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The central bank plans to overhaul its monetary policy
instrument of Bank Indonesia Certificates (SBI), which has been
criticized for siphoning off idle funds from the banking sector that
could have been channeled the real sector as loans.
Bank Indonesia (BI) is considering deepening its overnight lending
market as an alternative market instrument, as well as gradually
replacing its one- and three-month bills with the government short-term
treasury bills planned to be issued this year.
"We are assessing the possibility of using the overnight lending rate
as a benchmark. It is common in other countries, which either use the
overnight lending rate or the rate of shorter-term bills like seven-day
bills," BI deputy governor Hartadi A. Sarwono.
"The government has also revealed its plans to issue treasury bills
this year, which can be used as future monetary policy instruments as
well."
The overnight lending rate is the interest rate banks use to borrow and
lend one-day funds among each other. A central bank can use it --
setting a target rate for it -- as a monetary policy instrument to
influence market liquidity.
Deepening the local overnight lending market may help BI provide an
alternative for banks to place their excess funds, with a shorter cycle
to avoid the funds being idle for too long.
At present, BI uses its SBI bill sales and reserve requirements on
banks as its main resources to influence the market's money supply. It
sets a BI rate target for the bill sales, which is also used as a
benchmark for bank lending rates, eventually influencing inflation and
growth.
Hartadi acknowledged difficulties in developing the local overnight
lending market and using its rate as a benchmark in the near future,
considering the still diverse condition of the banking sector, with
smaller banks likely to have problems in participating with larger
banks in the overnight lending market.
He however, expected that BI's efforts to consolidate the industry,
which encourages mergers and acquisitions, into fewer and stronger
banks by 2010 will help improve the situation.
Meanwhile, on the use of other shorter-term notes as an alternative to
the SBI bills, BI deputy governor Aslim Tadjuddin had separately said
the central bank planned to move to gradually replace them with the
government's own treasury bills as the situation permitted.
The government plans to issue treasury bills in April, July and
December. It has yet to specify their exact amount or maturity term.
The sale of SBI bills currently amounts to Rp 235 trillion.
This has put banks and the SBI under harsh criticism lately, as the SBI
funds were originally purely for monetary policy measures and thus
considered idle and unproductive for the economy.
Funds from the sales of government treasury bills -- like from other
bonds -- can meanwhile be used for government spending such as
financing infrastructure projects, although a portion must also be
reserved to serve its monetary policy purpose.
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