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New finance law extends BI’s role, but poses risk to fiscal discipline
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The Bank Indonesia office complex in Jakarta is seen on Feb. 26, 2020. (JP/Dhoni Setiawan)
A
newly ratified omnibus law on the financial sector will formalize Bank Indonesia’s (BI) role in helping to finance the fiscal deficit in times of crisis, which economists believe could undermine the central bank’s independence and the government’s efforts to maintain fiscal discipline.
The Development and Strengthening of the Financial Sector (PPSK) Law, was passed by the House of Representative during a plenary meeting on Thursday after being finalized in just a month following the government’s formal response to a draft made by the legislative body.
Article 36A of the new law extends BI’s role in purchasing government bonds in the primary market, also known as debt monetization or burden-sharing scheme.
That way, the central bank is enabled to finance the state budget deficit, a scheme that was initially designed as a temporary measure to prevent economic meltdown during the COVID-19 pandemic and which was supposedly set to end in 2022 to give room for the government to maintain its fiscal discipline.
In the new law, BI’s role is also expanded further, including a duty to repurchase government bonds owned by the Deposit Insurance Corporation (LPS) to finance handling of troubled banks, as well as government debt paper owned by corporations to provide financing for them.
The article also stipulates that the central bank’s “bailout” will be made possible only if the president declares a crisis.
Read also: Finance omnibus bill: Govt, House reinstate ban on party 'cadres' running for BI posts
