Fiscal Expansion Creates Tension Between Government and Bank Indonesia

Conflicting Monetary and Fiscal Policies

Indonesia's aggressive fiscal expansion in 2025 has created significant challenges for monetary policy management. The government's large budget deficit, potentially exceeding the 3% GDP limit, has put pressure on Bank Indonesia (BI) to maintain macroeconomic stability while supporting government financing needs.

The Fiscal-Monetary Policy Dilemma

Senior researcher Deni Friawan from CSIS highlighted that the government's fiscal expansion has constrained BI's monetary policy effectiveness. The massive issuance of State Securities (SBN) to finance the deficit has forced BI to intervene in the market to maintain SBN prices. This intervention has created a dilemma for BI, as it must balance between injecting liquidity through SBN purchases and absorbing excess liquidity through the issuance of Bank Indonesia Rupiah Securities (SRBI).

Criticism of SRBI Policy

Finance Minister Purbaya Yudhi Sadewa has criticized BI's SRBI policy, arguing that it absorbs market liquidity despite government efforts to inject funds into the banking system. The government had previously injected Rp276 trillion into banks to boost money circulation. Deni Friawan countered that BI's actions were necessary to maintain macroeconomic stability, suggesting that the real issue lies with the government's 'reckless' fiscal management.

BI's Policy Measures

BI has implemented various policy measures to maintain stability and support growth. These include: 1. Purchasing SBN in the secondary market, totaling Rp327.45 trillion by December 16, 2025; 2. Issuing SRBI to manage liquidity; 3. Providing FX swap and repo facilities to banks with accumulative values exceeding Rp1,000 trillion.

Implications and Future Outlook

The current fiscal-monetary policy dynamic highlights the need for better coordination between the government and BI. While the central bank has supported government financing through SBN purchases, the conflicting policy objectives have created market distortions. Moving forward, experts suggest that fiscal discipline is crucial to enabling more effective monetary policy and maintaining macroeconomic stability.