Indonesia’s minister of finance Sri Mulyani spoke to The Banker on the sidelines of Asia House’s “In Conversation” event in London last week to discuss the country’s roadmap to membership of the OECD, the impact of geopolitical fragmentation on regional trade, and the country’s climate change priorities.
The interview has been edited for clarity and length.
A: The principles of the OECD — based on good governance, including anti-corruption — should create more certainty for business climate and investment. Being part of the OECD will create more or less an expectation, which will allow Indonesia to overcome the perception risk (related to country risk or other risks) which is usually important in attracting foreign direct investment. That’s definitely what we are expecting to see.
Indonesia has been doing quite a lot of this reform because we believe it is good for our own economy and people, not just because we want to comply with a certain principle. The OECD’s conditionality steps must be complied with, which is quite wide-ranging on the fiscal side, including a lot of regulatory framework, policy and practices, which is standardised within the OECD.
The good side of this process is that Indonesia doesn’t have to start from scratch. Secondly, we don’t have to invent the process of the wheel by ourselves, but it is already the standard practice adopted in the 38 OECD countries. That will help accelerate more reform which will be good for Indonesia.
A: If we manage things consistently, 5 per cent growth is our expectation. It is not the level that we want: we want to have higher growth, like 6 per cent.
Five per cent, with our track record, should be a baseline for the new government. The challenge is, of course, consistency in managing the balance of so many needs such as the need to invest more in human capital, in education, in food security. These are all going to be huge demands. The revenue cannot be kept up immediately, so the government really has to make sure that this balance is going to be right. At the same time, geopolitics continues to become a factor.
A: With geopolitical risks, the idea of globalisation effectively no longer exists, because it is no longer the market that is governing decisions. What is deemed “good”, efficient, and best for both producers and consumers becomes more of a security concern, like whether it is too vulnerable for you to be dependent on a certain country and so on.
It is no longer taken for granted that the supply chain and global value chains — which were governing globalisation in the past two to three decades — can actually work. That will definitely affect the members of the Association of Southeast Asian Nations. For Indonesia, it can be that both climate change and geopolitics provides opportunity, because we are non-aligned in our foreign policy. We are working closely with all parties and stakeholders. But it can definitely create a very large setback in the short term, if you suddenly cannot transact or trade or have an investment relationship because a group of countries has an embargo and it becomes a process of stop and go, stop and go.
We all hope for the best that the US and Europe’s relationship with China, and even Russia, is going to be settled in an amicable way to create better coexistence. Indonesia is going to be quite open; we will work with all parties.
A: Climate change has been mainstreamed into Indonesia’s policy. It’s not that every issue has been proposed or has been implemented separately, but that there is a co-ordinated effort in which the national determined contribution — our contribution to cutting CO2 emissions — is mainstreamed into Indonesia’s national development plan. We have cascaded it down to the sectoral level, as well as local government.
On climate change, the biggest contribution for Indonesia is forests, forest management and land use. This ensures that the forests that we have will be managed according to this climate change compliance, and land use refers to the agricultural needs which are to be continually improved in terms of CO2 emissions.
Secondly, energy is very important. Energy has become very expensive because building renewables costs a lot, building the transmission costs a lot and retiring fossil fuels like coal also costs a lot. It is cascading down from Indonesia’s climate commitment at the national level, and then cascading down to the sectoral and regional level.
Now, it’s a question of financing and some policy change that still needs to be formulated. For example, improving renewables, and what it means in terms of building the transmission, especially because we are an archipelago country it is going to be very expensive, going under the sea, and so on. It’s more about discussing it in very technical, financial detail. That’s where we work together with many of the multilateral development banks, like the Asian Development Bank, the World Bank and the Asian Investment Infrastructure Bank. We also work with the private sector to create a country platform for this transition.
MDBs are explaining and responding to shareholders and borrowers about how climate finance is one of the biggest obstacles in achieving climate commitment goals. MDBs are now upsizing and increasing their financing power, like the World Bank through their capital adequacy framework and balance sheet optimisation.
I was in Riyadh — the Islamic Development Bank wants to create concessional financing specifically for climate change. And the ADB is also working on their balance sheet; they have $100bn in new funding over the next 10 years to support Asia and the Pacific. MDBs also commit that new financing will be more focused on climate change. As well as risks, the challenge is about how to prepare a project or programme. Challenges need to be not only discussed, but overcome, for us to really unleash the financing power from the MDBs’ own balance sheet, as well as the private sector.
A: Indonesia is quite unique in terms of the way it manages inflation, compared with many advanced economies, where inflation is seen as more of a central bank issue. If it is just about the demand side, then it is the central bank that is responsible for managing inflation. In Indonesia, we recognise that inflation is driven by growth structures and not purely from the demand side.
The phenomena of inflation today is also because of many disruptions on the supply side, like geopolitical events such as oil prices suddenly doubling overnight because of war and cooking oil like sunflower oil increasing because of the embargo on the movement of shipments. Within the context of more disruption on the supply side, you cannot use your tool on another side to control the demand side, you must address the supply side.
The Indonesian government participates very actively in this — like myself as the minister of finance, together with the minister of interior affairs — controlling and monitoring inflation quite intensively. For example, inflation continued in some regions in Indonesia which may have been flooded, causing disruption on the distribution side, which may then significantly increase food prices, and that can contribute to inflation.
We control inflation in a way that’s been institutionalised and that’s why inflation in Indonesia has been down because of this joint effort by the government to address the structural issues.
