Indonesian Finance Minister Purbaya Yudhi Sadewa has ordered state-owned banks to use 200 trillion rupiah (about $12.2 billion) of government funds for lending, not buying bonds.
The move is an urgent effort to stimulate sluggish credit growth.
This is Purbaya's first major move since taking office on Monday, with a promise to boost economic growth from around 5% after the COVID-19 pandemic.
The minister is confident that Southeast Asia's largest economy can achieve growth of 6% to 7%, even describing President Prabowo Subianto's target of 8% as not impossible.
Purbaya's strategy is to transfer most of the government funds held at the central bank to commercial banks, so that credit can expand and stimulate the economy. He stressed that these funds must flow into the real sector, not be stored in a dry banking system.
In an official decree last Friday, the funds were placed in a six-month “deposit on call” instrument with an interest rate of around 80.5% of the central bank’s current 5% policy rate. Despite the short maturity, the government can withdraw the funds at any time for operational purposes.
Major state-owned banks such as Bank Mandiri, Bank Negara Indonesia and Bank Rakyat Indonesia each received 55 trillion rupiah, Bank Tabungan Negara 25 trillion, and Bank Syariah Indonesia 10 trillion.
A cooperation agreement will be signed between the banks and the ministry’s treasury department to monitor the use of the funds and monthly reports.
Maybank economist Brian Lee expects there to be an informal agreement that the funds will be renewed if used for loans. The concept of money multiplication through a semi-savings banking system allows the initial injection to grow exponentially.
What is clear is that Purbaya is not just providing a financial injection, but is also trying to break the credit crunch that has gripped the Indonesian economy.
However, focusing on real sector lending requires strict discipline, or the risk of these funds being clogged back up in the capital market.
If this move is successful, it could be a signal that Indonesia is serious about moving out of its comfort zone of moderate growth and pursuing higher targets. But if not, global and domestic economic pressures may continue to weigh on it, raising questions about whether the 8% target is merely an illusion.
