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High monetary costs aimed at taming inflation have led Bank Indonesia to project an Rp 1.9 trillion ($203 million) budget deficit for 2009, a central bank official told the House of Representatives finance commission on Monday.

Analysts said rising monetary costs were a consequence of BI’s policy of curbing liquidity and keeping prices down by issuing too many Bank Indonesia notes (SBIs), which yield more than 6.5 percent annual interest.

Darmin Nasution, the central bank’s senior deputy governor, said issuing SBIs to absorb excess liquidity, that would have sparked inflation, had contributed to the shortfall. He said BI’s monetary deficit would come in at Rp 18.3 trillion, partly mitigated by an Rp 16.4 trillion surplus from its operational budget.

Darmin declined to go into more depth. “We cannot disclose the details of the monetary policy budget because it could negatively affect the economy.”

According to Bank Indonesia, SBI holdings have risen 23 percent to Rp 217 trillion through September this year. Foreign holdings of the notes have rocketed more than 300 percent to Rp 36 trillion over the same period.

“Do not think that we are happy to absorb the excess liquidity, because the cost is very expensive. We are forced to do it to control domestic liquidity because the economy cannot absorb all the money,” Darmin said.

David Sumual, an economist at PT Bank Central Asia, said the economic crisis had sown distrust and slowed down the domestic and global economies. These conditions limited business expansion and infrastructure development, as reflected by rising undisbursed loans in the banking system, he said.

When loans are not disbursed, banks usually invest the funds in SBIs to pay interest on deposits.

“Past crises have always caused low credit disbursement and increased SBI issuance. The [amount] of outstanding SBIs will fall if the economy returns to its normal cycle,” David said.

Halim Alamsyah, BI’s director of banking research and regulation, acknowledged the amount of undisbursed loans remained quite high. Through September this year, the undisbursed loan ratio rose to 22 percent.

“Not many [big customers] have taken their loans. The undisbursed loan ratio is usually less than 20 percent,” Halim said.

David urged BI to gradually decrease foreign ownership of SBIs. “I do not see other countries’ central banks issuing similar notes for foreign investors. The policy contributes significantly to rising monetary costs.”

Anton Hendranata, an economist with PT Bank Danamon, echoed David’s sentiments. “I heard the central bank has plans to limit foreign ownership of SBIs. If implemented, it will be good to decrease economic and exchange rate volatility from hot money flowing in and out so fast,” he said.

Darmin said BI’s monetary policy had succeeded in lowering inflationary pressures.

“Currently our midterm inflation is around 5 to 6 percent, which is lower than in the Suharto era, when it sometimes reached double digits. However, it is still higher than other countries where average inflation is 3 to 4 percent,” he said.

To push inflation lower, the central bank also needed the government’s help, Darmin said.

“Other factors that increase inflation are administered prices [for basics such as fuel] set by the government. Poor infrastructure is another prob lem.”