The central bank saga

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?