A significant financial initiative has been set in motion by the Indonesian government. It was recently announced by Finance Minister Purbaya Yudhi Sadewa that the nation’s state-controlled banks are being required to dedicate a new allocation of 200 trillion rupiah ($12.2 billion) in government funding exclusively for lending purposes, a move that prohibits the funds from being used to acquire bonds. This action is seen as a key step in a broader strategy to bolster credit growth and stimulate the economy. The liquidity injection into the state banks is understood to be the first major policy decision made by the minister since he assumed office, having committed to elevating the country’s annual economic growth rate, which has been stagnant at around 5% since the conclusion of the COVID-19 pandemic.
The finance minister has previously conveyed that an economic growth rate of between 6% and 7% is a realistic and achievable target for Southeast Asia’s largest economy. Furthermore, he has described President Prabowo Subianto’s more ambitious target of 8% as being “not impossible.” In an effort to facilitate this credit expansion, which is viewed as a vital catalyst for economic stimulation, Mr. Purbaya is in the process of transferring a portion of the government’s cash reserves, which are held at the central bank, to commercial banks. The primary objective of this measure is to ensure that the funds are directed toward the “real sectors” of the economy. The move is intended to address what the minister has referred to as a “dry” banking system, where funds are not being adequately channeled into productive economic activities.
In a decree that was issued, it was mandated that the funds transferred to the state banks be placed into a “deposit on call” instrument for a six-month term. The term could, however, be extended. The funds would be held at an interest rate that is equivalent to approximately 80.5% of the central bank’s policy rate, which is currently set at 5%. This rate is notably higher than the interest rates that state lenders typically offer on six-month rupiah term deposits, which currently range from 2.5% to 5%. Despite the short-term nature of the deposit, the minister indicated that the “deposit on call” instrument provides the government with the flexibility to withdraw the money at any time it is needed for its operational funding. He also assured that the remaining excess cash the government holds at the central bank is sufficient to cover its needs for the rest of the year.
The funding has been strategically distributed among the country’s largest state-controlled lenders. According to the decree, Bank Mandiri, Bank Negara Indonesia, and Bank Rakyat Indonesia are each slated to receive 55 trillion rupiah. Additionally, Bank Tabungan Negara would be allocated 25 trillion rupiah, and Bank Syariah Indonesia would receive 10 trillion.
An analysis from an economist at Maybank, Brian Lee, suggests that an informal understanding may exist between the government and the banks. It is believed that the funds would be rolled over if they are used for loans, a notion that is supported by the government’s clear intentions. The government’s strategy is believed to be centered on the concept of the money multiplier, which posits that as the initial cash injection is lent out and then recirculated through the fractional reserve banking system, the resulting increase to the money supply would comfortably exceed the original amount. The finance minister has also hinted at the possibility of a future top-up to the fund injection. To ensure compliance, the banks will be required to sign a partnership agreement with the ministry’s treasury department. This agreement will contain specific rules on how the funds must be used. Furthermore, the banks will be obligated to provide monthly reports to the department detailing the utilization of the funds. This oversight mechanism is a crucial part of the plan to ensure that the government’s objectives are being met and that the funds are indeed being channeled into the real economy. The policy is a clear departure from a hands-off approach and signals a direct, interventionist role for the government in stimulating economic activity. The effectiveness of this initiative will serve as a key test of the new administration’s economic policies.
