• Puspa Amelia

Indonesia Monetary and Financial Strategy to Fight Against COVID-19 Outbreak

Updated: Aug 31

by Puspa Amelia (puspa.amelia@launcher.id) and Alifia Putri (alifia.putri@launcher.id)

Since the first case of COVID-19 was announced in Indonesia, the pandemic has slowed the growth the national economy. The impact of COVID-19 to Indonesian economy stability is threaten the financial system which indicates by the decreasing of various domestic economic activities so that the Government and the Financial System Stability Committee (“KSSK”) needs to collaborate to mitigate and carry out anticipatory actions to maintain the stability of Monetary Sector. Therefore, on 1 April 2020, our President, Mr. Joko Widodo has issued a Government Regulation in Lieu of Law Number 1 of 2020 on State Financial Policy and Stability of Financial Systems for the Management of COVID-19 and/or Encounter the Threat to National Economy and/or Stability of Financial Systems (“PERPPU COVID-19”).

To support the KSSK in handling the Indonesian financial stability issue, Central Bank of Indonesia (“BI”) is authorized by PERPU COVID-19 to conduct the following actions:

1. Expansion of BI authority to purchase long-term Government Securities (Surat Utang Negara – SUN) and/or Government Sharia Bonds (Surat Berharga Syariah Negara – SBSN) at the primary market to assist the Government to finance the handling of the COVID-19 impact on financial system stability, as the last resort.

2. Providing short-term liquidity loan or short-term liquidity financing facilities based on the sharia principle to Systemic or non-Systemic Banks.

3. Purchasing or repo the Government Securities (Surat Berharga Negara – SBN) owned by the Deposit Insurance Corporation (LPS) to finance the handling of solvency issues at Systemic and non- Systemic Banks, as an anticipatory measure.

4. Providing Special Liquidity Loan (Pinjaman Likuiditas Khusus) to Systemic Bank that has liquidity difficulties and not eligible to obtain the short-term liquidity loan or financing facilities based on sharia principle, that will be guaranteed by the Government and granted based on the Decree of KSSK.

5. Foreign exchange flow management for Indonesian residents, including provisions for the transfer, repatriation, and conversion of foreign exchange to maintain macroeconomic and financial system stability as follows:

  • Applying the policy to manage foreign exchange which only applicable to Indonesian residents (excluding non-residents/ foreign investors). Foreign investment portfolios and Foreign Direct Investment (FDI) are still needed by the Indonesian economy. So that the free foreign exchange traffic policy for foreign investors is still applicable.

  • The foreign exchange flow management for Indonesian residents is still consistent with the principles of prudent macroeconomic management that apply internationally, especially in economic conditions under pressure caused by the COVID-19 pandemic.

6. Providing access to fund the corporations/private companies by repo SUN or SBSN owned by the corporation/private companies through banking.

To strengthen monetary and financial market stability due to the COVID-19 outbreak, BI has taken some actions, by issuing several monetary policies and government press releases, as follow:

1. Changes in Underlying Activities of Domestic Non-Deliverables Forward (“DNDF”) Transaction

At the beginning of March 2020, the IDR exchange rate against USD is crawling up to IDR14,889. 1 per 1 USD and predicted to continue increasing. On 19 March 2020, BI issued the Central Bank of Indonesia Regulation No. 22/2/PBI/2020 on the Second Amendment to Bank Indonesia Regulation Number 20/10/PBI/2018 on Domestic Non-Deliverable Forward Transactions, to hold the growing demand of USD.

The above regulation adding 1 underlying (condition) to conduct the DNDF Transaction which is the one that could be conducted if the foreigner owns the IDR bank account. Hence, the underlying of DNDF Transactions are as follow:

  • trade of goods and services within and outside Indonesia;

  • investments in the form of direct investments, portfolio investments, loans, capitals, and other investments within and outside Indonesia;

  • loan or financing facility by Bank in foreign currencies for trade and investment activities, particularly for transactions between a Bank and Customer; and/or

  • IDR Bank Account ownership by the foreigner.

2. Policies on Statutory Reserves (Giro Wajib Minimum – GWM) to mitigate the risk of COVID-19 outbreaks

BI has issued two regulations relating to GWM, the first one is Board of Governor’s Regulation No. 22/2/PADG/2020 on Fourth Amendment of Board of Governor’s Regulation No. 20/10/PADG/2018 on GWM in IDR and Foreign Currency for Conventional Commercial Banks (“BUK”), Sharia Commercial Banks (“BUS”), and Sharia Business Units (“UUS”). The second regulation related to GWM is Central Bank of Indonesia Regulation No. 22/3/PBI/2020 on Amendment of BI Regulation No.20/3/PBI/2018 concerning GWM in IDR and Foreign Currencies for BUK, BUS, and UUS.

There are 2 (two) things that amended by the regulations, which are:

a. Decreasing GWM in foreign exchange for BUK which was originally 8% to 4%, with the following fulfilment:

  • The portion of daily GWM which was originally 6% is now 2%; and

  • The portion of average GWM remains 2%.

b. Addition of 2 (two) articles that regulate the authority to grant concessions to the fulfillment of GWM in IDR that must be fulfilled daily for BUK, BUS, and UUS in the context of macro prudential policy.

3. The Incentive for Bank which Provides Funding for Certain Economic Activities to Support the Handling of Economic Impacts of the COVID-19 Epidemic

Through Bank Indonesia Regulation No. 22/4/PBI/2020, 31 March 2020, BI grants incentive in the form of concessions for the fulfillment of GWM in IDR for the bank who provides funding for export-import, UMKM, and the other priority sector of economic activities which specified by BI. The incentive will be provided monthly and the scope of providing funds for certain economic activities consist of:

  • Export credit/export financing;

  • Productive imports credit/productive financing of imports;

  • Letter of Credit;

  • UMKM credit or UMKM funding; and/or

  • Credit or other funding determined by BI.

To be able to receive the incentive, the bank shall provide data regarding the provision of funds for certain economic activities, monthly to BI. The data are as follow:

  • BUK monthly report;

  • Monetary stability and the monthly financial system of BUS and UUS;

  • Integrated statement of BUK; and/or

  • Other reports or data determined by BI.

To bank which not submitted the data related to providing correctly will be subject by the following action:

  • A written warning sanction;

  • Stated that the bank never grant any incentive during the period of incorrect data use;

  • BI recalculates the obligation to fulfill GWM in IDR and/or RIM Demand Deposits or Sharia RIM Demand Deposits following the relevant BI provisions; and

  • If based on the recalculation, the bank does not fulfil the obligation to fulfil the GWM in IDR and/or RIM Demand Deposits or Sharia RIM Demand Deposits, the bank will be subject to sanctions following the relevant BI provisions.

The incentive will be granted starting from 16 April 2020 until 31 December 2020, and BI will supervise the bank that obtains incentives through surveillance and/or inspection.

4. BI Relaxes Mandatory Reporting and Late Penalties during COVID-19 Pandemic

On 31 March 2020, through Press Release No.22/25/Dkom, BI inform the following matters:

  • BI has relaxed the mandatory reporting for BUK and any other party that required to submit a report to BI, as well as exporters of non-Natural Resources (non-SDA) that not comply with the provision related to non-SDA Foreign Exchange Export Proceeds (DHE).

  • BI has extended the reporting deadline and relief the penalty for late submission of certain reports, following the attachment of this Press Release.

  • For exporters of non-SDA who not comply with the provision will be postponed by the imposition of Export Suspension Sanction (SPE) until the end of September 2020.

5. Reducing the BI 7-Day Reserve Repo Rate (“BI7DRR”), Deposit Facility Rate (“DFR”), and Lending Facility Rate (“LFR”)

On 19 March 2020, through Press Release No. 22/22/DKom, BI decided to reduce the BI7DRR by 25 bps to 4.50%, DFR by 25 bps to 3.75%, and LFR by 25 bps to 5.25%. Other than that, BI also maintaining the stability of the money market by doing the following actions:

  • Strengthen triple intervention policy to maintain the stability of IDR exchange rate following the currency’s fundamental and market mechanism, including in the spot, DNDF, and purchasing SBN from the secondary market;

  • Extend the SBN repo tenor up to 12 (twelve) months and providing daily auctions to loosen banking IDR liquidity, effective as of 20 March 2020, as well as increasing the frequency of FX Swap auctions to daily to ensure the adequacy of liquidity, effective as of 19 March 2020;

  • Strengthen instrument of foreign exchange Term Deposit and encourage the bank to reduce foreign exchange GWM;

  • Speed up the implementation of Regulation No. 22/2/PBI/2020;

  • Reduce the GWM by 50bps not only for the bank that is engaged in export-import financing but also for the financing of UMKM and other priority sectors, effective as of 1 April 2020;

  • Strengthen the payment system policies, such as ensure the hygiene of paper money and encourage the utilization of cashless payment by reducing the costs of the National Clearing System (SKNBI), maintaining QRIS Merchant Deposit Rate (MDR) of 0% for micro-merchants, and support non-cash disbursements of various government programs, effective from 1 April 2020 to 31 December 2020.

BI has secured a repurchase agreement line (repo line) with the Federal Reserve of the United States of America worth USD60,000,000,000.

The agreement can be utilized by BI if in the even BI needs liquidity of USD. In addition, BI also has repo line cooperation with several institutions, namely the Bank for International Settlements (BIS) worth USD2,500,000,000, Monetary Authority of Singapore (MAS) worth USD3,000,000,000, and other central banks in the region worth USD500,000,000 up to USD1,000,000,000. These agreements will strengthen the second line of defence that has been held by BI so far, such as the Bilateral Currency Swap Arrangement (BCSA) cooperation with several countries, namely with the People's Bank of China (PBOC) worth CNY200,000,000,000 or (equivalent to USD30,000,000,000), Bank of Japan (BOJ) worth USD22,760,000,000, Bank of Korea (BOK) worth KRW10,700,000,000,000 (equivalent to IDR115,000,000,000,000), and Monetary Authority of Singapore (MAS) worth USD10,000,000,000.

These actions were taken by BI to maintain macroeconomic, financial system stability, and sustain the growth of Indonesia's economy in order to keep it well and resilient. BI will continue to strengthen this coordination with the Government and other related parties to closely monitor the dynamics of the spread of COVID-19 and its impact on the Indonesian economy from time to time, as well as further policy coordination steps that need to be taken to.

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