Independent BI<\/p>\n
The draft law on the central bank (Bank Indonesia), proposed
\nto the House of Representatives on Wednesday, is part of the
\noverall restructuring of the banking industry. The legislation,
\ndesigned to shield the monetary authorities from the myopic
\ninterests of politicians, will address one of the main obstacles
\nto the development of a sound banking system: political
\ninterference, which, aside from the lack of technical competence,
\nhas often been cited as one of the causes, if not the main
\nreason, behind the banking crisis now engulfing the nation.<\/p>\n
The fact that most problem banks have committed egregious
\nviolations of legal lending limits testifies to the central
\nbank's impotency in enforcing its prudential rulings on banks
\nwith strong political connections. The huge sum of bad credits
\nsuffered by state banks and the profile of their main borrowers
\nshow how dominant political influence has been in the lending
\ndecisions made by directors of public banks.<\/p>\n
The long-awaited legislation will provide a legal basis for
\nthe central bank's authority in maintaining monetary stability,
\nsafeguarding the rupiah and setting aggregate monetary targets.<\/p>\n
Though the central bank's governor will still be appointed by
\nthe President, his deputies, called managing directors, are
\nnominated by the governor and all are secured with a five-year
\ntenure. They cannot be fired by the President. They can resign in
\nspecial circumstances and can be sacked only if they are
\nconvicted of criminal acts.<\/p>\n
However, independence or autonomy alone is not effective
\nenough to enable the central bank to perform its task properly.
\nPast experiences have shown that Bank Indonesia, as a result of
\nthe 1968 Central Bank Act, has been tasked with so many missions
\nthat often the bank's duties have conflicting objectives.<\/p>\n
The new law therefore seeks to eliminate the central bank's
\nrole as supervisor of the banking sector by mid-2000. An
\nindependent body is to carry out this function, and the central
\nbank will resume its role as a lender of last resort in the real
\nsense. This means that the central bank will provide emergency
\nfunds only to temporarily illiquid banks, and not to insolvent
\nbanks, as it has done until now. Bank Indonesia will also be
\nfreed from the task of providing subsidized credit to farmers and
\nsmall businesses and other government-sponsored development
\nprograms.<\/p>\n
Its autonomous status will not, however, mean that the central
\nbank's policy-making process will be detached from the complex
\nprocess of macro-economic management. The draft law specifically
\nstipulates that the central bank's governor, though not a member
\nof the ministerial cabinet, attends cabinet meetings and that the
\neconomics minister is present at the central bank's monthly
\nmeeting.<\/p>\n
But granting statutory independence to the central bank to
\nprotect it from the hurly-burly of politics is not in itself a
\nguarantee for excellent performance. After all, the central bank
\ndoes not operate in a vacuum. Hence, it also needs a constructive
\npolicy environment, meaning a government which looks beyond the
\nshort-term political costs of its actions and focuses on the
\nlong-term good of the economy.<\/p>\n
Having the right people in the central bank is another
\nprerequisite. The central bank's governor, managing directors and
\nother key personnel must show not only excellent professional
\nqualifications but also a convincingly high degree of personal
\nindependence and integrity.<\/p>\n
Autonomy could lead to arbitrary decisions if the central
\nbank's independence is not underpinned by openness, transparency
\nand accountability. It is most important therefore that the
\ncentral bank announces to the public its annual financial targets
\nas a guidepost to its monetary policy stance in the year ahead.
\nThe declaration of quantitative targets demonstrates the
\nprojected path of monetary policy for everyone to follow and to
\nconsider when making financial decisions. As, in the final
\nanalysis, public support is pivotal to the effectiveness of the
\ncentral bank's monetary policies.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/independent-bi-1447899208",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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