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Analysis: BI compelled to inject Rp 150 trillion in liquidity, delay govt debt

Tenggara Strategics (The Jakarta Post)
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Jakarta
Sat, January 18, 2025

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Analysis: BI compelled to inject Rp 150 trillion in liquidity, delay govt debt The logo of Bank Indonesia is seen in front of the central bank's building in Jakarta. Bank Indonesia (BI) has forecast a U-shaped recovery for the country’s economy as the coronavirus pandemic took a greater toll than previously expected, threatening to cause a deep contraction in the second quarter. (JP/Rafaela Chandra)

B

ank Indonesia (BI) planned to increase the liquidity in the economy by buying government bonds (SBN) from the secondary market amounting to Rp 150 trillion ($ 9.25 billion) in 2025 through a debt switching mechanism. This expansive monetary policy aims to stabilize the rupiah after sequential depreciation against the United States dollar in December 2024. However, the risk of surging inflation may harm BI’s independence and credibility.

Market talks have it that BI finally agreed to purchase Rp 150 trillion in government bonds in the secondary market this year following a move by the Indonesian Corruption Eradication Commission (KPK) to investigate possible corruption involving BI’s corporate social responsibility spending, much of which was allegedly distributed to foundations affiliated with legislators who are part of House of Representatives Commission XI on finance.

A few days after KPK investigators searched the office of BI Governor Perry Warjiyo for evidence, Perry made an announcement that BI would spend around Rp 150 trillion or more to purchase government bonds in the secondary market in 2025 in a bid to stabilize the financial market and the rupiah.

Some analysts liken BI’s recent move to the burden sharing mechanism during COVID-19, when BI was compelled to help the government handle the pandemic by buying government bonds in the primary market. This way, BI injected liquidity when economic activity slowed down during the pandemic. BI’s commitment to purchasing a certain amount of government bonds under normal circumstances could undermine BI’s independence and credibility.

Some parties, however, have dismissed the link between the KPK investigation and BI’s commitment to purchasing government bonds as BI often conducts open market operations through quantitative easing (QE), a prevalent practice implemented by major economies, including the United States, the United Kingdom and Japan. Through quantitative easing, BI purchases bonds in the secondary market to curb bond field increase and lower long-term interest rates. This measure injects liquidity into the market, boosts spending, increases inflation rate and curbs the rise in government bond yields.

As of Jan.7, 2025, the government bond yield has climbed to 7.123 percent, which means it is more costly for the government to issue new bonds. This increase is linked to the US Treasury bond yield hike because of speculations over US economic policies under Donald Trump's presidency, which has dampened investor demand.

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The rising government bond yield becomes a concern as the government plans to issue new bonds totaling Rp 775.87 trillion (US$47.85 billion) this year, as stated in the 2025 state budget. Much of the debt will be used for debt interest payments totaling Rp 552.85 trillion ($34.1 billion), consisting of 479.6 trillion for domestic debt interest payments and Rp 55.2 trillion for foreign debt interest payments.

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