Central Bank-Fiscal Coordination in Indonesia: Opportunities and Risks for Investors

In an era of global economic uncertainty, Indonesia’s renewed burden-sharing scheme between Bank Indonesia (BI) and the Ministry of Finance has emerged as a pivotal experiment in central bank-fiscal coordination. This arrangement, which involves BI purchasing government bonds and sharing interest costs to fund initiatives like affordable housing and village cooperatives, reflects a deliberate effort to stimulate growth under President Prabowo Subianto’s Asta Cita agenda. While the policy offers short-term fiscal relief and liquidity injection, its long-term sustainability and implications for market stability warrant careful scrutiny.

Opportunities: Fiscal Support and Liquidity Injection

The burden-sharing scheme is designed to reduce the government’s financing burden by splitting interest costs on Rp200 trillion ($12 billion) of bond purchases between BI and the Ministry of Finance [1]. This mechanism not only lowers borrowing costs for public programs but also aligns with BI’s expansionary monetary policy, which aims to inject liquidity into the financial system while maintaining low interest rates [4]. For investors, this creates a favorable environment for sectors directly tied to government spending, such as construction and rural development, which could benefit from increased infrastructure investment.

Historically, similar schemes during the pandemic demonstrated efficacy in stabilizing markets. For instance, BI’s $40 billion burden-sharing package in 2020 helped finance pandemic response efforts while keeping inflation in check, despite a fiscal deficit peaking at 6.34% of GDP [5]. The current iteration, with a projected 2025 fiscal deficit of 2.53% of GDP, appears more prudent, suggesting a measured approach to balancing growth and fiscal discipline [3].

Risks: Fiscal Dominance and Institutional Credibility

However, the scheme is not without risks. Critics warn that large-scale bond purchases risk fiscal dominance, where monetary policy becomes subordinated to fiscal needs, eroding investor confidence. Economist M. Rizal Taufikurahman cautions that such practices could undermine BI’s independence, with the central bank appearing to operate under the influence of the Finance Ministry [5]. This concern is amplified by the International Monetary Fund’s (IMF) warnings about potential losses on BI’s balance sheet under certain policy scenarios [4].

The legal and political dimensions further complicate the arrangement. While the pandemic-era scheme was framed as a temporary crisis response, the current iteration lacks a clear exit strategy, raising questions about its long-term viability [2]. Prolonged debt monetization could also strain BI’s credibility, particularly if inflationary pressures emerge as demand recovers. Although inflation remains subdued for now, the central bank’s ability to pivot to tighter policy in the future may be constrained by its expanded balance sheet [5].

Market Impact: Rupiah Volatility and Bond Yields

The market’s reaction to the scheme has been mixed. On one hand, BI’s secondary market bond purchases have helped stabilize the rupiah amid global headwinds, such as capital outflows following Donald Trump’s U.S. election victory [1]. On the other, government bond yields have risen to 7.123% as of January 2025, reflecting heightened borrowing costs and investor skepticism about fiscal sustainability [3]. Public debt issuance surged 46.9% year-on-year in the first half of 2025, reaching Rp315.4 trillion ($19.5 billion), underscoring the scale of fiscal reliance on central bank support [3].

Conclusion: Balancing Growth and Stability

For investors, the renewed burden-sharing scheme presents a dual-edged sword. While it offers near-term growth catalysts and liquidity benefits, the risks of fiscal dominance and institutional erosion cannot be ignored. The scheme’s success will hinge on BI’s ability to maintain its independence, implement a credible exit strategy, and avoid inflationary overreach.

As Indonesia navigates this complex policy landscape, stakeholders must remain vigilant. The central bank’s actions, while innovative, must align with long-term macroeconomic stability to preserve investor trust. In this context, the Indonesian Parliament’s role in overseeing fiscal legitimacy and BI’s transparency in communicating policy trade-offs will be critical. For now, the scheme underscores a broader global trend of central banks assuming expanded roles in economic recovery—a trend that demands both optimism and caution.

Source:
[1] Indonesia Turns to Central Bank for Burden Sharing [https://www.bloomberg.com/news/articles/2025-09-03/bank-indonesia-shoulders-some-debt-costs-of-prabowo-s-programs]
[2] The Role of the Indonesian Parliament Integrating Fiscal and Monetary Policies in The State Budget for Handling Covid-19 [https://papers.ssrn.com/sol3/Delivery.cfm/5165551.pdf?abstractid=5165551&mirid=1]
[3] Indonesia’s Government Debt Jumps 47% in First Half of 2025 [https://jakartaglobe.id/business/indonesias-government-debt-jumps-47-in-first-half-of-2025]
[4] Bank Indonesia Defends Rp200 Trillion Burden Sharing Scheme with Finance Ministry [https://en.tempo.co/read/2045869/bank-indonesia-defends-rp200-trillion-burden-sharing-scheme-with-finance-ministry]
[5] Govt, BI shake hands on $40b burden-sharing scheme toward COVID-19 recovery [https://www.thejakartapost.com/news/2020/07/07/govt-bi-shake-hands-on-40b-burden-sharing-scheme-toward-covid-19-recovery.html]