Jakarta. Bank Indonesia, the country's central bank, has said it may buy government bonds in the primary market to help the government plug a swelling budget deficit during the Covid-19 pandemic. 

The country had abandoned the practice – basically the central bank printing money for the government – in 1999 by issuing a Central Bank Law to impose fiscal discipline on a debt-ridden government struggling with the aftermath of the Asian financial crisis. 

Since then, Bank Indonesia had only been able to buy government bonds from private investors or from banks in the secondary market.

"But this is an abnormal time. The market would not be able to absorb all the bonds if the government issues them on a large scale," Bank Indonesia Governor Perry Warjiyo said in a teleconference on Wednesday. 

"If the market could not absorb them, the interest would skyrocket, none of us wants that. That's why Bank Indonesia should get involved in the primary market to ensure our financing need is met without the interest getting too high," Perry said. 

President Joko "Jokowi" Widodo on Tuesday announced a Rp 405 trillion ($25 billion) stimulus package to battle the Covid-19 pandemic and its impact on the economy.  

The government estimated the plan would push Indonesia's budget deficit to more than 5 percent of its gross domestic product and plans to finance the spending by issuing the so-called recovery bonds. 

On the other hand, liquidity has been at a premium in the market recently. Foreign investors, who usually hold 30 percent to 50 percent of the government bonds, have been selling their holdings to the tune of Rp 153 trillion from Jan. 20 to March 30, Bank Indonesia data showed. 

Finance Minister Sri Mulyani Indrawati said the condition has forced the government to reconsider forgoing the rein in the Central Bank Law temporarily. 

A government regulation in lieu of law (Perppu) signed and enacted by Jokowi late on Tuesday had given Bank Indonesia its old power to buy government bonds from the primary market.   

"We will use [the power] very carefully, very prudently. Our macroprudential policy, one of our strengths, would remain firmly in place," Sri Mulyani said. 

Halim Alamsyah, the head of the Deposit Insurance Agency (LPS), said the Perppu gives the agency the power to issue bonds on its own as an alternative to raising funds other than by collecting premiums from banks or from the government's capital injection. 

"Actually [according to a 2016 Law] on LPS, we are able to raise funds from other parties. This is what was clarified by the Perppu, that LPS can sell bonds to investors under the market mechanism," Halim said. 

The central bank can also indirectly fund the LPS should the need arise. "Indirectly, the government could issue bonds to Bank Indonesia and give the proceeds to LPS," Halim said.