The government has stated it will not sell sovereign debt papers with a zero coupon rate to Bank Indonesia (BI) as part of its efforts to close the widening state budget deficit despite pressure from lawmakers to do so.
Finance Minister Sri Mulyani Indrawati said the government and the central bank were still discussing instruments that could be used to step up the country’s response to the pandemic, adding that this did not include zero-coupon bonds.
The instruments would have to allow BI to “share the burden, but in the medium [and] long term we still continue to maintain the credibility of fiscal and monetary authorities in managing macroeconomic discipline in Indonesia,” Sri Mulyani said as quoted by Reuters on Tuesday.
She said the government and BI focused their discussion on finding a “very fine balance” so as to maintain prudent policy making, with the central bank called on to broaden its focus beyond inflation and rupiah stabilization.
The central bank can now buy government bonds directly in auction using a market rate and as a buyer of last resort, as stipulated in Law No. 2/2020. Previously, BI could only buy government bonds on the secondary market.
BI purchased up to Rp 166 trillion (US$11.75 billion) in government bonds on the secondary market during the first quarter of 2020 to stabilize the rupiah and another Rp 26.1 trillion to support budget financing needs, boosting the central bank’s ownership of government bonds to Rp 445.4 trillion.
With the government having allocated Rp 695.2 trillion for fiscal stimulus to address the impacts of the coronavirus crisis on the economy and public health, it expects the budget deficit to reach 6.34 percent of GDP this year, more than double the prior legal limit of 3 percent.
“We are seeing a dramatic increase in the budget deficit that will be a burden for the next 10 years, so sharing the burden with BI is key to managing the coronavirus without increasing the fiscal burden on development programs,” Sri Mulyani said recently.
Indonesian lawmakers are putting pressure on the central bank to purchase zero yield government bonds in a bid to reduce the government's burden.
House Budget Committee chairman Said Abdullah urged BI on Friday to buy government bonds with a zero coupon rate to take part in “burden sharing” to help bolster the economy.
Golkar Party lawmaker M. Misbakhun, separately, pushed the central bank to play a significant role in addressing the economic impacts of the crisis, noting that the country’s debt would rise significantly so that it could provide fiscal stimulus.
“The mounting debt must be reduced with a low interest rate,” Misbakhun said in a statement on Tuesday. “Government bonds yields are currently 7 to 8 percent […] we need government bonds with a zero yield that can be bought specifically by Bank Indonesia.”
Center of Reform on Economics (CORE) Indonesia research director Piter Abdullah, meanwhile, stressed the importance of prudent monetary practice.
“The idea that the central bank should buy zero yield bonds is too extreme,” he said. “Unlike other investors, BI is not a profit seeker, so it would make sense for it to buy bonds with lower yields to lower the government’s burden, but again, not at zero yield.”
