Indonesia beefs up central bank’s powers to handle virus crisis

  • AseanPlus News
  • Friday, 03 Apr 2020


JAKARTA: Besieged by the worst turmoil since the Asian financial crisis more than two decades ago, Indonesia has given its central bank unprecedented powers to shield the economy from the fallout of the Covid-19 (coronavirus) pandemic on Friday (April 3).

The government has already cut its growth forecast by more than half and unveiled $25 billion in fiscal support to cushion the economic blow. Now Bank Indonesia will be allowed to buy sovereign bonds in the primary market and extend a lifeline to banks in the event of insolvency.

Authorities are scrambling to stabilise the economy and financial markets amid a sell-off in emerging markets, which has led to a 16% plunge in the rupiah against the dollar so far this year. The expanded role for the central bank came in an emergency ruling earlier this week by President Joko Widodo, who also temporarily scrapped a cap on the budget deficit to allow the government to spend more.

"The Indonesian government is reinforcing its defenses as the global economy looks likely to engage in a long war against Covid-19 outbreak,” said Satria Sambijantoro, an economist at PT Bahana Sekuritas in Jakarta.

"By waiving the fiscal rule, expanding the central bank’s role, and giving legal protection to economic policy makers, Indonesia is sending a signal: ‘Come, we are prepared.’”

Bank Indonesia can now purchase long-term bonds and Treasury bills issued by the Finance Ministry in the primary market to help the government fund its fiscal measures and provide stability to the financial system.

The central bank will purchase the bonds only as a "last resort” when the market can’t absorb the supply, according to Governor Perry Warjiyo.

Bank Indonesia and the Finance Ministry said they’ll take into account financial-market conditions and the bond purchases’ impact on inflation.

Under the new rules, Bank Indonesia can buy the repurchase securities owned by Indonesia Deposit Insurance Corp if it needs to address bank insolvencies. The central bank can also extend short-term liquidity loans or financing based on Shariah principles to banks.

Bank Indonesia can also now control the management of foreign exchange owned by Indonesian citizens.

The provision will allow the authority to force holders of foreign currencies to surrender, repatriate and convert it, in order to maintain macroeconomic and financial-system stability.

The ability to manage foreign exchange doesn’t amount to capital controls and applies only to citizens, Warjiyo said. Foreign direct investment and non-resident portfolio investments, which the country needs, will be outside the purview of this rule, he said. - Bloomberg
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