IMF recommends limiting stimulUS purchases to periods of market dysfunction

JAKARTA: The International Monetary Fund IMF has recommended Bank Indonesia BI limit its purchases of government bonds to periods of market dysfunction in 2022, as Southeast Asia's largest economy begins to unwind the Pandemic-era economic stimulus.

In a report published on Wednesday January 26th, the fund recommended that BI allow greater flexibility in the exchange rate if the economy is facing adverse spillovers from global monetary tightening.

The IMF team supports the authorities' commitment to leave from monetary budget financing by the end of 2022 target date, and further recommends confining further primary market purchases under the market mechanism this year only to periods of severe market dysfunction, Cheng Hoon Lim, the Indonesia mission chief, said in a press briefing for its so-called Article IV.

Since 2020, BI has cut interest rates by 150 basis points and injected tens of billions of dollars to help Indonesia weather the economic impact of the COVID-19 epidemic.

Some of the government's debt interest expenses have been covered by government bond purchases in auctions and private placement.

In a first step toward rolling back monetary stimulus, BI will raise the reserve requirement ratio by 300 basis points for banks from March to September by 300 basis points, it said last week.

IMF's Lim said that Indonesia was in a good position to normalise policy and BI's liquidity absorption measure will help anticipate the US Federal Reserve's monetary tightening.

In the event the Fed tightens, we do not anticipate the need for significant capital outflows, so we expect an orderly adjustment in the monetary policy for BI, according to Lim. Indonesia's improved external balance is pointing to the improvement in the external balance on the back of high commodity prices.

In the case of capital outflows, BI should preserve its monetary policy space by allowing the rupiah to absorb the shock first, Lim said.

The IMF downgraded Indonesia's 2022 economic growth forecast to 5.6 per cent in 2022, from 5.9 per cent in its October report, which Lim said was due to the spread of the Omicron variant and slower global economic growth. The GDP growth is 6 per cent in the year 2023, according to the fund.