Indonesia will not ask central bank to buy zero coupon bonds

Jakarta

INDONESIAN Finance Minister Sri Mulyani Indrawati said on Tuesday the government would not ask the central bank to buy bonds with zero yield to help finance a fiscal deficit driven up by spending related to the coronavirus pandemic.

Ms Indrawati's comment came after lawmakers last week put pressure on Bank Indonesia (BI) to expand its bond buying and purchase zero coupon government debt.

In a streamed seminar hosted by Bloomberg, Ms Indrawati said the finance ministry and BI were still discussing what kind of instrument to use to help in Indonesia's response to the pandemic, but it would not be zero coupon bonds.

The chosen instrument would have to allow BI "to share the burden, but in the medium, long term we still continue to maintain the credibility of fiscal and monetary authorities in managing macroeconomic discipline in Indonesia," she said.

Ms Indrawati described her discussion with BI Governor Perry Warjiyo as focused on finding "a very fine balance" so as not to "destroy" prudent policymaking.

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She said this was made more complicated because BI's mandate was limited to controlling inflation and the rupiah's exchange rate, unlike say the US Federal Reserve, which has a mandate that includes pursuing full employment.

A BI spokesman did not immediately respond to a request for comment, but a BI deputy governor last week said parliament's suggestions would be discussed in negotiations with Ms Indrawati.

Some economists have criticised the zero coupon bonds as potentially inflationary, though others have said BI needs to move beyond its conventional tools as South-east Asia's largest economy may suffer its first recession in decades this year.

The fiscal deficit this year is expected to be 6.3 per cent of GDP, up from an initial plan of 1.8 per cent, with the government forecasting a 10 per cent drop in revenue and allocating nearly US$50 billion for the Covid-19 budget.

BI has cut interest rates three times this year to support economic activity, on top of four reductions last year, in an easing cycle totalling 175 basis points. REUTERS