The central bank law

The government has finally bowed to international pressure against hasty amendments to the 1999 central bank law, under which Bank Indonesia is protected from political interference. Chief economics minister Rizal Ramli said on Wednesday that the House of Representatives had agreed to the government's request to postpone the deliberations of the government-proposed amendments until mid-May to allow adequate time for the International Monetary Fund-appointed panel of independent, foreign and Indonesian experts to review the planned changes to the law.

The formation of the panel seemed to be the only point of agreement reached by the government and the IMF when Rizal visited Washington three weeks ago to mend relations with the multilateral agency -- relations which became prickly after the delay in December of the US$400 million third tranche disbursement of its $5 billion bailout fund for Indonesia.

The postponement of the House deliberations and the government's acquiescence to wait for recommendations from the expert panel will hopefully eliminate the great concerns among the IMF, World Bank and analysts about the independence of Bank Indonesia if the amendments were hastily approved by the House.

The IMF in January joined the chorus of domestic critics who saw the government-proposed amendments to the central bank law mainly as an attempt to give the government broader leeway to intervene in Bank Indonesia's affairs, including replacing its board of governors.

The controversy over the planned amendments then became a bone of contention between the government and the IMF, in addition to the privatization of two nationalized banks, fiscal decentralization and the slow pace of asset recovery by the Indonesian Bank Restructuring Agency (IBRA).

Even though the government claimed when proposing the amendments in November that the changes were aimed mainly at cleansing the central bank of corrupt officials and at establishing clear-cut parameters for performance and accountability, many cannot help but conclude from the draft amendments that the board of governors, notably Governor Sjahril Sabirin, is actually the main target.

Events preceding the government initiative to amend the central bank law did not lend any credence to the stated motive of the move. President Abdurrahman Wahid's controversial attempt in early 2000 to get the central bank governor fired, the government's threat to liquidate the central bank over alleged malfeasance in the extension of several billions of dollars in emergency liquidity loans in 1998 and 1999, and the manners in which the government tried to bulldoze the amendments through the House for approval, all smacked of a vendetta against Sjahril.

Even Abdurrahman's four international advisers who called on him in Jakarta in mid-February strongly recommended that the proposed amendments be dropped.

The advisers, like the IMF, World Bank and all analysts, fully agreed that the central bank should be subject to high standards of accountability for decision-making and management. But many articles in the proposed amendments, instead of reinforcing the central bank's independence, would make it highly vulnerable to partisan politics and government interference.

The role of a strong, independent central bank as the guardian of monetary policy and an arbitrator of the financial system is even more imperative now when the weak government under the erratic leadership of the embattled President Abdurrahman is prone to take populist measures at the expense of sound macroeconomic stability.

Hopefully, now that the thorny issue of the central bank law has been resolved and the sales of Bank Niaga and Bank Central Asia have been definitively scheduled, the IMF will soon start reviewing the September 2000 reform package so that the next set of reform measures can be set in place.

Indonesia urgently needs an IMF-supported reform package to provide the market with a clear economic policy directive amid the current tumultuous political condition in the country.