Jakarta. Bank Indonesia, the country's central bank, sees bank lending to expand by 7 percent to 9 percent next year on the back of low-interest rates and recovery in the economy, Governor Perry Warjiyo said on Wednesday. 

"This year, banking conditions are marked by a credit crunch. This condition will no longer occur in 2021," Perry said at the 2021 Bank Indonesia Annual Meeting on Thursday. This virtual President Joko "Jokowi" Widodo, Finance Minister Sri Mulyani Indrawati, bankers, and business people also attend the meeting. 

Lending shrunk by 0.5 percent in the first ten months this year from the same period a year ago, in line with the slow down in business activities and weak consumer demand amid the Covid-19 pandemic. Both consumers and companies alike clang to their cash, as evident in the 12 percent growth of the third-party funds in local banks in the January to October period.   

Perry said that today, the economy has improved; there has been an increase in people mobility, and the discovery of a vaccine provides optimism. Business activities have begun to open, and the economy has increased as the government ease the restriction to curb the Covid-19 pandemic. 

Other indicators also show improvement. Inflation rose slightly to 1.59 percent in November from 1.44 percent a month earlier, reflecting an increase in consumer demand.

The rupiah exchange rate against the US dollar was stable and tended to be undervalued, Perry said. Foreign exchange reserves continued to increase, while the current account deficit declined and foreign capital flowed into Indonesia.

Those indicators encouraged Bank Indonesia to cut its benchmark rate by 25 basis points last month. 

"Currently, the BI benchmark interest rate is 3.75 percent, the lowest in history," said Perry.

Perry said Bank Indonesia pledged to keep monetary stimuli on going next year, including first maintaining the stability of the rupiah exchange rate according to the fundamentals.

"Second, interest rates will remain low until signs of increasing inflationary pressure appear," Perry said.

Third, Bank Indonesia would continue purchasing government bonds from the primary market to help plug the 2021 State Budget deficit and macroprudential policies, which would also remain accommodative in 202, Perry said.

With this low benchmark interest rate, banks should lower their lending rates so that credit expansion accelerates.

Bank Indonesia has identified six priority sectors for which banks should disburse credit next year, namely the food and beverage industry; the chemical, pharmaceutical, traditional medicine industries; forestry and logging; horticultural crops; plantation crops; and metal ore mining.

These sectors have a low risk of default and make a large contribution to Indonesia's gross domestic product (GDP) and exports, Perry said.