The legislation gives Bank Indonesia and the government policy flexibility if the economy worsens. (Reuters pic)
JAKARTA: Recent legislation allowing Indonesia’s central bank to buy bonds directly from the government in a crisis is raising concerns about the damage it could deal to central bank independence and fiscal discipline.
The Development and Strengthening of Financial Sector bill passed last month permanently enshrines into law an emergency measure taken in 2020 as the country was grappling with the coronavirus pandemic.
The legislation aims to give Bank Indonesia and the government flexibility to coordinate on policy if the economy takes another unexpected turn for the worse. The law limits bond purchases to crisis situations in an effort to prevent debt monetisation – where the central bank prints money to buy bonds issued to cover deficits.
But there are fears that an administration could arbitrarily enlist the central bank to enable reckless spending, especially since the legislation allows the president to determine what constitutes a crisis.
Bhima Yudhistira, director of the Jakarta-based Center of Economic and Law Studies, warned of the moral hazard risks presented by the bill, arguing that fiscal discipline could suffer if the government comes to see the central bank as constantly available to buy bonds when deficits are high.
After the coronavirus pandemic hit in 2020, Bank Indonesia was allowed to buy government bonds on the primary market to fund emergency measures. The government also suspended a rule limiting fiscal deficits to 3% of the gross domestic product.
Indonesia’s economy shrank for the first time in 22 years in 2020 but has since been recovering – due in part to a rally in commodity markets that has boosted export prices. The government expects growth to come in at around 5% for 2022, and is restoring the deficit cap for 2023.
