Indonesia Draft Law Seeks to Limit Central Bank Autonomy
People exit the Bank Indonesia headquarters in Jakarta, Indonesia. (Photographer: Dimas Ardian/Bloomberg)

Indonesia Draft Law Seeks to Limit Central Bank Autonomy

Indonesia is pursuing another attempt at increasing government influence in the decision-making and operations of its central bank, as well as expanding its ability to fund public debt, according to a draft legislation to be discussed in parliament.

A proposed omnibus financial sector reform bill would require Bank Indonesia to take into account the government’s broad economic strategy when making monetary policy decisions, according to a copy of the bill reviewed by Bloomberg. The central bank’s mandate would also be extended to promoting job creation, supporting sustainable economic growth and keeping stability in the financial system.

Bank Indonesia declined to comment. A finance ministry officer, Yustinus Prastowo, said a draft is in the works.

This is the second time Southeast Asia’s largest economy has attempted to increase the government’s oversight of the central bank, with an earlier measure put forward and ultimately shelved last year after investor pushback. Similar moves to expand central bank responsibilities have been made elsewhere in the region, with South Korea urged to include employment and New Zealand to consider housing prices.

Central Role

Like many countries, Indonesia has leaned on its central bank to absorb the blow dealt by the pandemic. Bank Indonesia has since delivered successive interest-rate cuts, relaxed lending rules, and helped shoulder the largest budget shortfall since the Asian financial crisis. As the pandemic fallout looks set to continue to 2021, threatening the government’s 5% growth goal, monetary authorities could come under renewed pressure to do more to support the economy.

Policy makers will meet next week, and all economists surveyed by Bloomberg forecast the key rate to be kept unchanged.

The draft measure also lays down a new framework for the central bank to finance government debt, initially a one-off move that was allowed last year as the pandemic drained state coffers. During times of financial crisis, Bank Indonesia may directly purchase bonds in the primary market and repurchase government securities held by private companies through banks, the draft rules show. It can also reverse-repurchase debt papers from the Indonesia Deposit Insurance Corporation to address any liquidity issues in the banking sector.

“This measure aims to strengthen the safety net of the financial system, which includes optimizing the mechanism for handling banking problems, strengthening coordination, and restructuring the authority of Bank Indonesia, the Financial Services Authority, and the Deposit Insurance Corporation,” it read.

Reject, Ignore

To be sure, the bill says Bank Indonesia can “reject and/or ignore any form of interference from any party in the context of carrying out” its duties. Other parties are likewise “prohibited from engaging in any form of interference in the implementation of Bank Indonesia duties,” except for matters expressly regulated by the law.

“The independence of the central bank is very important in maintaining a prudent, credible and effective macro policy framework to achieve the goal of safeguarding the economy together with the government,” the bill read, adding that monetary policy must be kept “objective and free from political interests.”

Other highlights of the draft legislation include:

  • Proposes the creation of a supervisory board of Bank Indonesia and the Financial Services Authority. The board, comprised of three members selected by the President and two by the parliament, will have the power to evaluate all policies taken by the two organizations, save for monetary policy decisions.
  • A separate Integrated Banking Supervision Forum will be established among the central bank, banking watchdog and state deposit insurer to monitor the banking sector and formulate policy recommendations to address any problems.
  • The Financial Services Authority will be tasked to conduct their own macroprudential policies for the capital market and non-bank financial industry. It should also support Bank Indonesia’s macroprudential policies and assess the systemic impact of financial conglomeration.
  • The banking regulator can also give written orders to financial institutions to carry out mergers, consolidations, acquisitions, integrations or conversions. It can also exempt certain parties from the obligation to implement the principle of transparency in the capital market to prevent and resolve financial crises.

©2021 Bloomberg L.P.

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