Policy U-turn raises questions over fiscal coherence

Finance Minister Purbaya Yudhi Sadewa's recent decision to withdraw Rp 75 trillion (US$4.5 billion) from state-owned banks has reignited concerns over the coherence and consistency of Indonesia's fiscal strategy.

Purbaya last year placed surplus state funds in state-owned lenders, initially amounting to Rp 200 trillion before being expanded to Rp 276 trillion. The policy had been intended to accelerate credit distribution to the real sector by boosting banks' liquidity. However, in January, the finance minister reversed course, pulling back Rp 75 trillion from the banking system.

The abrupt shift has prompted questions over whether fiscal policy is being guided by a clear, coordinated strategy or adjusted through rapid trial and error.

Part of the initial fund placement took place on Nov. 10, 2025, when Rp 76 trillion in excess budget balance (SAL) funds previously held at Bank Indonesia were transferred to Bank Mandiri, BRI, BNI and BTN. The Finance Ministry framed the move as a continuation of earlier placements that it said had achieved absorption rates of more than 94 percent, equivalent to around Rp 188 trillion.

Taken together, the policy reflected the minister's belief that aggressively injecting liquidity into state-owned banks would accelerate financial intermediation and translate fiscal resources more quickly into economic growth.

Yet the results fell short of expectations. Bank Indonesia data show that credit growth stood at just 7.36 percent year-on-year around two months after the initial placement, a modest outcome given the scale of funds injected into the banking system. The lackluster performance reinforced concerns that the policy had limited impact on stimulating lending.

Borrowing costs also remained stubbornly high. Average bank lending rates stood at 8.96 percent as of November 2025, despite Bank Indonesia's benchmark policy rate being set at 4.75 percent. High lending rates continue to weigh on business expansion, constraining firms' ability to invest. An internal survey by the Indonesian Employers' Association (Apindo) found that 43.05 percent of business owners cited high bank lending rates as a key obstacle to scaling up their operations.

The wide gap between the policy rate and commercial lending rates has highlighted the weak transmission of liquidity-driven stimulus to the real economy. Despite ample funds in the banking system, credit remains expensive and difficult to access, suggesting that banks have been slow to pass on lower funding costs to borrowers. As a result, fiscal injections have bolstered bank balance sheets without delivering a commensurate boost to business activity.

Purbaya has attributed the underwhelming outcome to weak coordination between fiscal and monetary authorities, arguing that government and central bank policies have yet to operate in sync. He rejected Bank Indonesia's view that sluggish credit growth reflects weakening demand, instead pointing to the banking sector's slow transmission of liquidity.

To his credit, the finance minister has acknowledged that the strategy did not deliver the expected results, a rare admission in fiscal policymaking. He subsequently withdrew Rp 75 trillion from the banks and redirected the funds toward state spending to stimulate growth through other fiscal channels.

However, the rapid pivot from liquidity injections to expenditure-driven stimulus underscores a deeper concern. Frequent policy reversals risk creating the impression that economic management is being recalibrated on the fly, with limited coordination across institutions. While responsiveness is preferable to denial, repeated adjustments can undermine policy credibility.

Ultimately, this episode is less about liquidity than about confidence. When fiscal policy expands and contracts within a short period, markets are left uncertain whether decisions are driven by careful analysis or improvisation. Acknowledging missteps is important, but effective economic management also requires foresight, coordination and clearly defined objectives. Without these anchors, large-scale interventions risk becoming costly experiments at a time when the economy needs predictability rather than policy volatility.