BI cautions govt to be 'careful' over bond issuance

The Jakarta Post, Jakarta

Bank Indonesia senior deputy governor Anwar Nasution warned the government to be "very careful" in issuing more bonds in the domestic market this year to avoid a negative impact from inflation.

He said that the central bank would coordinate with the Ministry of Finance over the government's new domestic financing strategy to minimize a negative side effect on the economy.

"We'll coordinate things. After we exit from the IMF, we don't want a return to a period of hyperinflation," he said on the sidelines of a hearing with the House of Representatives.

The government has decided not to extend the current International Monetary Fund (IMF) economic bailout program when it ends later this year. IMF reform measures have contributed to the current stability in macroeconomic indicators, reflected, among others things, in a low single-digit inflation rate. In comparison, inflation skyrocketed to more than 77 percent in 1998 after the economy tumbled in the late-1990s regional financial crisis.

Minister of Finance Boediono announced earlier on Tuesday that the government intended to increase the extent of its bond issuance this year to Rp 11.7 trillion from the Rp 7.7 trillion initially planned. The government had already issued Rp 2.7 trillion in bonds in April, which means that it has only to issue another Rp 9 trillion. Boediono has said that the second issue would be in early September.

The increased bond issuance is aimed at plugging the greater- than-projected state budget deficit, which for this year is now expected to widen to 2 percent of gross domestic product (GDP) from an initial projection of 1.8 percent of GDP, or around Rp 34.4 trillion. The greater deficit is mainly a result of increased fuel subsidies and lower tax revenues.

However, Anwar feared that the increased bond issuance could raise the level of central bank currency in circulation, which in turn could theoretically push inflation higher, thus affecting hard-won macroeconomic stability.

Anwar was also concerned that if the huge amount in bonds were absorbed by local investors it would mean that a greater portion of national savings would go to government bonds rather than direct investment, the latter of which could create more jobs.

He said that the government should seek ways to ensure that the domestic bonds were absorbed instead by foreign investors.

He explained that to achieve this, the government and other related parties would have to work hard to improve quickly the country's investment climate.

Analysts have also said that to achieve such an improvement the government must maintain current fiscal consolidation by avoiding populist measures that would leave the budget deficit in a precarious position.