The central bank saga

The House of Representatives failed to select three new deputy governors of the central bank out of the nine candidates put forth early this year by Bank Indonesia Governor Sjahril Sabirin. This means that Bank Indonesia will have to do with only four deputy governors at a time when its work burden is steadily increasing amid the worsening economic crisis as the House will not return from its current recess until late next month.

One may again attack the House for lacking a sense of urgency in dealing with the economic crisis. However, further analysis shows that this episode could simply be yet another twist of events to the saga of the central bank that started last year.

Bank Indonesia was on the verge of insolvency mid-last year after the government refused to recognize the equivalent of several billion of 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 1998. Only a last-minute political compromise between the government and the House of Representatives saved the central bank from technical bankruptcy.

Another major blow hit the central bank in June last year when Sjahril was named a suspect in a corruption case related to the Bank Bali scandal, upon which he was immediately detained. When Sjahril was released early last December he immediately returned to his job, even though he was to face trial at the South Jakarta District Court.

Frustrated by its inability to replace Sjahril, despite his alleged involvement in the scandal, the government last November proposed amendments to the 1999 central bank law that currently provides tenure security to the board of governors. However, the House balked at the proposed amendments, arguing that it was not worthwhile changing the law only to enable the government to replace the board of governors. The International Monetary Fund also opposed the planned amendments, warning that they could compromise the political independence of the central bank. The proposed amendments remain pending at the House.

This episode was followed by the resignation of five deputy governors in mid-November to take moral responsibility for the emergency credit controversy, although they remained at their jobs.

Bizarre? Not in Indonesia, which has been mired in a multidimensional crisis since early 1998 because of the complications of the economic crisis and the transition from three decades of authoritarian government to democracy and from strong-handed, centralized government into regional autonomy.

It is business as usual. Sjahril, despite his status of being a defendant, appears to be functioning normally at work. He has not shown any sign of being demoralized.

We are nevertheless not comfortable with how the government and the House have been treating the central bank, which is supposed to be the bedrock of the monetary system, the guardian of monetary policy and the arbitrator of the financial system. Former president Abdurrahman Wahid never met with Sjahril after the latter's release from detention. Nor has President Megawati Soekarnoputri since her installation in late July.

Despite his status of being a defendant, Sjahril deserves the treatment accorded to a governor of Bank Indonesia, until the court proves his guilt. We should let the court decide on the case and not treat him as a perceived corrupter. After all, the case against him appears very weak now, particularly since all the primary defendants in the Bank Bali corruption case -- Bank Bali directors and several businessmen associated with the Golkar Party and officials of the Indonesian Bank Restructuring Agency -- have been acquitted of all charges by the court. Likewise, not even a single banker has been tried in relation to the alleged abuse of Bank Indonesia's emergency liquidity credits.

Continued derisive treatment of the central bank does not help its confidence in setting and managing monetary policies that have been made increasingly complex by the persistently volatile rupiah.

Bank Indonesia's basic tasks, as stipulated in the 1999 central bank law, have been immensely daunting. Because different from central banks in most other countries that are tasked only with either maintaining currency stability or guarding inflation, Bank Indonesia is responsible for maintaining the stability of the rupiah, general price stability (low inflation) and banking supervision.

Moreover, the worsening economic condition requires good cooperation, a good flow of information between the monetary and fiscal authorities. But how can good cooperation be possible if the government and the House constantly perceive the monetary authority as a corrupt institution?