JAKARTA: Indonesia's central bank will purchase government bonds worth up to 439 trillion rupiah (US$30.46 billion) in 2021 and 2022 to provide cheaper financing for the government's COVID-19 relief measures, senior officials said on Monday (Aug 23).
The fiscal deficit financing scheme is similar to an agreement Bank Indonesia (BI) had with the finance ministry last year to fund ballooning healthcare and welfare bills amid the pandemic, which authorities said was a one-off measure. Investors and economists have raised concerns about the scheme's effects on inflation and the rupiah.
In a call with investors, BI Governor Perry Warjiyo cited a rise in infections since June, driven by the Delta variant, as the main reason for the agreement under which BI will purchase up to 215 trillion rupiah worth of tradeable bonds in 2021 and 224 trillion rupiah in 2022.
BI will relinquish interest payments for bonds worth 58 trillion rupiah in 2021 and 40 trillion rupiah in 2022, but the rest of the notes will carry a floating interest rate equal to the central bank's three-month reverse repo rate.
"I cannot imagine buying vaccine, (paying for) medical expense, by issuing government bonds in the market with the cost of now about 6.3 per cent. I cannot comprehend it," Warjiyo said, referring to the current yield of the benchmark 10-year government bond.
Warjiyo and Finance Minister Sri Mulyani Indrawati stressed several times in the call that the agreement will not compromise BI's independent in determining monetary policy.
BI would continue its plan to reduce liquidity in the banking system next year, said Warjiyo, who also argued the bank's quantitative easing measures would be more effective by cooperating with fiscal authorities.
The governor said the central bank was mindful of the new agreement's impact on inflation in coming years and BI would "stand ready to adjust our policy including interest rates" if inflation heats up.
Josua Pardede, an economist with Bank Permata in Jakarta, said the agreement will provide a bigger fiscal room for the government by reducing interest expense.
"The bond purchases by BI could also limit the potential rise in (Indonesia's) bond yields amid a potential Fed tapering next year," he said. "So I think this will be well accepted by investors."
Last year, BI agreed to buy 397.6 trillion rupiah worth of bonds without receiving interest as part of a US$40 billion fiscal deficit financing scheme.
Since the start of the pandemic, BI has cut its benchmark rate by a cumulative 150 basis points to a record low of 3.50 per cent and injected more than US$57 billion of liquidity into the financial system.