Indonesia’s lawmakers call for caution over central bank reform

Several lawmakers who attended the Thursday meeting raised concerns over how much influence the government should wield over Bank Indonesia (BI) and whether there are good enough reasons for seeking to revamp the 1999 Central Bank Act.

INDONESIAN lawmakers called for caution over proposals to reform the central bank amid investor worries the changes would erode its independence.

Several lawmakers who attended the Thursday meeting raised concerns over how much influence the government should wield over Bank Indonesia (BI) and whether there are good enough reasons for seeking to revamp the 1999 Central Bank Act.

“The proposal speaks of independence while mentioning coordination with the government and saying the central bank must support the government’s policies, so what kind of independence is that?” said Arteria Dahlan, a lawmaker in the ruling Indonesian Democratic Party of Struggle, or PDIP.

The pushback from lawmakers in the meeting signals that the revamp may not happen as soon or be as extensive as earlier feared by investors.

Concern over changes at BI started after a panel of experts put together a draft bill that proposes widening the bank’s mandate to include supporting economic growth and employment as well as adding ministers to its interest rate-setting board.

The latest version of the bill discussed Thursday also added that the government must consult the central bank in setting out bond issuance plans.

Remaining credible

Central bank governor Perry Warjiyo defended the institution’s independence on Thursday, saying the president and finance minister have made clear that “monetary policy must remain credible, effective and independent.”

Masinton Pasaribu, a member of parliament’s Commission XI that oversees the financial and banking sectors, even questioned who had commissioned the panel of experts to come up with the draft bill.

The lawmakers also called for the need to seek the government’s input on current conditions, to ensure separation of fiscal and monetary policy, and to respect the constitutional basis underlying BI’s standing.

They also pointed out that changes to the central bank could spur fears in the financial markets and add further pressure on the rupiah, which is already Asia’s worst performer this year.

“Even if this is still in the early stages, we really must be wise as this affects the financial sector that’s very sensitive, ” Andreas Eddy Susetyo, a PDI-P lawmaker, said in the meeting.

Separately, The Jakarta Post reported that Indonesia’s economy is widely expected to enter a recession in the third quarter this year after declining 5.32% in the second quarter, with the government expecting the economy to shrink 1.1% at worst this year or grow by only 0.2% at best.

The central bank decided not to comment regarding this year’s GDP estimate but said the economy may grow by 4.8 to 5.8% next year.

The risk of the deeper economic contraction coupled with the prospect of the prolonged spread of the virus in Indonesia, has driven the market to be more volatile than before and may jeopardise the rupiah’s stability, University of Indonesia economist Teuku Riefky said.

“BI’s decision to maintain its macro-prudential policy and expand the unconventional monetary policy measures will prompt liquidity and thus promote economic growth, ” he wrote in a note, adding that the current rate remained attractive to maintain capital inflows and ensure the rupiah’s stability.

The new BI bill proposal is ill-designed and ill-advised, according to CIMB Niaga chief economist Adrian Panggabean, adding that the country had four policy instruments to promote economic growth and jobs, namely monetary policy, fiscal policy, income policy, as well as trade and industry policy.

“So far, fiscal policy has been ineffective and the latter two have been conspicuously mute, ” he told The Jakarta Post, calling for the government to expedite spending to support the economy. — Bloomberg/ The Jakarta Post

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