The government will transfer half of the Rp400 trillion in cash reserves that it holds with the central bank to state-owned lenders, finance minister Purbaya Yudhi Sadewa told lawmakers in a hearing yesterday, without giving a time frame.

The reserve pile has accumulated due to past underspending, and some should be tapped to support the economy, he said.

“My job here is to rev up the monetary and fiscal engines,” Purbaya said, adding that he has asked the central bank not to absorb the fresh liquidity.

The move may galvanise lending in Indonesia, according to Purbaya, who was sworn in as finance minister on Monday after the surprise ouster of veteran Sri Mulyani Indrawati.

He has been tasked with accelerating growth in Southeast Asia’s economy, and supporting the rollout of the president’s priority programnes.

“From a liquidity perspective, the move to deploy idle funds bodes well for money velocity,” Radhika Rao, senior economist at DBS Bank Ltd., wrote in a research note.

“Liquidity markers are, however, already in ample territory, suggesting that any positive impulse to credit activity will also need an improvement in demand from households and corporates,” she said.

Jakarta’s benchmark stock index climbed a second day, with financials the best performers today.

Recent selling pressure by global funds over political uncertainty had made banking shares a laggard given the sector’s high concentration of ownership by foreigners.

The Indonesian rupiah and government bond yields were little changed.

Still, markets remain jittery with the rupiah holding most of its 1% decline, and stocks paring about half of their almost 4% decline, since Indrawati was replaced as finance minister earlier this week.

Purbaya has said banks shouldn’t use the additional funds to buy government debt, but instead to boost lending, which is growing at its slowest pace in three years.

“The goal is for banks to have more free cash on hand, and banks should not put it anywhere else but in loans,” Purbaya said late yesterday.

“We are forcing the market mechanism to work,” he added.

There is some precedent for tapping the cash reserves, which can be used for tasks such as supporting government financing.

The finance ministry earlier this year placed Rp16 trillion of the buffer with state banks to get them to extend cheap lending for village cooperatives, with some funds earmarked for low-cost housing.

In Indrawati’s final days as finance chief, it revamped a burden-sharing arrangement with the central bank to shoulder the debt costs of both programnes.

Still, she was seen as resisting a transfer from the cash reserves at the scale envisaged by Purbaya.

Purbaya has pledged to spur economic growth beyond 6% in the “not-too-distant future” to hit the president’s 8% target.

He said the weakness in the economy is caused by a “drought” in the financial system, given slow government spending and sluggish money supply growth, despite recent interest rate cuts by the central bank.

“The new fund transfer shouldn’t be inflationary,” he said.

Inflation stood at 2.31% in August, within the central bank’s 1.5%-3.5% target range.

“Inflation occurs when economic growth exceeds potential growth, which is 6.5% or more, so we are still far from any inflation risk,” he said.

To boost spending, Purbaya said his ministry will monitor budget absorption more regularly, especially for programmes with large allocations such as the free school meals.

Meanwhile, Bank Indonesia has cut its policy rate by 125 basis points since September, while reducing the return and the issuance of its rupiah securities, known as SRBI, to loosen up more liquidity.

“This liquidity infusion adds to broader set of measures to jumpstart economic activity,” said Rao, citing the monetary easing, various stimulus measures, and the coordination between the central bank and finance ministry to support spending priorities.