BI to use treasury bills for management

JAKARTA (JP): Bank Indonesia (BI) will switch to treasury bills as its main tool for monetary management starting this April or May, the central bank deputy governor Miranda Goeltom said on Tuesday.

Miranda said that using treasury bills would be more effective when operating in an open market because it wouldn't affect the central bank's balance sheet.

"Bank Indonesia will gradually replace the SBIs debt instrument with treasury bills starting in April or May," she said in reference to Bank Indonesia's short-term promissory notes.

At present, Bank Indonesia relies on SBIs to control money in circulation and interest rates.

The change in Bank Indonesia's strategy is in line with government plans to issue six to 12-month treasury bonds in April this year.

The government has said that the issuance of short-term bonds was meant to replace part of the outstanding long-term government bank recapitalization bonds.

The measure is expected to ease pressure on the state budget when the majority of outstanding bank recapitalization bonds mature in 2004.

The government has issued some Rp 430 trillion (US$46 billion) worth of bonds to help finance the country's bank recapitalization program.

Economists have warned that the government must be able to retire or to redeem part of its outstanding bonds within the next two years to avoid risking another economic crisis.

They pointed out that in 2004, more than Rp 70 trillion of bonds would mature and become unbearable for the state budget. The burden will be even heavier as some of the loans owed to the International Monetary Fund (IMF) will also mature at the same time.

The government has also said that plans to issue treasury bonds would help develop a domestic secondary bond market.

Miranda said that developing the bond market was crucial in helping to ensure the country's economic recovery process.

She pointed out that treasury bonds would become a benchmark for the private sector in issuing rupiah bonds, rather than overseas, which could experience some currency risk.

The domestic bond market is still not liquid due to a lack of appetite from investors.

Meanwhile, Citibank economist Anton Gunawan said that investors' appetite for planned treasury bonds would depend on the interest rate offered.

He said that in terms of risk, both SBIs or government treasury notes were relatively risk free.

"Perhaps the interest rate should be more or less the same as the SBI rate," said Anton on the sidelines of the same seminar.

Elsewhere, Miranda agreed with the IMF that Bank Indonesia should not be allowed to purchase government bonds in the primary market.

"If Bank Indonesia is allowed to purchase (government debt) in the primary market, while its independence remains unclear, it could be dangerous," she said.

She explained that purchasing government debt in the primary market would in effect make Bank Indonesia cover the state budget deficit, which was against the central bank's primary mission of controlling inflation.

Coordinating Minister for the Economy Rizal Ramli said on Monday that the IMF had expressed concern over the proposal to allow Bank Indonesia to purchase government debt in the primary market.

The proposal is included in the government-proposed amendment of the central bank law. The House of Representatives is currently debating the bill, and is expected to complete the process by the middle of this month.

Critics have said that the proposed amendment of the central bank law would undermine Bank Indonesia's independent status. (rei/bkm)