Govt urges House to quickly complete amendment of BI law

The Jakarta Post, Jakarta

The government urged on Friday the House of Representatives to quickly approve the proposed bill on the amendment of the central bank law because a further delay would cause a costly set back in other key financial sector reform programs.

"If the amendment of the central bank law is delayed, other programs would also be affected," Director General of Financial Institutions of the Ministry of Finance was quoted by detik.com as saying.

The government and the House's special committee have been debating the bill on the amendment of Law No. 23/1999 on Bank Indonesia for two years now. The snail's pace process was mainly due to strong opposition from the central bank over the proposed contents of the bill.

The deliberation was supposed to be completed on Thursday, but as the central bank continued to oppose certain key issues, the House committee decided to extend the deliberation process for an indefinite period of time. The current House sitting is scheduled to end on Sept. 26 and to resume in late October.

Darmin hoped the House could complete the amendment process by the end of this year.

He explained that without the completion of the bill, the government could not proceed with other key financial sector reform programs, among others, a gradual termination of the costly blanket guarantee program and setting up an insurance deposit scheme.

Darmin said that the government was hopeful that if a new central bank law could be approved by the end of this year, the government could start the gradual elimination of the blanket guarantee program next year.

The blanket guarantee program was introduced in 1998 when confidence in the banking sector was at a low. Under this program, the government guarantees all obligations of closed down banks.

The government now intends to gradually stop the guarantee program because it is costly and creates moral hazards for banks. Under this plan, the government will stop its guarantee on bank obligations except on time deposits, saving accounts and interbank loans. The government expects this step to be realized in June 2004. The second phasing out stage would only guarantee time deposits sized at no more than Rp 100 million, and this is expected to materialize in January 2005. By this time, the government expects that the law on the establishment of an insurance deposit scheme -- which will replace the government's blanket guarantee program -- will already be approved by the House.

But this program may be further delayed as the central bank continues to oppose the government's proposals. Bank Indonesia, for instance, has strongly opposed a proposal to set up an independent supervisory board, particularly if the board is authorized to assess the Bank's monetary policies and can recommend the dismissal of members of the board of governors.

The Ministry of Finance has said that the supervisory board is crucial to ensure accountability and improve corporate governance of the central bank.

Another controversial issue is the disagreement over a plan to set up a new agency called the financial services authority (FSA), which will take over Bank Indonesia's role in supervising and regulating the banking sector. The central bank is less than happy with the proposal.