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During the New Order era, the Government subsidized the interest on the KLBI received by Bulog.
However, this import duty policy has not produced good results because of the problem of "moral hazard." Apart from this, the lifting of the subsidy on the interest rate on KLBI which Bulog and the cooperative receive to finance their purchases of rice from farmers has forced these two institutions to operate using credit at commercial interest rates.
Distribution of KLBI (Bank Indonesia Liquidity Credit to agricultural sector increases
The Government's growing attention to the provision of financial support for small- and medium-scale businesses with funds from KLBI seems to be intended to compensate for the removal of a number of subsidies from the agricultural sector.
Bank Indonesia's liquidity credit (KLBI) is credit extended by Bank Indonesia to a number of executing banks as part of the former's funding support for the latter because the latter extends credit to certain sectors as determined by the former.
According to the January 1990 Package, the bank credit facilities which are supported by KLBI are as follows: Agricultural Undertaking Credit, Credit for Cooperatives (for food procurement and productive activity purposes), Credit for Bulog (for food and sugar procurement purposes), Investment Credit, Home Ownership Credit, and Convertible Credit (for plantation purposes).
According to data from Bank Indonesia, the actual distribution of KLBI reached Rp 10.2 trillion for the first four months (January-April) of 1998, up 41% from the corresponding period of 1997.
By the end of December 1997, KLBI totaled Rp 25 trillion, up to Rp 35.2 trillion by April 1998.
The highest increase in the use of KLBI was recorded in food and sugar procurement, up 180% to Rp 15.6 trillion in April from only Rp 5.6 trillion by the end of 1997.
The farm sector and cooperatives account for only 0.8% and 4.5% of the KLBI respectively.
According to plan, Bank Indonesia will expand its KLBI to Rp 15.1 trillion to finance small enterprises.