Voice of the IMF is voice of the Indonesian people, but is it weakening our Rupiah?

Anthony Budiawan
Anthony Budiawan, Managing Director Political Economy and Policy Studies (PEPS)

IO – The International Monetary Fund (IMF) has taken a stand on financing of the state budget by Bank Indonesia (BI – the state bank of Indonesia). The IMF conveyed their views politely. 

First, the IMF recognizes their authority to terminate the state budget out of the monetary authorities sector by the end of 2022: “The IMF team supports the authorities’ commitment to exit from monetary budget financing by the target date of end 2022 …” 

The word “supports” needs to be interpreted as a warning to the authorities to end, meaning not to extend financing of the state budget by Bank Indonesia and to do so according to the time target as stipulated, mandated in Law No. 2 of 2020, regarding the Covid-19 pandemic, by the end of 2022. 

The “authority” refers to the Government (and not BI) as the one responsible for passing laws. BI is the one charged to enforce the Law, as ordered. BI is responsible for financing currency printing through the direct purchase of state securities in the primary market, as addressed in the letters of joint decision (SKB) I, II and III. 

Second, the IMF recommends state securities purchase in the primary market under a market mechanism this year, in a time when the market cannot function well (hold control of a market or supply state securities). “The IMF…, further recommends confining further primary market purchases under the market mechanism this year only to periods of severe market dysfunction.” 

The IMF fundamentally warned the authority about the possibility of certain parties appropriating currency printing (by BI) to fund irresponsible budgeting, purportedly directing moneys for pandemic control and national economic restoration instead of financing the new state capital, for instance. 

Finance Minister Sri Mulyani inadvertently blurted the matter out. “We can use 2022 National Economy Recovery (PEN) budget for first stage development of the new state capital (IKN),” which she later walked back: after receiving harsh criticism from numerous parties, Sri Mulyani casually admitted, “If this is not allowed, so be it.” 

Coordinating Economic Minister Airlangga Hartarto denied Mulyani’s statement by stating there had been no budget allocation concerning the IKN in the State Budget (APBN) or PEN 2022. The Public Works and Housing (PUPR) Minister had a similar response: up to now, no funds for the new state capital project. 

Sri Mulyani was cornered; it sounded like she was unaware of how to manage the State Budget. IMF had to step in, recommending curtailment of currency printing by BI, if possible, this year. 

Was Sri Mulyani that naïve? 

Two perceptions to consider with the above phenomenon: first, the Government wished to use the 2022 State Budget or the 2022 National Economic Recovery budget for new state capital (IKN) development, as Sri Mulyani publicly divulged. 

The IMF responded swiftly, if politely. First and foremost, Bank Indonesia’s budget allotted for currency printing must be responsibly and wisely applied. The IMF therefore suggested the authority stop BI “money printing”. 

IMF argued that the Indonesian economy has revived, economic growth having bounced back. The Government itself has steadily boasted about a revived economy. Hence, financing and budgeting should return to normal, without any “money printing”, as that would jeopardize the national economy. On this occasion, the voice of the IMF is thus “the voice of the Indonesian people”. IMF has voiced the concerns of the Indonesian public. 

Or, on the contrary, Sri Mulyani is aware that PEN funds must not be used to develop the IKN. Too dangerous and blatantly illegal. But perhaps the person concerned was under intense pressure to fund the newly-approved state capital. Thus, the intention of diverting 2022 PEN to develop the IKN project was revealed to the public, daring the IMF and the public to respond, and annul financing the IKN development from the State Budget (APBN). In the event, this strategy worked as designed. 

In this manner, the voice of the IMF and Sri Mulyani represent the voice of the Indonesian people. Sri Mulyani voiced the concerns of the Indonesian people. 

The IMF’s final warning was for BI to anticipate US monetary correction. IMF suggested that the Indonesian Bank allow the Rupiah exchange rate to adjust to global monetary policy tightening, which implies weakening of the Rupiah. There will be no need for intervention. “In the case of capital outflows, BI should defend its monetary policy space by allowing the Rupiah to absorb the shock first.” 

Does this indicate that the Rupiah is currently overpriced?