Indonesia's budget and its central bank are pulling in opposite directions

Indonesia's economy is under heavy pressure, and a new analysis points to an unusual reason: the government's two main economic tools are working against each other. "Fiscal policy" is how the government taxes and spends. "Monetary policy" is how the central bank, Bank Indonesia, sets interest rates and controls the supply of money. They are supposed to move together. Right now, East Asia Forum writes, they are out of step, and the country is paying for it.

The signs are hard to miss. Since Prabowo became president in late 2024, the rupiah has lost about 14 percent of its value and the Jakarta stock market has fallen more than 26 percent. In June 2026 the rupiah touched a record low near 18,190 to the US dollar, which pushed Bank Indonesia to raise interest rates to defend it. Meanwhile the country's balance of payments, the total flow of money into and out of Indonesia, swung to a deficit of about US$9 billion.

The core problem is bad timing. The government made sharp, sudden budget cuts, while the central bank poured extra money into a banking system that already had plenty, so the two pushed in opposite directions. In early 2026 government spending jumped 31.4 percent from a year before, but revenue grew only 10.5 percent. That gap is pushing the budget deficit toward the legal ceiling of 3 percent of GDP, a limit in place since 2003 that has long protected Indonesia's financial credibility. When investors see policy that looks confused, they grow cautious, and a weaker rupiah and higher borrowing costs follow. You can read the full East Asia Forum analysis here.

Why it matters

A weaker rupiah makes imported food, fuel, and medicine more expensive, so this reaches your shopping and your bills, not just the markets. If the deficit breaks the 3 percent limit, the government would have to cut spending or borrow more, and either choice touches jobs and public services. Watch whether the finance ministry and Bank Indonesia start sending the same message; until they do, expect more currency swings.