Independent BI 'must no longer act as govt cashier'
JAKARTA (JP): A new central bank law should allow Bank Indonesia to focus its activities on stabilizing inflation and exchange rates and end its role as the government's cashier, experts have said.
Former BI governor J. Soedradjad Djiwandono said that of the central bank's trilogy of functions -- maintaining monetary stability, managing the national payment system, and bank supervision -- "the most crucial to be made independent is the function of monetary management".
He stressed that although BI's function would be limited to stabilizing prices, it remains committed to national economic growth and government employment creation programs.
"Remember that a stable inflation rate provides a good investment climate," he said.
The government and experts from Germany's Bundesbank are currently preparing a draft law to institutionalize BI's autonomy. This will be submitted to the House of Representatives at the end of September.
Soedradjad said that if BI was still required to provide direct support for the government's economic programs, the central bank should use the Bundesbank as a reference model.
"The Bundesbank will support the government's economic targets, but only as long as they're consistent with the central bank's main target," he pointed out.
Soedradjad also said the supervision of banks and nonbanking financial institution should be in one autonomous body, either BI or another institution, because of the conglomeration trend in the banking and finance sectors.
"A separate supervision system is not effective," he said.
Former state-owned Bank BNI director Sutan Remy Sjahdeini said the Indonesian Bank Restructuring Agency (IBRA) could be given the supervisory role.
"But IBRA should be independent and not under the Ministry of Finance," he said.
He added that if BI was to be made independent, the decision to appoint and dismiss the governor must be made by both the President and the House.
Sjahdeini explained that the new central bank law was important to free BI from pressures from state ministers who wanted to make policies only to gain popularity, especially when a general election period was approaching.
Soedradjad, however, said that the new law would not mean much if BI failed to win public confidence and credibility to make its policies acceptable.
"This can only be achieved if BI's officials are professional and have integrity. This is the most challenging part for BI," he said.
The ongoing preparations to create an independent central bank largely focus on whether Bank Indonesia should cease being the government's cashier and limit its function to stabilizing inflation and the rupiah's exchange rate and whether the bank should relinquish its bank supervision duty, according to a BI director.
Achjar Iljas said that based on the 1968 Central Bank Law, BI's duty was not only to maintain price stability but also to push economic growth and create employment by providing money for government programs and special interest rate on certain economic sectors.
"There has always been a trade-off in implementing the two functions, that's why it's impossible to achieve optimum results," he said yesterday at a seminar on the independence of the central bank.
"It should also be realized that a more focused function will be easier to implement and make for improved accountability," he said.
Achjar also said that the legislation drafting team was considering whether BI should maintain its bank supervision duty or relinquish it to another institution because of a potential conflict between maintaining monetary stability and providing liquidity for troubled banks.
He added, however, that if the supervision function was to be maintained in BI's hands for the practical reason that it had the most experience, the central bank's lender-of-last-resort role should not be aimed at bailing out insolvent banks but only to solve temporary liquidity problems.
"But what is more important is to put the supervision of banks and nonbanking financial institutions under one roof, because of the cross management and ownership between the two and their almost similar product," he said. (rei)