In response to concerns among economists and market players regarding proposed revisions to legislation on the central bank, Finance Minister Sri Mulyani Indrawati pledged on Sept. 4 that the government would maintain a credible and independent Bank Indonesia (BI) to maintain stability and market trust.

Monetary policy must “remain credible, effective and independent” going forward, the minister stressed, reiterating President Joko “Jokowi” Widodo’s statement earlier last week.

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“The government has not yet discussed the revision to the BI laws that was initiated by the House [of Representatives],” she said at a virtual press briefing last Friday.

“The President’s statement is clear that monetary policy must remain credible, effective and independent,” Sri Mulyani said, citing Jokowi’s pledge during a foreign press briefing on Sept. 1.

The House Legislation Body (Baleg) has proposed a bill that revises the 1999 and 2004 laws on the central bank in the biggest legislative shake-up for the monetary authority since 1999.

The draft bill scraps all provisions on central bank independence and gives the government voting rights on monetary policy. Central bank independence was enforced by law in the wake of the 1998 Asian financial crisis to ensure a prudential central bank for the country.

The bill also expands the central bank's mandates as managing the rupiah exchange rate, managing inflation, boosting economic growth and contributing to sustainable job creation. The prevailing laws stipulate only the first two mandates.

Economists said legal reform to expand the central bank's mandate was necessary to ensure that the central bank could face the challenges of recent developments in the global economy. They warned, however, that the proposed revisions would curtail BI's independence and macroprudential capacity.

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In addition, Sri Mulyani said the government wanted the central bank to continue buying government bonds through auctions until 2022, citing the uncertainty over when the coronavirus pandemic might end.

“The burden sharing scheme will continue until 2022, in which BI will be a standby buyer of sovereign debt papers in [direct] auctions,” she said.

Sri Mulyani, however, ruled out the possibility of another bond-buying scheme by BI through private placement, which she said was a “one-off policy” for this year only.

The government and BI have agreed to a US$40 billion debt monetization scheme for just this year to fund the COVID-19 response, under which the central bank is to buy up $28 billion in government bonds while shouldering the debt burden.

The government was pursuing systemic financial reform to strengthen its crisis management capacity to more effectively address issues in the financial industry, Sri Mulyani said.

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The reform effort looks to smooth the flow of data and information between members of the Financial System Stability Committee (KSSK) and review macroprudential and microprudential supervision, the responsibility for which respectively resides with BI and the Financial Services Authority (OJK).

The four members of the KSSK, a crisis management task force, are the Finance Ministry, BI, the OJK and the Deposit Insurance Corporation (LPS).