BI cautions govt to be 'careful' over bond issuance
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.