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Debt switching and the complex dynamics of BI's independence
The law restricts the government from conducting debt switches without following specific procedures, such as initial offerings in the primary market.
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The logo of Bank Indonesia (BI) is seen in front of the central bank's building in Jakarta in this undated photo. (JP/Rafaela Chandra)
T
he independence of a central bank is a cornerstone of an effective monetary policy, ensuring that economic decisions are made based on economic indicators rather than political pressures. In Indonesia, Bank Indonesia (BI) has long been regarded as an independent institution, as mandated by Law No. 23/1999 on the central bank.
However, recent developments, particularly the proposed Rp 100 trillion (US$6.2 billion) debt-switching program between the government and BI, have raised questions about the extent of this independence in the long term.
During the COVID-19 pandemic, Indonesia, like many other countries, faced significant economic challenges. To mitigate these, the government and BI implemented a burden-sharing program to stimulate economic growth. This involved BI purchasing government bonds, effectively printing money to finance government spending on health, social protection and other critical areas.
Between 2020 and 2022, BI injected approximately Rp 1.1 quadrillion into the economy through this scheme.
Initially, BI was reluctant to do this burden-sharing program. However, then president Joko “Jokowi” Widodo's remarks about the need for institutions to "share the pain" highlighted the pressure on BI to support government initiatives.
While this program was crucial in addressing immediate economic needs, it blurred the lines between fiscal and monetary policy, raising concerns about BI’s independence.
As of July 2024, BI held government securities amounting to 23.8 percent of the outstanding government bonds in the market, valued at Rp 1.37 quadrillion. This figure surpasses the value of government securities held by banks, insurance companies, pension funds and investment managers.
