BI Sells Government Securities to Suppress Inflation

state budget

Bank Indonesia (BI) is trying to suppress inflation in various ways. BI tightened liquidity in the financial market by selling Government Securities (SBN) on the secondary market. This is also a step to attract foreign investors.

BI plans to sell short tenor SBN 0-5 years amounting to Rp 70 trillion. The Indonesian central bank will also sell longer tenor SBN to the secondary market.

On the other hand, Bank Central Asia (BCA) Economist David Sumual said BI’s move to sell SBN could help reduce liquidity and demand for credit, thereby suppressing inflation.

With the addition of SBN in the secondary market from BI, banks or non-banking financing institutions can buy the SBN.

The liquidity of the banking system that was originally reserved for lending may be reduced because banks prefer to buy SBN with lower risk. This condition can reduce the money supply so that inflation is expected to be sloping.

“Funds that were originally for credit can be bought by SBN so that liquidity and money circulation are tighter,” said David.

He added that selling SBN is BI’s next step in its tight monetary policy. Previously, BI had also increased the statutory reserve requirement (GWM) as part of tightening liquidity.

The rupiah statutory reserve requirement for conventional commercial banks, which previously was 5%, rose to 6% starting June 1, 2022, and gradually increased to 7.5% starting July 1, 2022, and 9% starting September 1, 2022.

David explained that the next step in tightening monetary policy after the reserve requirement and selling secondary government securities could be an increase in the benchmark interest rate.

As is known, the SBN market still recorded a large outflow this year due to the heavy flow of foreign capital outflows. BI noted that until July 21, 2022, capital outflows in the SBN market reached Rp 138 trillion.

“If possible, foreigners who haven’t, but in reality, foreigners are selling and not buying,” added David.

The large proportion of BI’s ownership in SBN makes the current yield not reflect the actual conditions, making it less attractive to foreigners.

According to data from the Ministry of Finance as of July 20, 2022, BI’s ownership in SBN reached 25.94% while foreigners only had 14.45%. This condition is in contrast to the pre-pandemic period in which BI only had 9.93% of government SBN while foreigners amounted to 38.57%.

BI ownership jumped sharply because of the burden-sharing policy. The policy requires BI to buy government SBN in a certain amount to be used as government financing in mitigating the impact of the Covid-19 pandemic.