A bill on amending the law, initiated by the House and currently under deliberation will give the government a bigger role in making and managing monetary policy.
he House of Representatives seems determined to strip Bank Indonesia (BI) of its independence, which is mandated in Law No. 23/1999 on the central bank. A bill on amending the law, initiated by the House and currently under deliberation will give the government a bigger role in making and managing monetary policy.
In carrying out its main duties and authority in stabilizing the rupiah, BI is to be free of interference in any form and from any party. The central bank is also required to refuse or disregard any attempt at interference, so it can fulfill its role and function as a monetary authority more effectively and efficiently.
The Central Bank Law was enacted in 1999 soon after the 1998 economic crisis with an aim to gear BI’s function and task more toward maintaining stability, rather than enhancing economic growth. Though the law was revised in 2004 and 2009, the bank has maintained its independence. But now the House, seemingly with the government’s support, intends to reduce the central bank’s independence by requiring it to be more pro-growth in its monetary policy.
However, Law No. 2/2020 — formerly regulation in lieu of law (Perppu) No. 1/2020 — actually contains provisions that allow or even mandate BI to monetize the fiscal deficit by purchasing government bonds in the primary market.
The BI law amendment bill will also return micro-oversight of the banking industry, which is now in the hands of the Financial Services Authority (OJK), to the central bank. The bill will also set up a “Monetary Council” to be chaired by the finance minister, thereby increasing the fiscal authority’s intervention in monetary management.
Placing the central bank under the Monetary Council (recently renamed as the “Macroeconomic Policy Board”) is very risky: This would undermine the confidence of both investors and the market in the credibility of BI’s monetary policy, because a politician or a political party representative could hold the position of finance minister.
This concern is justified. It is common knowledge that there are no permanent friends or enemies in politics; only permanent interests. Political interests are always short-term, regardless of the medium- to long-term impacts of the political decisions made in the present.
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