Bank Indonesia, government allay concerns that ‘burden sharing’ deal will reduce independence

[JAKARTA] Indonesia’s government and central bank sought to allay concerns on Monday (Sep 8) about their unusual collaboration to fund government programmes, as analysts questioned whether it would compromise Bank Indonesia’s independence.

The central bank will pay a higher interest rate on government deposits it holds to help fund President Prabowo Subianto’s housing and cooperative projects, describing this as “burden-sharing” as concerns mount about the budget impact of the costly programmes.

The deal has “the potential to damage BI’s reputation as an independent institution”, said Wijayanto Samirin, an economist with Paramadina University in Jakarta, adding he was not aware of any similar arrangements by other reputable central banks.

“Several things BI is doing are odd. They get too deep and detailed into fiscal matters and this disrupts our monetary policy ecosystem,” said Wijayanto, a vice-presidential adviser for five years until 2019. He backed a rival candidate to Prabowo in last year’s election.

The finance ministry and BI on Monday committed to conduct the burden-sharing deal “transparently, accountably and with a strong governance”.

In a joint statement, they said the higher rates would be paid until the end of the programmes, but did not mention the interest rates, the amount expected to be paid or the length of the projects.

“The synergy continues to refer to the principles of prudent fiscal and monetary policies, while maintaining market discipline and integrity,” they said.

The new deal rekindled worries about BI’s independence nearly three years after parliament expanded its mandate to include economic growth in addition to price stability.

S&P Global Ratings sovereign analyst Rain Yin called the arrangement unusual, as most central banks paid dividends to the government instead of raising interest on deposits.

SEE ALSO

“Given the pressures on revenue, we see the latest move as an effort to raise funds to keep the fiscal deficit close to the government’s target,” Yin told Reuters.

Jahen Rezki, from the University of Indonesia’s Institute for Research and Economics and Society, said the deal risks inflation overshooting in the long run, pointing to Turkey as an “extreme” example where government interference in the central bank led to a spike in inflation.

The government hopes to set up 80,000 village cooperatives, each of which could borrow up to 3 billion rupiah (S$235,854) from state banks, officials said.

President Prabowo has also pledged to build three million affordable homes annually, with the government subsidising interest payments on mortgages from state banks.

“The deal opens up opportunities for the government to be bolder in introducing populist policies,” said Jahen.

Raza Agha, London-based head of emerging market sovereign strategy at L&G’s asset management division, said the deal came as a surprise given there was no discernible evidence of sustained pressure on funding costs.

Borrowing costs have been declining in Indonesia driven by BI’s rate-cutting cycle of 125 basis points in the past year. Some economists expect more cuts to come.

“Needless to say, strong public institutions, including an independent central bank, are a key pillar in maintaining macroeconomic stability and investor confidence,” Agha said. REUTERS