Who benefits from discriminatory and counterproductive monetary policies?

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

IO – The COVID-19 pandemic has forcibly opened people’s eyes to how weak the Indonesian economy basically is. Fiscal policy must be doped with two stimulants. First, the budget deficit was increased from 3 percent to an apparently unlimited level. But still inadequate. So a second doping is needed, by appealing to the Bank of Indonesia (BI) to finance the budget deficit. BI was asked to buy most state debt securities (in the primary market?). In common language: to print money. 

Both dopings are illegal. Violating the law on State Finance and the Law on the Bank of Indonesia. But it was overridden by Government Regulation instead of Law (PERPPU) No. 1/2020 which was later ratified as Law No. 2/2020. 

To complete this doping to make it perfect, PERPPU is armed with “legal immunity”. Those implementing it cannot be prosecuted under any circumstances, even if the doping is misused or abused. But keep in mind that the laws that are contrary to the Constitution and formed with bad intentions cannot obstruct the law of truth when the truth finally makes itself seen. 

BI’s current monetary policy is clearly inadequate to withstand the economic crisis. It can even be seen as counterproductive. 

BI should reduce the benchmark interest rate (BI-rate) aggressively. Unlike now, the reduction in the BI-rate signifies little. It has only settled by 1 percent from January 23, 2020, until now. Each decreased 0.25 percent on February 20, 2020, March 19, 2020, June 18, 2020, and last July 16, 2020. The BI-rate has remained at 4 percent until now. 

In comparison, the US Central Bank (The FED) has been very aggressive in reducing its benchmark interest rate (Fed-rate) in the face of this pandemic. The FED-rate fell 1.5 percent in less than two weeks: down 0.5 percent on March 3, 2020, and down 1 percent on March 15, 2020, bringing the FED-rate close to 0 percent. 

The Bank of England also lowered its benchmark interest rate aggressively. It decreased from 0.75 percent to 0.25 percent on March 16, 2020. Then it fell again to 0.1 percent on March 19, 2020. 

The reduction in BI-rate is essential for economic recovery, since if the BI-rate goes down, interest rates will also be forced down. The BI-rate being set at 4 percent amid this severe economic crisis makes no sense. As a result, bank loan interest rates remain high. Currently, they are still at least 8 percent, some even above 10 percent. Of course, high loan interest rates are a burden to economic recovery. 

The 4 percent BI-rate also keeps the interest rate (yield) on bonds (corporate and government) high. Much higher than similar bond yields in Vietnam, the Philippines, or Thailand. Therefore, BI should lower the BI-rate to 1 percent or 1.5 percent, to accelerate economic recovery. Instead of lowering the BI-rate, BI and the government have agreed to run a burden-sharing scheme. This means that BI buys government bonds at an effective interest of 0 percent because BI will return to the government all the interest received. 

Burden-sharing is just a camouflage term, one which can fall into the category of duping or public deception, because burden-sharing is clearly printing money, whereby BI buys government bonds at an effective interest of 0 percent. In this case, BI does not bear the burden at all because BI income comes from “printing money”. 

Such a monetary policy above is very inappropriate for the central bank of the world’s fourth-largest country, a member of the G20. This is a discriminatory monetary policy against citizens: corporations, small enterprises, and communities versus the government. 

Why is the government allowed an interest rate of 0 percent while the citizens are burdened with high interest? BI should undertake a policy of lowering the BI-rate and loan interest rates so that the public can enjoy the same benefits. However, they have not done that. 

The question is, why? What is wrong? Who benefits? Amid an economic crisis and recession, large banks in Indonesia can still enjoy a Net Interest Margin (NIM) of 5.09 percent in April 2020. This is enormous, like a loan shark.