Supervising central bank

The amendments to the 1999 Bank Indonesia Act that were proposed by the government in late 2000 were designed to have been approved by the House of Representatives by January, 2001 at the latest because the proposed changes would affect only several articles that would make the central bank's board of governors more accountable.

However, the planned amendments are still pending. Even the latest plan to have the proposed changes approved by the House at a plenary session today (Sept. 23) is not yet definitively final due to widely differing views between the government and the central bank and between the government and the House.

The political process for amending the Bank Indonesia Act has indeed been quite turbulent, spiced with issues about the personal animosity between then Bank Indonesia Governor Sjahril Sabirin and then president Abdurrahman Wahid, and mired in an international controversy after the intervention by the International Monetary Fund.

Several House leaders who had initially agreed to speed up the deliberation of the proposed amendments in December, 2000, later declined to approve the changes upon learning that the real motive behind the proposed amendments, though coated in a lofty objective' to make the central bank's board of governors more accountable', was to fire Sjahril.

Despite the initially deceptive motive behind the planned amendments, the issue of accountability remains a bone of contention within the House deliberations. While the three parties -- government, House and Bank Indonesia -- have bridged their differences on such matters as financial-sector supervision, financial safety net and the central bank's function as lender of last resort, they remain widely apart regarding the issue of the central bank's accountability.

The government firmly holds that the 1999 Bank Indonesia Act provides the board of governors with an excessive degree of immunity from the processes of accountability normally applicable to other public institutions. It therefore proposed changes that will allow for the establishment of a supervisory board at the central bank.

However, Bank Indonesia flatly opposed such changes, arguing that such intervention may compromise the central bank's independence in setting its monetary stance.

The government has strong points of arguments. Under the 1999 Bank Indonesia Act, which provides the central bank with independence, the board of governors appears to be unusually powerful and yet is subject to lenient procedures of accountability.

The board determines by itself the remunerations of the governor and deputy governors and the central bank's annual budget and yet it is accountable to nobody.

The law only requires the board: To publicly disclose, through mass media at the beginning of its budget year, its evaluation on monetary policies in the previous year and its monetary policies and monetary targets for the following year; to submit a quarterly report to the House on the implementation of its tasks and authority.

These disclosures are not accountability in the real sense because the House does not subject the central bank's reports to any kind of scrutiny. Hence, there has never been a performance evaluation of the board of governors.

Moreover, the current law seems to vest too much power with the governor. That is because the governor is the only one that is authorized to nominate candidates for deputy governors and has the authority to adopt the final decision in case the board of governors fails to reach a consensus.

The government therefore has proposed a checks and balance mechanism through a supervisory board. This board will not be allowed to intervene into the central bank's monetary-policy decisions but will be charged mainly with ensuring good governance responsibility within the board of governors, approving the central bank's annual budget and remuneration of the board of governors and making annual reports to the House on its appraisal of the central bank's performance.

The government proposal, we think, would not in anyway erode Bank Indonesia's independence. It is simply meant to establish a mechanism to hold the central bank responsible for delivering the agreed objectives. After all, since the central bank operates with taxpayers' money it should account for the use of the public money.

It is, we think, not sensible for Bank Indonesia's Governor Burhanuddin Abdullah to flatly and entirely reject the proposal to strengthen the procedures of accountability within the central bank. It is simply all right if the scope of responsibility and authority as well as the job descriptions of the proposed supervisory board are clearly defined and set from the outset.

Fundamental requirements to Bank Indonesia's independence are freedom to set the stance of monetary policies, freedom to refuse to give credits to the government, secured tenures for the board of governors and adequate financial resources to fund its operations. This is the areas where Burhanuddin cannot compromise.