Carefully Calculating the Burden Sharing

Tempo ()

AFTER just two months, the government is once again forced to hastily revise the budget through a presidential decree (peraturan presiden or perpres). Such is the effect of the Covid-19 pandemic, which has heavily strained government’s coffer.

The budget deficit has swelled incredibly. Initially the 2020 state budget only planned a Rp370.2 trillion deficit. In the first revision of Perpres No. 54/2020 which was issued on April 3, the deficit highly jumped to Rp852.9 trillion. Now according to Perpres No. 72/2020 which was issued on June 25, the deficit has gone up to Rp1,039 trillion, more than triple the initial deficit before the pandemic.

Other than covering the deficit, which is revenues minus expenses, the government must still finance several other posts. There is a net government’s investment of Rp181 trillion. Besides that, there are debts coming into maturity which amount to Rp426 trillion. So in 2020, the government must borrow Rp1,647 trillion to meet all its needs.

Since January to May, the government has successfully collected Rp569 trillion of new debt. Thus, until the end of the year, the government must find Rp1,078 trillion more. A small part of it can come from multilateral institutions. However, most of it will come from issuing rupiah-denominated bonds. This is not an easy task. When rupiah liquidity is tightening, can the financial market absorb such a massive amount of bonds offering?

As an illustration, as of June 25, the value of all rupiah-denominated marketable government bonds was at Rp3,106 trillion. From that amount, Rp937 trillion is already in the hands of foreign investors. Additional massive new bonds will certainly drown the market, especially now, when the banking system is experiencing tight liquidity due to the rising number of non-performing loan.

There is a shortcut to solve this problem, and that is for the central bank to come to the rescue. The central bank can print money to buy bonds directly from the issuer, the government. Thus the central bank buys ‘fresh’ and newly issued bonds. In other words, it buys from the primary market instead of buying from the secondary market, where bonds are circulated and traded freely. This can lighten the government’s burden and save it the trouble of selling to the market. The government would also be able to pay a lower coupon rate for those bonds purchased.

Before the pandemic, Bank Indonesia (BI) was not allowed to buy government bonds in the primary market. The Central Bank Law forbids it. But the issuance of Government Regulation in lieu of Law (Perpu) No. 1/2020 has overthrown that rule. Now BI can buy government bonds in the primary market. Until this June, BI has bought a total of Rp29.4 trillion in bonds. How much more the BI would and could buy is still an object of a prolonged negotiation between the finance minitry and BI. They have not reached an agreement yet on this so called burden sharing scheme.

Indeed, this BI’s move cannot be taken lightly. It is like a strong medicine with several serious side effects. It must be administered carefully to prevent much bigger problems. Government bonds purchased in the primary market by BI are like fresh rupiah injections into the system. Adding an excessive amount of rupiah is definitely to decrease its value.

Rupiah is not similar to the US dollar, a global reserve currency that can be exported. The Federal Reserve has the privilege that BI does not. The Fed can create new US dollars that will end up roaming around the world without worrying about US domestic inflation too much. By contrast, the rupiah only has value in this Republic, and no other.

If BI injects fresh liquidity, this excess rupiah will only flooded on-shore. Other than potentially causing a spike in inflation, the rupiah’s exchange rate with foreign currencies will be disturbed. The value of the rupiah may take a sharp dive. BI and the finance ministry must be careful in their burden-sharing calculations. A reckless move would bring a disaster to Indonesia’s economy.