Govt submits bill to boost central bank's freedom

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)