JAKARTA (Reuters) -- Indonesia's central bank will purchase government bonds worth up to 439 trillion rupiah ($30.46 billion) in 2021 and 2022 to provide cheaper financing for the government's COVID-19 relief measures, senior officials said.
The fiscal deficit financing scheme is similar to an agreement Bank Indonesia had with the finance ministry last year to fund ballooning health care and welfare bills amid the pandemic, which authorities said was a one-off measure.
Investors and economists have raised concerns about the scheme's effects on inflation and the rupiah.
In a call with investors on Monday, BI Governor Perry Warjiyo cited a rise in infections since June, driven by the delta variant, as the main reason for the agreement under which BI will purchase up to 215 trillion rupiah worth of tradeable bonds in 2021 and 224 trillion rupiah in 2022.
The bonds will carry a floating interest rate equal to BI's three-month reverse repo rate -- currently at 3.06%, but the central bank will return to the government interest payments for bonds worth 58 trillion rupiah in 2021 and 40 trillion rupiah in 2022.
"I cannot imagine buying vaccine, (paying for) medical expenses, by issuing government bonds in the market with the cost of now about 6.3%. I cannot comprehend it," Warjiyo said, referring to the current yield of the benchmark 10-year bond.
Warjiyo and Finance Minister Sri Mulyani Indrawati stressed the agreement would not compromise BI's independence.
BI would continue its plan to reduce liquidity in the banking system next year, said Warjiyo, who also argued that the bank's quantitative easing measures would be more effective by cooperating with fiscal authorities.
At a press briefing on Tuesday, the governor said the central bank was mindful of the agreement's impact on inflation, but he did not expect price pressures to heat up before 2023. Warjiyo also reiterated BI's earliest consideration for an interest rate hike would be at the end of 2022.
Sri Mulyani said the agreement would bring down the government's interest expense to roughly 2.2% of gross domestic product in 2021, from an estimated 2.4%. She said that ratio would be maintained over the next several years, providing greater fiscal headroom for other spending.
"The bond purchases by BI could also limit the potential rise in (Indonesia's) bond yields amid a potential [U.S. Federal Reserve] tapering next year," said Josua Pardede, an economist with Bank Permata. "So I think this will be well accepted by investors."
Since the start of the pandemic, BI has cut its benchmark rate by a cumulative 150 basis points to a record low of 3.50% and injected more than $57 billion of liquidity into the financial system.