The saga of the central bank

The saga of the central bank

After analyses concluded that the weak central bank fully
controlled by the government was one of the main culprits of
Indonesia's financial crisis in late 1997 and the consequent
banking collapse in 1998, the then B. J. Habibie administration
and the House of Representatives worked at full speed to enact in
May 1999 a new central bank law that granted full autonomy
(political independence) to Bank Indonesia.

But the lawmakers overlooked something that was a vital
element inherent in the exercise of autonomy: accountability and
performance standards. This crucial shortcoming now puts the
Abdurrahman Wahid administration in an imbroglio over the legal
process to replace the top management of Bank Indonesia.

The central bank law does stipulate that the governor and
deputy governors can only be replaced if found guilty of a crime,
incapacitated or resigns. This provision is one of the clauses
that safeguards the independence of the board of governors. But
as recent developments show, in the absence of clear-cut
parameters for accountability and performance standards, this
provision now gives the board of governors a blank check.

An earlier attempt by the President to force Bank Indonesia's
governor Sjahril Sabirin to resign over his alleged involvement
in the Bank Bali scandal, has been protracted in a legal battle.
Sjahril, legally still the governor but an inactive one since his
arrest in June, is under house arrest awaiting trial.

Failing in its first attempt to oust the governor, the
government launched another campaign to make the whole central
bank management dispirited with the hope that the board would
find it almost impossible to do their job and decide to quit. But
even after acting governor Anwar Nasution and four other deputy
governors resigned en masse on Friday night after several months
of being publicly reviled and denounced as responsible for
several billions of dollars in state losses from the extension of
emergency liquidity loans to ailing banks, the process of
appointing a new board of governors remains strewn with legal
hurdles because Sjahril and two other deputy governors have
refused to quit.

It is now clear that the reshuffle can only be made after the
1999 Central Bank Law is amended to tie up Bank Indonesia's
independence to clear performance standards and accountability,
thereby providing the government with a broader leeway to deal
with underperforming executives or those embroiled in law suits.

However essential accountability, standards of performance and
professional conduct are to keep the board of governors on their
toes, we cannot help but suspect that the amendments that are
being proposed to the House are designed mainly to make it easier
for the government to dismiss members of the board of governors.
If that was the case, the end result of the government-Bank
Indonesia battle would be a new central bank under the government
control and one that does not possess autonomy in monetary
management, a condition very much like the one under former
president Soeharto that caused the financial crisis.

Right from the beginning when the President began his legal
attack on Sjahril in relation to the Bank Bali scandal, we got
the impression that his main objective was not primarily to clean
up the central bank and bring the rule of law against those
responsible for the losses in the bailout of ailing banks between
1997 and 1999. After all, Sjahril was not the main suspect in
that scandal. In fact all the primary suspects in the scandal --
Bank Bali directors and several other politically well-connected
businessmen -- have been acquitted of corruption charges by the
court.

The President's main motive seem to be his grudge against
Sjahril, who was part of the team which decided in 1998 to close
down two insolvent banks closely associated with Abdurrahman,
then chairman of the Nahdlatul Ulama Islamic organization, as
well as his personal ambition to have a man he liked and trusted
at the helm of the central bank.

Likewise, the government's threat to recapitalize or liquidate
the central bank over last year's discovery by the Supreme Audit
Agency of alleged improper extension by Bank Indonesia of Rp
138.5 trillion in emergency loans and the alleged misuse of Rp 80
trillion of the loans by recipient bankers seem to appear more as
political pressure to force the board of governors to resign,
rather than a genuine attempt to clean up the institution.

If central bank cleaning and law enforcement were the real
objective, why have thus far, two years after the loan misuse
took place, none of Bank Indonesia officials and recipient
bankers implicated in the loan scam been brought to court.

The House, which is deliberating proposed amendments to the
central bank law, would be well-advised to realize that giving
the President more control over Bank Indonesia isn't the answer
to cleaning up the bank's performance. That even risks
subordinating important financial market decisions to short-term
political concerns. Anything that reduces the power to be an
independent arbitrator of the financial system is a clear
negative signal to the market.