Supervising central bank

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.