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Indonesian central bank independence comes under new attack



JAKARTA – Indonesia crossed the Rubicon earlier this year when its central bank became one of the first in the world to break the unwritten taboo of buying bonds directly from the government.

Today, the Bank of Indonesia was put in the spotlight again, as lawmakers discuss proposals to amend the law governing the central bank that would potentially strip it of its independence – a cornerstone of modern monetary policy .

The late August proposal sent the rupee, already the region’s worst performing currency, down against the dollar. Economists were quick to raise concerns: “The fact that this is coming from Parliament, in our opinion, may add to market concerns that the independence of Bank of Indonesia is undermined,” Nomura said. in a note.

The central bank’s board of governors consists of six independent members, proposed by the president and voted on by parliament. The new proposal for an “expert panel” made up of current lawmakers aims to give the government more influence by inviting two ministers to join the board and vote at its monthly monetary policy meeting. The recommendation also calls for the creation of a “monetary council” headed by the finance minister to oversee the Bank of Indonesia.

The independence of the central bank is considered important because it protects monetary policy from political interference. A non-independent central bank could be used by politicians to finance excessive public spending in order to generate short-term economic growth despite electoral pressure. Such a lack of fiscal discipline could then lead to economic instability and higher sovereign debt.

Having a cabinet member on the board of a central bank is not a new concept. In the Philippines, for example, a member must be a minister. Still, “the limits of must be clear,” said Josua Pardede, economist at the Permata Bank. “If coordination is necessary, [the existing] The Financial System Stability Committee is sufficient to address this problem and should be strengthened. Monetary policy … must be entirely in the hands of the Bank of Indonesia. “

The independence of the Bank of Indonesia was called into question in March, when President Joko Widodo signed a settlement that allowed it to buy government bonds in the primary market. Then, in July, the central bank and the government agreed to a “burden-sharing” plan under which the Bank of Indonesia bought 397.6 trillion rupees ($ 27 billion) of bonds directly from the government. Jakarta’s $ 40 billion budget deficit financing program to fight COVID-19. All interest payments had to be returned to the government.

Some investor fears have been allayed by time-bound measures – primary market purchases will only be allowed until 2022, and the government and Bank of Indonesia have stressed that burden-sharing is ” punctual ”.

But the proposed legal change aims to put these measures into effect as a permanent tool for the Bank of Indonesia.

The recommendation states that the central bank may make primary market bond purchases “for monetary control operations and / or an emergency funding facility”, while an arrangement similar to the sharing arrangement charges can be taken “under certain economic conditions”. The proposal may also allow Bank Indonesia to provide temporary financing in the event of a government revenue shortfall.

The proposed changes are “potentially damaging to the central bank’s reputation for independence, which was crucial in appeasing investors when the Bank of Indonesia began directly funding the swelling budget deficit this year,” Sung Eun Jung said. , economist at Oxford Economics. “If such a practice is no longer seen as temporary, credit rating agencies are also likely to place Indonesia under greater scrutiny.”

The members of the “expert panel” who put forward the recommendations are unknown, as are their intentions. The plan, however, follows the global trend of calls for increased cooperation between fiscal and monetary policy.

Importantly, Widodo has made it clear that his administration intends to maintain the independence of the central bank. While acknowledging that the government does not yet know the details of the recommendations, the president said in a meeting with foreign correspondents last week that “the government does not want the independence of the Bank of Indonesia to change.” .

“The current conditions for monetary surveillance are good,” said the president.

Sri Mulyani Indrawati, the country’s finance minister, said earlier this week that the proposals are “an initiative of lawmakers” and that the government “has yet to hold discussions” on the recommendations.

“The government recognizes that the structuring and strengthening of the financial system must give priority to the principles of good governance, a clear distribution of tasks and responsibilities for each institution, as well as an adequate control and balance mechanism” , she said.

The Bank of Indonesia declined to comment on the matter.

Any changes to the Bank of Indonesia law will take time. The proposal is under discussion in the legislative body of parliament, which will have to form a bill to be submitted to the House.

“Historically, any bill proposed by the House has a long way to go before it is passed,” said Satria Sambijantoro, economist at Bahana Sekuritas. “In most cases, the government normally publishes its own version of the bill and the final law would include clauses deemed best by the legislative and executive branches.”

The government may also decide to reject the bill – something Nomura economists believe is necessary to allay market fears.

“More explicit statements from President Jokowi and even key members of parliament to dismiss the bill may be needed to allay market concerns on a more permanent basis,” they said. Unless announcements to reject the bill are made, economists added, “there is a risk that market concerns over potential legislative changes initiated by Parliament that undermine the independence of Bank Indonesia could to reemerge”.

Additional reporting by Ismi Damayanti and Bobby Nugroho

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