Jakarta – Following the success of the burden-sharing agreement between Bank Indonesia (BI) and the Finance Ministry in financing the fiscal deficit over the past three years to prevent a deeper economic crisis during the COVID-19 pandemic, the government and the House of Representatives have agreed to maintain that cooperation under the newly enacted omnibus Financial Sector Law.
The omnibus law not only extends the burden-sharing arrangement, which was supposed to end this year, but even broadens BI's authority to buy not only government bonds (SBN) from the primary markets, but to buy or sell-and-repurchase (repo) SBN from the Deposit Insurance Corporation (LPS) and provide funding to private companies by repurchasing SBN through banks. The Finance Ministry is also authorized to issue SBN for a specific purpose to be purchased by BI and state-owned companies.
But many analysts in the private sector have criticized the BI monetary financing obligation as a moral hazard, warning that the burden sharing could compromise BI's political independence. They argue that such burden sharing is supposed to be a temporary measure only, an emergency measure to cope with an economic crisis like the one experienced in early 2020 when the economy contracted by 2.1 percent.
We think the risks mentioned above are not so adverse because the monetary and fiscal authority and the Financial System Stability Committee (KSSK) should anyway maintain policy synergy and coordination aimed at maintaining macroeconomic and financial system stability. Even without special provisions in the law, BI is anyway obliged to cooperate with the fiscal authority in a time of crisis because a fiscal crisis automatically affects BI's main responsibility, controlling inflation and maintaining rupiah stability.
Stipulating the burden-sharing directives in the Financial Sector Law will avoid the hectic situation in the 2020 crisis when the government was forced to hurriedly issue a regulation in lieu of law to authorize BI to make monetary financing of the budget. This does not mean that the Finance Ministry will be able anytime to ask for BI aid because this emergency measure can be taken only after the president declares a state of crisis.
Now as the legal directives for the burden-sharing agreement are already stipulated in law, the KSSK which consists of the BI governor, the finance minister, chief commissioner of the LPS and the chief of the Financial Services Authority (OJK) already have clear guidelines for debating such an emergency monetary measure even before a crisis strikes.
BI has purchased Rp 975 trillion (US$65 billion) in SBN from the primary market through the burden-sharing agreement over the past three years.
We share Finance Minister Sri Mulyani Indrawati's confidence that that there should not be a big risk of moral hazard because the declaration of a financial crisis must be based on Law No. 2/2020, which defines a financial crisis as a situation where the financial system fails to perform its functions effectively and efficiently, which can be shown by worsening economic indicators.
We are neither so concerned about the political independence of decision making for the burden sharing because the BI board of governors and the chief commissioners of the OJK and the LPS are all selected by the House.