Indonesia Fuels Worries With Plans to Cut Central Bank Autonomy
Indonesia Fuels Worries With Plans to Cut Central Bank Autonomy
(Bloomberg) -- Bank Indonesia’s independence is coming under threat with proposals from lawmakers to give the government greater sway over monetary policy.
A draft bill -- which was prepared by a panel of experts and will now be discussed by various parliamentary committees -- recommends several sweeping changes to the 1999 Central Bank Act: widening the central bank’s mandate to include supporting economic growth and jobs; creating a new monetary council led by the finance minister to coordinate policy with the government; and adding ministers to the bank’s interest rate-setting board.
The rupiah dropped 1.6%, its biggest decline since May, to trade at 14,805 against the dollar as of 10:10 a.m. in Jakarta on Wednesday amid concerns over the plans.
The parliamentary process to change the law could be a drawn-out one and the final draft may not be as radical as the current proposals suggest. Even so, economists say the changes signify a gradual push by lawmakers to get the central bank to comply with the government’s growth objectives, steps that could damage its credibility down the line. The bank already took unprecedented measures this year to finance part of the government’s debt, raising questions about its autonomy.
“We sense that there has long been general discontent over the position of the central bank that is deemed as “too strong” under the current legislation -- and developments during the pandemic have reignited this sentiment,” said Helmi Arman, an economist at Citigroup Inc. in Jakarta. “It is probable that central bank independence will come out of this saga in a weakened position.”
Bank Indonesia and the Finance Ministry haven’t yet commented on the proposals, saying it’s being led by the parliament. President Joko Widodo, speaking to reporters on Tuesday, pledged to maintain the central bank’s independence.
More than two decades after the Asian Financial Crisis decimated Indonesia’s economy, the coronavirus pandemic is challenging authorities like never before. Jokowi, as the president is known, earlier this year scrapped a budget deficit ceiling of 3% of gross domestic product as the government braced for a collapse in government revenue.
He’s increasingly turned to the central bank to help finance the record borrowing needed to respond to the pandemic. The bank agreed this year to buy bonds directly from the government, with authorities assuring investors it was a one-off measure. However, with budget pressures likely to persist into next year, Jokowi has said he’ll need the central bank’s support next year too.
Bhima Yudhistira Adhinegara, an economist at the Institute for Development of Economics and Finance, an independent research group in Jakarta, sees the proposed changes being driven by the deficit financing objective.
‘Terrible’ Plan
“All of this has to do with the government’s goal that the monetary authority must support the widening of the budget deficit. That’s the point,” he said. If the central bank is under the government’s control, as it was prior to the Asian Financial Crisis, “it will be easy for BI in the future to print large amounts of money to finance government spending. This is terrible.”
Several lawmakers said Tuesday the changes would be given careful consideration, but agreed that the central bank’s mandate should be widened to support growth. Heri Gunawan, a member of parliament’s Legislative Committee and Commission XI -- which has oversight of the economy, central bank and financial regulation -- said an expanded role would allow Bank Indonesia to take concrete action to support small and mid-sized businesses, and that it must give attention to four areas: growth, inflation, the exchange rate and unemployment.
The 1999 Central Bank Act conferred it as an independent state institution with a mandate of maintaining currency stability. It achieves its objective by ensuring stable prices, and adopted an explicit inflation target in 2005. Interest rates are set every month by a board of governors, comprising six members of the central bank led by Governor Perry Warjiyo.
The draft bill under consideration by lawmakers proposes including one or more economy ministers and the finance minister onto this board with speaking and voting rights.
Nomura Holdings Inc. analysts, led by Euben Paracuelles, point out that it’s not unusual for a government minister to sit on the central bank’s rate-setting panel -- for example, the Philippine finance secretary is a member of the central bank’s policy board. Still, the “optics may not be good and represent a major change from the existing composition of the BI’s board of governors,” they said in a report.
©2020 Bloomberg L.P.