Govt submits bill to boost central bank's freedom

JAKARTA (JP): The government submitted to the House of Representatives on Wednesday the draft law on the central bank to replace a 1968 law often faulted as ineffective.

Finance minister Bambang Subianto said the bill was designed to boost Bank Indonesia's independence to allow it to effectively operate as the country's highest monetary body.

"Bank Indonesia is given status as an autonomous government body, free from government intervention or from other parties," Bambang told a House plenary session.

He admitted the central bank's lack of effectiveness in its monetary measures in the past resulted from bridled authority under the government.

Bank Indonesia now implements monetary measures established by the government with the help of the Monetary Council.

Bambang said the newly submitted bill also limited BI's operation to focus on establishing monetary policy and monitoring and supervising the flow of the payment system.

According to the bill, the government's involvement with the central bank's policymaking decision will be limited to an invitation to a minister, representing the government, to the bank's monthly meeting.

The minister would be able to give input but would have nonvoting rights.

The bank's governor will be involved in the ministerial Cabinet meeting on economics and finance, and could provide input on the state budget and other policies related to the bank's authority.

Despite greater freedom from government intervention, however, the central bank governor and his deputies are still appointed by the president, the bill says.

The bill would also free the central bank from its task of providing subsidized credits to small and medium businesses, farmers and cooperatives.

Bambang said financing of the loan programs would be done by the government.

"The provision of subsidized credits will be continued by a legal body which will be formed specially by the government," he said.

The government will return the central bank's lending function to the original "lender of last resort", he said.

Bank Indonesia could only provide short-term liquidity financing facilities -- either through liquidity loans or through the Islamic profit-sharing financing mechanism -- to banks with liquidity problems, he said.

The term is limited to 90 days and banks in need of the facility must provide collateral that can be easily liquidized at the value of the loans, he said.

The bill states Bank Indonesia would maintain its role to conduct bank clearances, transaction payments and settlements between banks.

The central bank is allowed to appoint a third party to conduct the clearing and settlement process to improve efficiency.

Under the new bill, the central bank will no longer supervise the country's banks to prevent conflicts of interest.

The government will establish an independent institution by the middle of 2000 to take over the central bank's supervisory task.

In the past, Bank Indonesia's liquidity facility was dispensed to many banks to enable them to survive, which was not necessarily "in tune with the efforts to maintain monetary stability" due to conflict of interests, Bambang said.

The bank's board of directors would consist of its governor and between five and seven directors, to be called deputy governors. (das)