Toying with Pillars of Credibility
Yopie Hidayat (Contributor)
THERE is no president or prime minister who would want to see the welfare of their people be compromised by a recession. That also applies to Indonesia. President Joko Widodo has repeatedly stated that he will not hesitate to take extraordinary measures to mitigate the effects of Covid-19 on the economy.
The problem is, when overdone, those extraordinary measures can create a problem that is worse than the recession it tried to overcome. Especially if those policies are toying with the main pillar of economy in this very open era, in which capital moves freely without restrictions. That pillar is central bank independence in managing monetary policy. This is the main anchor of economic credibility, especially in an emerging market like Indonesia, which still needs capital support from foreign investors.
Without that credibility, investor trust falls apart. No one will be interested in buying financial assets in Indonesia. Even if they are willing, Indonesia must pay higher interest or offer higher yields on investment. The supply of foreign currency which this country desperately needs is at risk of falling.
Not to mention the risk of the rupiah losing value against foreign currencies. If financial markets judge that the central bank that is issuing the rupiah is no longer in full control, whether due to political pressure or direct intervention, the charisma of the rupiah will dissipate.
Going into the first week of September, that negative perception has dominated the market. First, the coming of the news that the government will issue new regulation in lieu of central bank law or perpu. Furthermore, not only the government, the House of Representatives (DPR) is also preparing a revision to the Central Bank Law. In principle, these two planned regulations amendment carry the same spirit, creating the impression that the central government and the DPR both want to strip Bank Indonesia’s (BI) authority and independence.
Yet, President Jokowi reaffirmed that the government will maintain BI’s independence. He conveyed that position during his meeting with foreign media in the Bogor Palace, Tuesday, 1 September. But in the same forum, he also conveyed something contradictory to that statement: the government will ask BI to fund the budget deficit until 2022.
If the President is asking for help from the central bank until 2022, that is the same as forcing BI’s board of governors to violate its own ruling. This year, BI has helped to fund the budget deficit. Through a mechanism called burden sharing, BI directly bought government bonds in the primary market amounting to Rp397 trillion. This scheme is the same as BI printing new rupiah liquidity for the government. Understanding the risk, BI stressed that a scheme like this will be the first and the last of its kind. It is only in this year that BI has directly printed new money to fund a budget deficit.
This signal from the president is tripping the radar of the global financial market, putting it on alert. Analysts are now reviewing Indonesia’s true direction. Will President Jokowi break the most orthodox economic rules, all while carrying the rupiah and even the Indonesian economy through the risk of losing all credibility in the market?
On Friday, 4 September, Finance Minister Sri Mulyani attempted to convince the market. She repeated the President’s message which signifies the government’s position.
Monetary policy must remain effective, credible and independent. On that day, as the Jakarta market closed, the rupiah is still on a downward trend at around Rp14,750 per US dollar.
This government contradictive approach is similar to the situation approaching the revision of the Corruption Eradication Commission (KPK) Law. Repeatedly, the President claimed that he will not weaken the KPK. In reality, the change went through and significantly reduced the power of the anti-graft agency which was once so feared by corruptors.
It is not impossible that the central bank’s independence ends up sharing the same fate as the KPK’s, if politicians are working in orchestrated manner. It is just that this time, what is at stake is the credibility of our country’s economy.