By Gayatri Suroyo and Fransiska Nangoy
JAKARTA (Reuters) – Indonesia’s central bank came under pressure from lawmakers on Thursday to escalate its response to the economic fallout from the coronavirus pandemic, even as it cut its benchmark interest rate to a two-year low.
Bank Indonesia (BI) delivered on Thursday its third rate cut this year and said there was scope for more trims. In total, it has cut 175 basis points in an easing cycle since last year to bolster growth.
Said Abdullah, chairman of parliament’s budgetary committee, urged BI to fund the government’s health and welfare programmes of 397.56 trillion rupiah ($28.38 billion) by buying bonds with a zero coupon as part of the central bank’s “burden sharing”.
“We can’t go to the poor and say ‘Here is a government programme for you, but please know that it comes with an interest rate from BI’,” Abdullah said during a hearing slated to discuss the government’s 2021 budget.
Planning Minister Suharso Monoarfa, who also attended the hearing, suggested two alternatives: BI buy bonds with yields of 0.1% to 4.5% or bonds with no yield.
“If we see the most basic formula, exports, imports, consumption and investment are down. The only (driver of growth) is government expenditure. If the government is being saddled again with interest payments, I don’t think it’s fair,” Monoarfa said.
Finance Minister Sri Mulyani Indrawati also told the hearing she hoped BI would make its policy even more accommodative as inflation “is not a threat for now”. May’s inflation rate was the lowest in 20 years.
The suggestions made in the hearing about zero coupon bonds “would be used in our negotiations with BI”, she said.
“With COVID-19, we are seeing a dramatic increase in the budget deficit that will be a burden for the next 10 years, so the burden sharing with BI is key to managing COVID-19 without increasing the fiscal burden on development programmes,” she said.
Destry Damayanti, BI’s senior deputy governor who was at the hearing, focused on the central bank’s outlook for the economy this and next year, but did not address the other requests.
A spokesman for BI, which is independent under Indonesian law, did not immediately respond to a request for comment.
Governor Perry Warjiyo has previously said BI was open to sharing the burden with the government, but it would only buy bonds with higher return than its monetary operation costs so it could manage the inflationary risk.
BI has bought a relatively small amount of government bonds directly in auctions as a non-competitive bidder, with yields determined by the market. It has also bought bonds in the secondary market.
(Additional reporting by Maikel Jefriando and Tabita Diela; Editing by Hugh Lawson)
