Don't Mess with the Central Bank

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  • TEMPO.CO, JakartaThe plan by the government and the House of Representatives to reduce the independence of Bank Indonesia is very dangerous. It would damage the markets and is against the Constitution.

    THE independence of the central bank is a cornerstone of the markets' trust in a nation's financial system. With the central bank free of government intervention, the monetary policy of a country is more credible and trustworthy. In the end, investors become more certain when putting their money into that nation's financial markets. The currency becomes stronger and more stable.

    This classic formula is now under threat in Indonesia. Initially, reports of a plan by the government to issue a governmental regulation in lieu of law (perpu) on reforms to the financial system were followed by the news that the House of Representatives (DPR) has a similar plan through a revision to the Bank Indonesia Law. Both these initiatives are aimed at reducing the independence of the central bank.

    Like many other controversial bills from the DPR elected in 2019, it seems that this revision will pass easily. The coalition supporting President Joko Widodo holds the majority of seats in Senayan. Its members are usually not too interested in opposition from people outside Senayan. This means the public and businesses do not have much choice other than to prepare themselves for the shock of negative market sentiment as a result of this fundamental change.

    In the revised Bank Indonesia Law drawn up at Senayan and released to the public, efforts to reduce Bank Indonesia's (BI) independence are clearly apparent from a number of the proposed changes. For example, Article 4 paragraph 2 proposes to return BI to government control. It explains that BI would have to coordinate with the government in carrying out its duties and using its authority.

    Another fundamental change is the establishment of a monetary board. This body, comprising the finance minister, coordinating minister for the economy, BI governor, BI deputy senior governor, and the chair of the board of commissioners of the Financial Services Authority (OJK), would take over the role of the central bank in planning and implementing monetary policy. The board would be led by the finance minister, not the governor.

    The draft of the revised law also removes from article 19 the ban on intervention in BI carrying out its duties. The central bank's authority to reject and/or ignore intervention from others would also be removed. This change underlines the follow-up plan to eliminate BI's independence.

    No less worrying is that the revised Bank Indonesia Law includes a plan to change the aim of the central bank. In the future, BI would not only be responsible for maintaining the stability of the rupiah, but for also increasing economic growth and creating jobs. This is clearly a strange proposal because economic growth is the responsibility of the fiscal authority which is under the control of the government.

    There are reports that to stop the central bank protesting about this plan, the job of overseeing the bank would be returned to BI. The OJK would only oversee the capital markets. All of these drastic changes seemed to have been triggered by the government's plan to ask BI to print more liquidity to cover next year's budget deficit, something that the BI board of governors has repeatedly opposed.

    Whatever the motive is, this is clearly a step backward. The structure of the central bank and the establishment of the monetary board proposed by Senayan is the same as that of the New Order regime. As a result of the central bank not being independent, our economy was ravaged by the 1997-1998 monetary crisis.

    The independence of Bank Indonesia cannot be removed. Article 23D of the 1945 Constitution clearly states this. If the government and the DPR insist on returning to the New Order, the constitution will have to be amended first. A difficult conflict would be unavoidable. 

    Read the Complete Story in Tempo English Magazine