J Soedradjad Djiwandono: What to Expect from BI
Nino Eka Putra ~ FEB UI Public Relations Officer
DEPOK – (17/9/2020) Kompas daily published an article written by J Soedradjad Djiwandono, professor emeritus, the Faculty of Economics and Business, Universitas Indonesia, entitled “What to Expect from Bank Indonesia” in its Opinion page. Below is the complete article.
“What to Expect from Bank Indonesia”
The draft bill on the third amendment of Act of the Republic of Indonesia No. 23 Year 1999 concerning Bank Indonesia being discussed by the government and the House Legislation Body (Baleg) has been under the media spotlight of late.
According to the draft bill circulating in public, there are several points in the law to be amended or replaced. In this column, I will only discuss two points related to the status, tasks and responsibility inherent in most central banks in the world, which I believe are crucial for a central bank’s existence and for it to function effectively as a monetary authority.
I base by opinion on the background of central banking from the monetary economic-banking perspective and from my experience during my tenure at BI, when Indonesia faced a most though not the most challenging task of dealing with the 1997/1998 Asian financial crisis (AFC).
For Indonesia, which together with Thailand and South Korea Selatan was at the epicenter of the crisis, it all started with a drastic depreciation of the rupiah that rapidly and systematically developed into a banking, economic and socio-political crisis before it turned into a total crisis that caused the downfall of President Soeharto after 32 years in power. I have written a lot about my experience during the crisis and BI’s status as an independent institution with the passing of Act of the Republic of Indonesia No. 23/1999.
Without denying the significance of the other points, I will focus my discussion on two main issues, namely changes in the function and main task of BI and its independent status, and the meaning and implications of the proposed changes.
I deem the plan to amend the Act of the Republic of Indonesia concerning BI to have stemmed from the measures taken by the fiscal and monetary-banking and financial authority, which were sychronized and coordinated with measures to deal with the Covid-19 pandemic. The measures were taken in the realm of state finances and financial system stability, resulting from or were related to policies to deal with the extraoridinary problems in public health and the national economy.
The measures were taken based on Government Regulation in Lieu of Law No. 1/2020 concerning State Financial Policies and Financial System Stability for the Handling of the Covid-19 Pandemic, which was later signed into Law No. 2/2020. It seems that the law was issued to provide a legal basis for the measures taken by the Ministry of Finance, BI, the Financial Services Authority (OJK) and the Deposit Insurance Corporation (Lembaga Penjamin Simpanan, LPS), which form the Financial System Stability Committee (Komite Stabilitas Sistem Keuangan, KSSK), to take extraordinary measures in dealing with the extraordinary challenges.
It could be that the measures were taken considering past experiences, particularly the handling of the 1997/1998 crisis and more or less the implications of the 2008 global economic crisis that triggered legal issues. The 1997/1998 crisis was a regional crisis, but Indonesia was at the epicenter. The 2008 crisis was a global crisis with the US and Europe at the epicenter. Indonesia and other Asian countries were in the periphery, which was why for Indonesia, the destructive power of the first crisis was bigger than the second crisis.
The implementation of the policies should be monitored closely to determine whether they are consistent and effective in achieving the objectives without causing negative implications. Adjustment measures are necessary as guidelines. I consider the issuance of the regulation amid the current condition a prudent, normal move. Take for example the Quantitative Easing (QE). To my knowledge, based on the experience of developed nations, there are implications that cannot be fully handled should we expect things to return to normal while a new normal condition is not yet in place.
The question is whether the bill on the third amendment of Act of the Republic of Indonesia No. 23 Year 1999 concerning Bank Indonesia is the right step to implement the policies on the handling of the pandemic that is based on Law No. 2/2020.
Additional task and authority
Because BI’s role to maintain monetary stability is considered too limited, it is proposed that BI’s role is expanded to include support for national economic development. My interpretation of the draft bill is that the additional task is not formulated in the articles in the draft.
As part of the preparation for the drafting of the law, President Habibie invited a number of foreign central banking experts, led by Dr Schlesinger, former president of Bundesbank (Germany’s central bank). Not surprisingly, the decision to give an independent status to BI was made based on the model adopted by Bundesbank. BI had a sole task and responsibility, namely to create and maintain monetary stability and became an independent central bank.
This means no outside interference was allowed, either from the executive or judicial body. The central bank’s independence as the sole monetary authority became a new conventional wisdom in Asia and other countries who suffered a bad experience due to AFC because most central banks in the developing countries in Asia, including Indonesia, were part of the government.
In my opinion, expanding BI’s role to support national economic development is not only natural but also recommended. In fact, I have written or talked about it in several fora as speaker to discuss this issue following the enactmen of Act of the Republic of Indonesia No. 23 Year 1999.
I have tried numerous times to find out about this issue after the law concerning the central bank was enacted. However, the general response was that BI’s role to support national economic development was implied, that BI could not disregard the goals of national development, be it related to economic growth, employment opportunity, poverty eradication, equal distribution of wealth even at the start of the development decade, climate change, or the digital era. I’m not an expert in law, but I believe that the rule of law cannot be based on something that is implied. Such an important regulation must be explicit, even specific and clear so as not to create problems of interpretation during its implementation. A clear regulation is also important for the sake of accountability.
On BI’s independence
From what I’ve discerned from the draft bill and the discources that have developed, I can see that BI is considered too independent, like a state in a state. Therefore, the draft bill should review BI’s independent status. For me, it’s a matter of black or white, to be or not to be. Principally, there should be no difference between reducing and removing its independent status.
In other words, the bill should include a stipulation that removes BI’s independence as a monetary authority by transferring its authority to ot formulate and implement monetary policies to a new body, the Monetary Authority.
Based on the old law (Act of the Republic of Indonesia No 13/1968 concering the Central Bank), with adjustments to the current condition, was proposed that the Monetary Authority whose members include the Minister of Finance, (member concurrently chairman), one or two economic ministers, BI Governor, a member of the BI Board of Directors, and the head of the OJK.
I have also written a lot about this because of my experience in dealing with the 1997/1998 crisis, how BI’s room was very limited. All monetary and banking policies and supervision fell under BI’s jurisdiction, including the banking restructuring policy, which was drafted and discussed before it was finally endorsed as a decision of the Monetary Authority before its implementation by BI.
Therefore, revoking BI’s independent status and transferring its monetary authority to the Monetary Authority, which is led by the Minister of Finance, risks reducing the effectiveness of the support from the monetary-banking sector for the real sector in the national economy. On the contrary, BI has exercised its independence, as indicated by the policies to deal with the pandemic, namely burden sharing with the Ministry of Finance as the fiscal authority through the implementation of QE by BI.
With regard to BI’s independence, I want to stress that learning from the experience of most other economies in the world and BI’s own experience in dealing with the 1997/1998 financial crisis, an independent central bank as the monetary authority is crucial. Besides, a central bank’s independence does not disregard cooperation, coordination and policy synchronization with other institutions because with independence comes accountability, a principle that must be implemented strictly.
It’s like dealing with the Covid-19 pandemic, which requires people to wear masks to protect other people from infections in case we are carriers of the virus. Therefore, if everybody follows the protocol, everyone will be protected from the risk of infection; everyone protects everyone else. Independence that is coupled with accountability will not hinder cooperation and policy synchronization; rather, it ensures optimal results for all.
Regarding the task and responsibility toward development, I’m not trying to copy other countries, but I want to stress that even in the richest and most developed economy in the world, the US, its monetary authority, The Fed, has the responsibility toward national development, broadly formulated as support for achieving aconomic growth or employment opportunity. As an emerging economy, Indonesia should have a central bank whose tasks include support for national development.
If this is taken to mean that BI as a monetary authority will have an additional task, it’s quite strange that at the same time its independent status is removed. It’s like asking someone to do extra work while demoting him. (hjtp)
Source: Kompas daily, Thursday, 17 September 2020 edition. Opini column, Page 6.
(lem)