BI in the amended Constitution: Never repeat same mistake<\/p>\n
Umar Juoro, Economist, Jakarta, juoro@indo.net.id<\/p>\n
To meet the demands of reform, the People's Consultative
\nAssembly (MPR) have amended the 1945 Constitution. Subsequent to
\nthe first, second and third phase of amendments, a number of
\narticles are going through amendments in the current fourth
\nphase, which includes the role of Indonesia's Central Bank (BI).<\/p>\n
In the formulations proposed there are several alternatives.<\/p>\n
The first is that monetary policies should be the
\nresponsibility of an independent central bank. The second
\nalternative says that a separate monetary authority should take
\ncare of such policies. The third one is similar to the first,
\nexcept the word "independent" is not used.<\/p>\n
Based on Indonesia's and other countries' experience, when a
\ncentral bank is politically coopted, its function in implementing
\nmonetary policies and supervision of banks is very much impaired.<\/p>\n
During the New Order period, apart from being burdened with
\nmany duties - monetary policies, supervision of banks, payment
\nsystem and boosting the country's development - it often had to
\nbow down to the wishes of the government, or the president, to be
\nmore accurate, who often wielded his power directly or indirectly
\nthrough the minister of finance.<\/p>\n
If the Central Bank had been not "too close" to the
\ngovernment, some of its controversial policies - such as Central
\nBank Liquidity Support (BLBI), full guarantee for third parties'
\nfunds in the problematic banks - could have been not so damaging.
\nDuring that time the Central Bank was obeying the government's
\nwishes, though internally it had its own shortcomings as well.<\/p>\n
To avoid past mistakes and to let the Central Bank fully
\nconcentrate on monetary policies, especially those related to
\nexchange values and inflation, the demands for its independent
\nrole have grown stronger. Hence the issuance of Law no. 23\/1999
\nto make it an independent institution to implement the required
\nmonetary policies.<\/p>\n
However due to the pro and contra situation during the
\nimplementation of this law, it was deemed necessary to make an
\namendment to the constitution.<\/p>\n
Furthermore, during the tenure of former president Abdurrahman
\nWahid, there was a strong desire to change the governor of the
\nCentral Bank. In spite of this, most of the legislators involved
\nin the amendment realized the importance of an independent
\ncentral bank to create a more stable economy for the country.
\nOnly an amendment to the Constitution - rather than laws which
\ncan be easily changed to suit the wishes of anyone in power - can
\nstrengthen and confirm the central bank's independent position.<\/p>\n
The second alternative suggested for the amendment in regard
\nto a separate monetary body reminds us of the Currency Board
\nSystem (CBS), which was planned during the era of former
\npresident Soeharto at the beginning of the country's economic
\ncrisis in 1998. The plan was aborted as it was considered
\nunsuitable for Indonesia's economic condition. The country's
\nforeign currency reserve was not sufficient to make such a plan
\nworkable. What made it less feasible was the fact that
\nIndonesia's economy was closely linked to that of United States,
\nbecause the rupiah was to be pegged to the dollar at a certain
\nvalue.<\/p>\n
Another implication is that the rupiah currency would become
\nless flexible in facilitating exporters' competitive edge.
\nBesides, there could be a serious disparity in earnings because
\nmost of the community would enjoy less access to formal monetary
\nrealm as the amount of money in circulation became more limited
\nas it was brought in proportion to the availability of foreign
\nexchange reserves.<\/p>\n
Of course, there is a benefit of this system: the stability of
\nthe value of a currency will be maintained and inflation is
\nunlikely if the system is consistently applied. However, in
\ndeveloping countries, this is no easy thing to do. The experience
\nin Argentina shows that CBS has not only collapsed but that this
\nsystem has failed to withstand a serious economic crisis.<\/p>\n
In both developed and developing countries, there is enough
\nevidence to show that the independence of the central bank is
\nvery helpful in the creation of economic stability, particularly
\nin monetary terms such as a low-inflation rate and a stable value
\nof the currency. That's why interest rates can be competitive.<\/p>\n
BI alone has a good experience as an independent institution.
\nIn 1999, following a deep economic crisis, BI played a major role
\nin lowering the inflation rate from around 70 percent to only 2
\npercent and, also, in strengthening the exchange value of the
\nrupiah from about Rp 15,000 per US$1 to around Rp 6,700 to the
\ndollar.<\/p>\n
Unfortunately, very often BI has failed to work to the optimum
\nowing to frequent political intervention.<\/p>\n
There is fear, though, that BI's independence will create a
\nstate within a state. This fear is exaggerated. BI is independent
\nonly in the implementation of monetary policies, particularly in
\ndetermining the amount of the money in circulation and
\ncontrolling the rate of inflation, as reflected in the interest
\nrate.<\/p>\n
The independence of BI is also institutionally confined in the
\nsense that the central bank's board of directors cannot be
\ndischarged from office unless they violate the prevailing laws.
\nThis independent state of BI is open to accountability, which is
\ndirectly monitored by the House of People's Representatives, or
\nthrough the central bank's Supervisory Board proposed by the
\nHouse. These matters were discussed in debates on the amendment
\nto the law on the central bank.<\/p>\n
Furthermore, the amendment of the Law is also focused on the
\ncomposition of the board of governors of BI and also on how they
\nare appointed. It seems that the House's working committee
\nassigned to amend the Law agreed that the names of the governor
\nand senior deputy to governors should be submitted by the
\npresident with the approval of the House. The governor and
\nmembers of the senior deputy can come from political parties.
\nHowever, these people must fulfill the requirement that while in
\noffice in BI, they must give up direct relationships with the
\npolitical parties concerned.<\/p>\n
As for the number of deputies to the governor of the Bank of
\nIndonesia, it is still now a topic of discussion between the
\ngovernment and the House with the Bank of Indonesia undertaking
\nseparate monitoring. The present number of five deputies is
\nconsidered adequate. As stated in Law No. 23\/1999, a deputy
\ngovernor of BI had better be proposed by the bank's governor,
\ncoming from BI itself and getting the House's approval.<\/p>\n
Given that it is likely that its governor and senior deputy
\ngovernor will come from outside - even politicians stand a good
\nchance now - it would be better if the deputies to the governor
\ncome from within the bank itself.<\/p>\n
In this way, the work of the board of governors will be
\neffective, particularly in organizing the bank's bureaucracy and
\nmaintaining the continuity of monetary policies.<\/p>\n
The establishment of the board of supervision, as proposed by
\nthe House, can be accepted as an instrument which will assist the
\nHouse in exercising control over the bank's performance without
\nintervention in the stipulation of the policies of the central
\nbank.<\/p>\n
Its main job will be to monitor the performance of the board
\nof governors, in particular, and its performance in general. It
\nis also part of its job to submit a report to the House and give
\na recommendation on what steps the House should take either in
\nthe context of promoting the bank's performance or in overcoming
\nthe problems that arise, be they related to the scope of duty of
\nBI or to efforts to overcome economic problems in general. The
\nbank's board of supervision can reinforce the process of
\naccountability in the House.<\/p>\n
As for the government's proposal that BI allows an interest on
\nthe government's account in this bank, it seems that this will be
\nsomewhat financially burdensome to the bank, especially in the
\npresent transitional period.<\/p>\n
Likewise, the desire to charge interest on the minimum
\nreserves requirement of banks will be very burdensome,
\nfinancially, to BI. These matters had better be excluded from the
\nlaw. If the economic condition improves, they may be discussed
\nagain.<\/p>",
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