Resignation of Indonesia’s finance minister raises questions about continued reforms

Indonesia finance chief change may stall reforms

JAKARTA, Indonesia — She has been given credit for keeping Indonesia’s economy stable through the global crisis, reforming the Finance Ministry and substantially increasing the nation’s revenue by harnessing previously unpaid taxes.

So when Finance Minister Sri Mulyani Indrawati announced earlier this month that she was resigning to take a position at the World Bank, it was not surprising that the Indonesian stock market tumbled 3.8 percent in knee-jerk concern over whether the era of reforms had ended.

“Sri Mulyani’s position in the Cabinet was central to the president’s attempts to reform the state,” said Damien Kingsbury, an expert on Indonesia at Australia’s Deakin University. “She was moderately successful in that, given the type of resistance which she and the government faced. It’s fair to say that her departure is a win for anti-reformist politicians and a severe loss for the government.”

President Susilo Bambang Yudhoyono on Wednesday named Agus Martowardojo, CEO of the country’s largest bank, to replace her.

Martowardojo will have big shoes to fill.

Indrawati, who earned a doctorate at the University of Illinois and worked for the IMF, was named the 23rd most powerful woman in the world by Forbes magazine in 2008.

Since becoming finance minister in 2005, the 47-year-old technocrat led a campaign to rout corruption and reform the ministry, particularly the tax office and customs agency, which contribute about 70 percent of total state revenue.

During her tenure, the tax office increased income tax payers from 4.35 million to nearly 16 million — out of a population of 235 million — and tax receipts grew by 20 percent annually to more than 600 trillion rupiah ($66 billion).

She fired corrupt officials, raised salaries and managed budgets. Significantly, Indonesia’s economy — Southeast Asia’s largest — grew by 4.5 percent in 2009, joining China and India as the only G20 members to post growth during the global financial crisis. Her efforts mean the country is in line for Yudhoyono’s targets of 5.8 percent growth this year and 7 percent by 2014, the last year of his second term.

But an economist is not a politician, and Indrawati stepped on some toes along her road to reform. Her anti-graft measures were unwelcome to many but she was adamant about the importance of cleaning up the government, notorious for corrupt bureaucracy.

“Corruption is everywhere and it depends on the (leaders’) response to eradicate it,” Indrawati said in a speech to university students Wednesday. “If the leaders are clean, others will follow.”

According to many analysts and business leaders, all of Indrawati’s successes could not shield her from her enemies, and it was a bank bailout in 2008 that her opponents seized on to try to oust her from office.

The finance minister and the head of the Central Bank, Boediono — who uses just one name and is now vice president — spent $715 million to bail out Century Bank and prevent a meltdown of the country’s economy.

But the cost of the bailout — and the question of whether bank officials benefited personally from the funds — became a focus of an independent anti-corruption commission, and Parliament voted in March to launch a criminal investigation. Several cases of tax evasion have been uncovered but there is no evidence of any wrongdoing on Indrawati’s part.

Critics believe Yudhoyono encouraged Indrawati’s resignation so his political opponents would back off the bailout and clear the way for reconciliation within the ruling coalition. Many believe the two have lost a political power struggle.

But Yudhoyono denounced speculation that the resignation was the result of a political deal and said her replacement would continue to work on the reform platform.

Martowardojo has been widely praised for reforming PT Bank Mandiri’s assets by slashing non-performing loans and raising the bank’s profile among international investors.

Before Martowardojo was appointed, Helmi Arman, an economist at Bank Danamon, said the new minister would have to be strong enough to overcome the politics of the office.

“If anything, Indrawati’s departure shows the government is somewhat prone to political pressure and so her replacement must have both the will and the political backing to push through unpopular reforms,” Arman said.

As for Indrawati, she said in a lecture Tuesday that her resignation was a personal victory over opponents of reform.

“There are several parties saying that I’m running away, or that I have lost the battle,” Indrawati said. “I have won … because they were not able to dictate to me, and I have not betrayed my pride and conscience.”

Indrawati begins her term at the World Bank on June 1.