Govt seeks House nod to monitor capital inflow

JAKARTA (JP): The government is seeking legislative approval to enhance its monitoring of capital flow into and out of the country, but states it is not backing away from its open capital account regime.

Minister of Finance Bambang Subianto said on Friday that better monitoring of the inflow of short-term funds, which are speculative in nature, was needed to prevent a recurrence of the devastating financial crisis.

He stressed the open capital account regime would be maintained despite the plan.

"Maintaining the open capital account regime must be accompanied by an effective monitoring system so that a proper monetary management policy can be obtained," he told the House of Representatives when proposing the bill on the foreign exchange system.

The bill stipulates that all foreign currency and rupiah transfers of particular amounts must be reported to Bank Indonesia through banks or other institutions appointed by the central bank.

The government has yet to decide the minimum amount which would require reporting, but Bank Indonesia director Achjar Iljas said on Friday the equivalent of US$10,000 was being considered.

The bill is expected to be enacted in March.

The country suffered a massive capital outflow in the wake of the August 1997 rupiah flotation, which caused the local currency to tumble by more than 75 percent in value against the U.S. dollar.

Some members of the government have considered following Malaysia's step to adopt a foreign exchange control system in September.

The idea has irked the International Monetary Fund, arranger of a multibillion dollar bailout package for Indonesia.

The government later agreed with the IMF to introduce a capital monitoring system while maintaining the open capital account regime.

Bambang said the regime was needed to provide the conducive investment climate to promote long-term capital inflow to cover the current account deficit.

"Just like any other developing country, Indonesia has been suffering a current account deficit problem of between 2 percent and 3 percent over the past three decades," he pointed out.

The new bill on the foreign exchange system will be enacted together with the new central bank law, both currently under House debate.

The proposed law, which amends the existing central bank law, will create more independence for Bank Indonesia in managing the country's monetary system. But the central bank governor and directors are still appointed by the President.

In Friday's deliberation of the bill, the government turned down the legislature's demand for greater say in deciding the key figures in the central bank to uphold its independence.

Bambang maintained that the governor and directors of Bank Indonesia would be appointed by the President.

"Under the new central bank bill there are clauses that will prevent Bank Indonesia becoming less independent even if its board of governors is appointed by the President," he said.

He said the President did not possess the right to dismiss the governor before his term expired, and directors had different tenures.

The amended central bank law is designed to allow Bank Indonesia to effectively operate as the country's highest monetary body -- free from government intervention in establishing monetary policy -- and in monitoring and supervising the flow of the payment system.

Under the draft legislation, Bank Indonesia's board of directors, consisting of the governor and between five and seven directors or deputy governors, will be appointed by the President.

Bambang also said the government remained firm on its proposal to transfer Bank Indonesia's banking supervisory role to a new independent body by mid-2000 to prevent conflicts of interest between its lender of last resort role and bank supervisory function. (rei)