Indonesia's central bank to share some bond coupon payments with government

Indonesia’s central bank has agreed on a “burden sharing” deal where it will give the government some bond coupon payments it receives to fund state programmes such as affordable housing and village cooperatives, governor Perry Warjiyo said.

Bank Indonesia has bought 200 trillion rupiah (S$15.6 billion) of government bonds in the secondary market and through a debt switch arrangement with fiscal authorities in the year to September 1, Warjiyo told a parliament hearing on Tuesday (Sep 2). “With the burden sharing arrangement, we share the interest distribution, so we reduce the cost for the programmes,” the governor said, adding the deal was in line with BI’s policy to expand liquidity.

Warjiyo said bond coupon payments the central bank received would be split evenly, although he did not provide a rupiah figure for how much money BI would give to the government.

Finance Minister Sri Mulyani Indrawati told the hearing the arrangement would help the government provide cheap funding for one of President Prabowo Subianto’s flagship programmes of setting up 80,000 cooperatives in villages across South-east Asia’s largest economy.

“This is also because BI has a role not only to support stability, but also economic growth. BI still remains independent,” she said.

The minister said state banks will fund the cooperatives through loans with interest rates capped at 6 per cent, far below market rates which can reach double-digits. Next year, the government will place 83 trillion rupiah in the banks at a 2 per cent interest rate which they can then use to lend to cooperatives, she said.

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There was a similar “burden sharing” arrangement during the Covid-19 pandemic, where BI bought billions of dollars of government bonds and gave the government all or some of the coupon payments it received.

At the time, the agreement was intended to help fund the government’s pandemic response.

Last year, BI and the finance ministry announced a plan for a bilateral debt switch on 100 trillion rupiah of Covid-era bonds on BI’s books that would mature in 2025, pledging to switch them with tradeable bonds with longer tenure using prevailing market prices.

Warjiyo also said BI’s interest rate cuts of 125 basis points in the past year had helped reduce the government’s borrowing costs, adding the central bank might cut rates further. REUTERS