Abstract

Monetary policy has a limited role in the COVID-19 crisis, with the main macro challenge falling to fiscal policy. That said, Bank Indonesia has two important tasks. The first is to ensure the continuity of short-term portfolio inflows. So far so good: the outflows that occurred early in the crisis have largely stabilised, though vulnerability remains. We make several suggestions on currency and bond market intervention policy. The second, more challenging and unaccustomed task is to help fund the expanded budget deficit. An important element in Indonesian macropolicy has been fiscal discipline—with recent deficits funded largely by raising funds in the rupiah bond market. Faced with the COVID-19 crisis, Bank Indonesia is now directly purchasing government bonds, including some ‘burden sharing’ of the interest cost. This funding mode, often dubbed ‘money printing’, has become routine in many developed economies but is less common in emerging economies. It presents risks to macrostability and Bank Indonesia independence, particularly if the crisis persists, but is justified by the vital need for budget funding and the lack of alternatives. However, Bank Indonesia needs an exit strategy to limit this resort to unconventional funding. In the longer term, the emphasis needs to be on mobilising domestic savings as a more stable way to fund the budget.

Introduction

COVID-19 represents a twofold global challenge—how to handle the health aspects while softening the economic recession caused by the combined effect of imposed restrictions and the public's behavioural changes. The main economic task is to support the incomes of those put out of work and the viability of businesses in temporary forced hiatus. Thus the main macropolicy response is fiscal expansion.

Nevertheless, Bank Indonesia is playing several important roles. It is playing a traditional central banking function by cutting interest rates, ensuring adequate system liquidity and providing support for on-lending by banks. It has also intervened heavily in the currency and bond markets to stabilise these in the face of very large capital outflows, mostly in March and April. Finally, it is providing significant direct financing to the government—a process often (if incorrectly) called ‘money printing’.