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.