raises the interest rate paid on government deposits to help ease the government’s sovereign debt servicing burden (“debt service subsidies”).

The “burden sharing” measure, which was meant to be used temporarily during the Covid-19 pandemic, aims to relieve fiscal strain but has revived concerns about the erosion of central bank autonomy and blurring of monetary-fiscal boundaries. The arrangement risks setting a precedent for quasi-permanent central bank financing of government programmes. This will constrain BI from fulfilling its core mandate, which is maintaining financial stability and keeping inflation under control. All of these could erode investors’ confidence.

The government’s shift toward looser fiscal and monetary policies is understandable. After years of cautious budgeting, there is a strong political appetite to deliver visible results and reignite growth. Yet Indonesia’s longstanding reputation for fiscal discipline and an independent central bank has been hard-won, and this reputation needs to be safeguarded.

Markets are already signalling unease. The widening credit default swap spreads and a weaker rupiah have prompted investors to question whether the government’s aggressive spending will undermine stability. The sovereign risk premium is rising, reflecting growing concern over the direction of economic governance. In turn, this will also increase the debt servicing cost of new borrowings. For Indonesia, chasing higher real GDP growth above 5 percent makes little sense if it comes with higher inflation and eroding confidence. The August protests were a reminder that public frustration runs deep; people want jobs, affordable cost of living, and clarity about how public money is being used. Rebuilding that trust will require more transparency in the state budget, clearer communication of policy priorities, and stronger coordination across government ministries and agencies. Without these, the government risks not only unsettling markets but also testing the patience of an already restive public.

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