Peter Conti-Brown, a historian of the Federal Reserve at the Wharton School, recently issued a clear warning: the politicization of monetary institutions poses a serious threat to modern democracies. Such unease is emerging in today’s Indonesia.
In a Financial Times interview, Conti-Brown stressed that central banks lose credibility when they are staffed by figures acting more as presidential loyalists and followers of political narratives than as guardians of policy independence.
When a central bank loses its distance from political power, the historian noted, economic stability and public trust are inevitably put at risk.
The recent appointment of President Prabowo Subianto’s nephew as deputy governor of Bank Indonesia, the nation’s central bank, is not merely a personal controversy, but a symptom of a deeper structural problem.
It signals a rising tide of soft authoritarianism — a mode of institutional control that is orderly, legal and largely free of overt conflict yet gradually erodes the core principles of post-reform governance.
To be sure, there has been no explicit constitutional violation. Bank Indonesia’s governor has acknowledged that he proposed the candidate. Parliament moved swiftly: hearings were held, and approval was granted. The entire process appeared procedural, efficient and legally sound.
Yet, as Conti-Brown cautions, the central issue is not procedure alone, but power relations penetrating the heart of the monetary authority.
Soft authoritarianism does not rely on blunt coercion; it operates through normalization, rendering familial ties and political loyalty acceptable so long as formal rules are not violated.
When procedure trumps ethics
Since the early post-Reformasi period, Bank Indonesia has been designed as an institution independent from political power, as stipulated in Law No. 23 of 1999 and later reinforced by Law No. 3 of 2004.
This independence is not a privilege of technocratic elites, but a fundamental prerequisite for insulating monetary policy from the short-term interests of ruling regimes. Exchange rate stability, inflation control and the credibility of monetary policy all hinge on a clear separation between the central bank and political authority.
Economic literature has long shown that independent central banks tend to deliver lower and more stable inflation, as well as better-anchored market expectations. However, when a president’s nephew occupies a strategic position within Bank Indonesia, concerns over conflicts of interest and nepotism are inevitable.
Even if the appointment is procedurally sound and the candidate is technically qualified, familial ties raise unavoidable ethical questions — because in modern governance, perception matters as much as formal legality.
This is where soft authoritarianism becomes visible. Power operates not through overt repression, but through procedural dominance and the normalization of political loyalty.
Party elites cite the appointee’s resignation from political office; the central bank governor submits the name; parliament moves swiftly with hearings and approval — everything appears orderly, efficient and lawful.
For this very reason, the practice is dangerous. Soft authoritarianism does not dismantle institutions outright, but erodes their ethical foundations. Nepotism is no longer seen as a clear violation, but as acceptable so long as formal rules are observed.
When public ethics are reduced to procedural compliance, the spirit of bureaucratic reform is hollowed out. If normalized, Indonesia risks reverting to a system in which the state functions as an extension of personal and familial power networks instead of a professional institution insulated from political interests.
Reform, ultimately, is not only about rules, but about ethical commitment and example.
Monetary credibility at stake
Beyond ethics, such appointments risk eroding Bank Indonesia’s credibility in the eyes of markets and the international community. Global governance studies show central banks must be independent not only in statutory text, but also in public perception and ethical practice.
Central bank credibility operates not just through interest rates or open market operations, but through trust — market confidence that monetary policy is conducted professionally and free from political pressure.
Even slight doubts about independence can affect inflation expectations, financial stability and sovereign risk perceptions. Once trust fractures, even the best-designed policies lose their effectiveness.
These concerns are amplified by Indonesia’s underlying macroeconomic fundamentals, which are far from benign. Recurrent fiscal deficits, rising public debt and persistent depreciation pressure on the rupiah place Bank Indonesia in an exceptionally strategic yet vulnerable position.
In such circumstances, central bank independence serves as a critical anchor for inflation control, exchange rate stability and country risk perception.
The International Monetary Fund has warned that weakened central bank independence can trigger macroeconomic instability, heighten financial volatility and worsen inflation expectations.
When markets begin to doubt the distance between monetary authorities and fiscal power, the consequences are tangible: higher risk premiums, rising borrowing costs and intensified pressure on the domestic currency.
When monetary authorities are perceived as insufficiently independent, markets may conclude that monetary policy will be directed toward financing government debt rather than safeguarding price stability.
Political pressure on Turkey’s central bank has contributed to persistently high inflation and sharp currency depreciation. In Argentina, the historically close relationship between monetary authorities and fiscal interests has frequently undermined policy credibility and exacerbated price instability.
Fiscal dominance rarely emerges through a single extreme decision. Instead, it accumulates through political signals that gradually erode trust, heighten exchange rate vulnerability and raise the eventual costs of macroeconomic adjustment.
Ultimately, this issue is not about a single individual, but about the trajectory of Indonesia’s economic governance. Amid fiscal pressures, rising debt and a fragile currency, any erosion of trust in Bank Indonesia’s independence constitutes a systemic risk.
The state may win on procedure today, but markets will judge credibility tomorrow. In monetary economics, lost trust is a debt that must eventually be repaid — often at a far higher price in the future.
Pristanto Silalahi is researcher and lecturer in development economics, Atma Jaya University Yogyakarta
