New chief for central bank

The appointment of a new governor of a central bank is quite an important state affair in almost all countries, closely watched by the market in view of a central bank's function as the bedrock of the monetary system, the guardian of monetary policy and the arbitrator of the financial system.

But the selection of a new governor for Bank Indonesia by the House of Representatives within the next three months is even more crucial, because this will be the first time a new governor has been selected since the bank became a politically independent institution by virtue of the central bank law in May 1999.

The selection process is also quite an opportune time for the central bank to make a clean break from its scandal-tainted past, a legacy from the corrupt, authoritarian government of former president Soeharto, who was ousted in May 1998.

The period between 1997 and mid-2001 was a turbulent one for Bank Indonesia, marred by allegations of corruption and collusion. Its governor, Sjahril Sabirin, became embroiled in a personal dispute with then president Abdurrahman Wahid in 2000, which was followed by Sjahril's prosecution and jailing for six months and capped by the resignation of five of the bank's seven deputy governors in November 2000, though they remained at their jobs.

Bank Indonesia was on the verge of insolvency in mid-2000 after the government did not recognize the equivalent of several billion dollars in emergency liquidity credits the central bank injected into the banking system at the height of the financial crisis between late 1997 and early 1999. Only a last-minute political compromise between the government and the House saved the central bank from technical bankruptcy.

Even though Sjahril was acquitted of all charges of corruption by the high court, several former deputy governors of the central bank are still on trial for graft and allegations of corruption related to the emergency liquidity credits continue to haunt Bank Indonesia.

President Megawati Soekarnoputri has nominated three candidates to replace Sjahril, who was appointed by Soeharto in February 1998 and who will conclude his term on May 17.

All of the candidates are central bank insiders with adequate technical competence. Miranda Swaray Goeltom is currently a deputy governor and widely known as Sjahril's most trusted member of the board of governors and a popular and articulate spokesperson for Bank Indonesia. Burhanuddin Abdullah is a former deputy governor who was appointed by Abdurrahman as his chief economics minister in June 2001, a post he held for only about a month before President Megawati took over the government in July. Cyrillus Harinowo is also a former deputy governor who is now on assignment as a technical assistance adviser to the International Monetary Fund.

Technical competence is indeed crucial for the chief of the central bank because monetary policy is the most closely watched indicator of economic policy, and monetary policy action tends to have a fairly immediate impact on real economic activities. That is perhaps one of the reasons why Megawati did not venture outside of Bank Indonesia to look for alternative candidates.

However, technical competence is only one of the basic requirements that must be met by the new governor. More important is the integrity and managerial and leadership skills to preside over the board of governors and to resist political pressure, while at the same time maintaining good coordination with the fiscal authorities (government).

Moreover, it is the integrity and leadership of an institution's chief that inspires market confidence, particularly in a politically independent institution like the central bank.

That is because Bank Indonesia's basic tasks, as stipulated in the 1999 central bank law, are extremely daunting. Different from central banks in most other countries, which are tasked only with maintaining currency stability or guarding inflation rates, Bank Indonesia is responsible for maintaining the stability of the rupiah, general price stability (low inflation) and banking supervision, at least for the next two years.

Also different from many other central banks, the position of the central bank governor in Indonesia is unusually powerful because the law stipulates that in case the board of governors cannot reach a consensus the governor will make the final decision.

We should allow the House to select the candidate with all the basic characteristics needed to execute the daunting and important tasks of the central bank. But, given the crucial role of the central bank, the politicians would be well advised not to consider the interests of their political parties during the selection process.

Important, too, is that the House allow for extensive, vigorous public debate on the candidates, involving experts from financial organizations and institutions, to ensure that the selected candidate is the most able to lead Bank Indonesia into a new era of strong market confidence in Indonesia's monetary policies and financial system.