The global COVID-19 situation that emerge last year had a severe impact on the world’s economy. The world’s GDP annual growth rate dumped at -3.56%, worse than the Global Financial Crisis (GFC) back in 2008[1]. In Indonesia, since the official announcement of the first COVID-19 case in Indonesia, the number of cases increased constantly. To flatten the “curve”, the central government produce a regulation of national partial lockdown that must be imposed at the province and regency/city levels. As an impact, numbers of businesses suffer from losses forcing them to lay off some of their employees represented by a higher unemployment rate of 7.07% (y-o-y) in August 2020. Furthermore, the unprecedented shock slows down the growth by 2.97% (y-o-y) in Q1 2020. Afterwards, the number fell to the trench in Q2 2020 as the economic growth plummeted by a -5.32% rate (y-o-y) and did not bounce to a positive rate in Q3 (even it scores a better rate at -3.49% (y-o-y))[2]. From that on, Indonesia is officially hit by the recession.
The story then proceeds to a solution. Recall the simplest IS-LM model (model that represents how goods and money market works) suggests that increasing the money supply would increase output (or in this case the economic growth), other things being equal. We surely need to engage the economy by injecting lots of liquidity through the market. However, throwing a huge amount of money into the market could destabilize the prices and harm the monetary policy (in this case Inflation Targeting Framework). To ensure that the injection went right, President Joko Widodo and the central government produce an interim regulation which is called Peraturan Pemerintah Pengganti Undang-Undang (Perppu) No. 1 Tahun 2020 that already been ratified as a bill (Undang-Undang No. 2 Tahun 2020). The bill is critical for the government’s legal foundation to perform extraordinary measures in controlling the COVID-19 pandemic. The highlight of the bill that is going to be discussed is that the central bank (Bank Indonesia) now has a clearance to support funding for the government by allowing them to purchase government bonds (Surat Berharga Negara(SBN)) at the primary market. At a first glance, this should be stated as an act of “liquidity injection” that comprises the theory of “increasing money supply to boost the output/economy”. Hence, is that it?
How Does It Work?
The Burden-sharing scheme is first proposed by the government to Bank Indonesia (BI) to tackle the COVID-19 disaster that needs more resources and funds. The implementation is being done by preserving the fiscal space, holding the growth sustainability in the short run, and controlling the budget (Anggaran Pendapatan Belanja Negara(APBN)) deficit that is expected to decline in 2023. Furthermore, it is also performed under the prudent principle that keeps the stability of inflation, exchange rates, and interest rates. The scheme process is carried out by splitting the agenda into public goods and non-public goods funding. Public goods fund is described as an endowment for society’s welfare, including healthcare, social security, particular ministry and institution that are mainly in charge of handling COVID-19, and regional government. On the other hand, non-public goods are designated for the private sector that is now thriving to the fullest, e.g. Small-Medium enterprises (SMEs) and other non-SMEs corporations[3].
All public goods financing is owed by Bank Indonesia (BI), in which BI bought government bonds from a private placement such that the coupon rate is equal to the interest rates (BI 7-day Repo Rate (7DRR)) and will return it all to the government. Furthermore, the government will pay the costs of the non-public goods, such that SMEs and non-SMEs corporations, by issuing bonds to the market whilst BI will contribute to buying as far as the difference between market rate and 3-month BI 7DRR minus 1% deviation. Nevertheless, the leftover non-public goods burden will be covered by the government as much as the market rate that they issued bonds and offering it freely in the market where BI stands as the buyer of the last resort on April 16th, 2020’s MoU (Surat Keputusan Bersama)[3].
In a short thought, the Burden-sharing scheme can be imagined as when you get out with your partner to a fancy restaurant. In that scene, you realise that you only have the money as much as half of the bill, which is only for the food, not for the wine and dessert. For that reason, you asked your partner to split the bill by far that you will cover the food and he/she will do the rest. However, you realise that there are also service charges and taxes that you have to bear. In this situation, you will get your partner to pay for the wine and dessert plus the charges. After coming down to the lobby, you also found out that the valet parking cost is out of your pocket. So, you do not want to mess yourself up (again) in front of your partner that you messaged your friend to lend some money. In return, you will treat them on the next occasion. Moreover, you know, you can still rely on your partner if they are bothered (re: the buyer of the last resort).
The Result So Far
Until today, the Burden-sharing scheme has walked into its third chapter. One of the direct impacts of this scheme is that the 10-year long-term government bond yield gradually decreased since March 2020 while the asset’s price soared. It happens because the majority of those assets are in BI’s custody, which means that the supply of government bonds plunges down. Theoretically, this will be beneficial for corporations and the government because lower borrowing costs will increase spending. In fact, the predicted bonds denomination value that is available to offer is only left IDR 194 billion in the second term of 2021, which given that “small” amount will decrease the yield and increase its price[4]. At the present, the yield of the 10-Year Indonesia Government Bond on December 17th, 2021, was 6.412% and it is lower than the “pandemic time-high” of 8.115% on April 10th, 2020[5]. Hence, this will undoubtedly spur economic activity, right?
Probably, it is not (so far). Since the commencement date of the Burden-sharing scheme, the inflation rate walks on a sluggish path and is still stuck at 1.75% (y-o-y) (per November, Bank Indonesia 2021), obviously lower than the target of 3% (+/-1%). However, BI has decided to preserve the BI 7DRR at a 3.5% rate on December 16th, 2021 and had been doing this since February 18th, 2021. My unprofessional thought tells that this may be caused by the Liquidity Trap that theoretically explained the ineffectiveness of monetary policy because society tends to save their money, even when the interest rates are low. On the other hand, Faiz (2021) explains that this may occur from the impact of the low velocity of money caused by mobility limitations. Therefore, given the abundance of liquidity that is available in the market now, inflation is expected to rise next year to its target as the economy moderately recovers[4].
Outlook for the Future
All in all, the COVID-19 crisis had paralysed the world’s economic venture. Numbers of countries have been aggressively implementing stimulative actions on their monetary policy, not excluding the US, UK, EU, Japan, and other large economies. If we took a sample, the US’ inflation rate now is 6.8% and was the highest since November 1982. Thus, that will make us brace a massive taper in 2022 as the Federal Reserve (The Fed) announced to accelerate the taper until March 2022 instead of mid-2022[6]. Nevertheless, Indonesia’s current account in Q3 achieved a surplus of USD 4.5 billion or 1.5% of GDP and it is the highest since 2009. This surplus compensates for the previous quarter’s deficit with USD 10.7 billion on the Balance of Payment (BoP). As a result, the foreign exchange reserves will surge and could offset the effect of the US’ taper in 2022. [7]
From that fact, in my rough opinion, the Burden-sharing scheme does not necessarily have to go through “Chapter IV”. The current account performance was the evidence that we must focus on how to improve our export since the demand is rising offshore. Doing so will flush the domestic economy with money and will make inflation uncontrollable, even could be higher than the target in the next year. But this statement applies if and only if, the Omicron situation does not slap us in the face whilst the recovery and turns it into another episode.
Author: Salsabil Firdaus
Master of Economy, University of Birmingham
References
[1] World Bank, 2020
[2] BPS, 2020
[3] Ministry of Finance. 2020. “Burden Sharing Pembiayaan Penanganan Pandemi Covid-19 antara Pemerintah dan Bank Sentral.” https://www.kemenkeu.go.id/publikasi/siaran-pers/siaran-pers-burden-sharing-pembiayaan-penanganan-pandemi-covid-19-antara-pemerintah-dan-bank-sentral/.
[4] Faiz, Irman. 2021. “Mengkritisi Berbagi Beban Jilid III.” Bisnis Indonesia, September 11, 2021.
[5] CNBC Indonesia, 2021
[6] Kolakowski, Mark. 2021. “Fed Will Double Pace of Tapering.” Investopedia. https://www.investopedia.com/fed-will-double-pace-of-tapering-5213346.[7] Suroyo, Gayatri, Fransiska Nangoy, and Bernadette Christina. 2021. “Indonesia’s Q3 current account surplus biggest in 12 years.” Reuters.