Independent BI 'must no longer act as govt cashier'

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)