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Indonesia passes bill to boost central bank freedom.

JAKARTA, April 16 Kyodo

Indonesia's House of Representatives, after agreeing with government initiatives, passed a bill Friday to guarantee the independence of Bank Indonesia, the central bank, allowing it to operate as the country's highest monetary body as recommended by the International Monetary Fund (IMF). Under the agreement and the new legislation, Bank Indonesia must end its banking supervisory function by Dec. 31, 2002 at the latest. The supervisory role will be transferred from the central bank to a new, independent body that will supervise banks, the capital market and all financial services such as pension funds, insurance and leasing firms. The agreement is contained in the new legislation to replace a 1968 law that is widely criticized as ineffective. The legislation will be enacted after President B.J. Habibie signs it. All four factions in the legislature -- the Golkar party, the armed forces, the United Development Party and the Indonesian Democratic Party -- agreed to pass the bill during a plenary session, which was also attended by Bank Indonesia Governor Sjahril Sabirin. "To stress the status of Bank Indonesia is free from government has been agreed that the Bank Indonesia governor cannot be dismissed during his term of office," Finance Minister Bambang Subianto told parliamentarians. "Therefore, the law requires the appointments of (the central bank) governor, senior deputies and junior deputies must be agreed by the House of Representatives," Bambang said. Last year, then President Suharto dismissed the bank's then governor, Soedradjat Djiwandono, only a month before the expiration of his term for disagreeing with Suharto's idea of a currency board system that would peg the rupiah to the U.S. dollar. Bank Indonesia suffers from a loss of credibility because its decisions are often undermined by political interventions. The latest problem allegedly occurred when the announcement of closure against 38 banks initially set for Feb. 27 was delayed until March 13. Some suspected several well-connected business executives intensively lobbied the government to prevent their banks from inclusion on the list of those to be closed. The delay angered the IMF, which criticized Indonesia for what it called a lack of clarity in reporting its banking reforms. Based on the new law, the current role of Bank Indonesia as "lender of last resort" for banks facing liquidity problems will also be limited to providing a maximum 90 days of liquidity. The liquidity facilities must be backed 100% by high quality and liquid assets, which means, during the current economic crisis, only a central bank promissory note is acceptable. The limited lending function of the central bank is expected to guarantee that past weaknesses of Bank Indonesia will not be perpetuated. Bank Indonesia's current financing facilities are divided into short-term liquidity financing and long-term facilities, including subsidized loans for certain economic sectors. The central bank has been widely criticized because many of its facilities have been taken advantage of by errant bankers who are not made to provide enough quality collateral. Under the new law, penalties will be imposed on physical transfer of more than 5 million rupiah (about 585 U.S. dollars) out of and into the country, a bid to curb overseas counterfeiting of the rupiah, which has been rampant since the economic crisis first hit the country in July 1997. The rupiah has been trading at between 8,700 and 9,000 to the dollar over the past few months, far down from the 2,450 when the economic crisis began. The punitive measure also seeks to stem massive outflows of the rupiah, such as one that occurred following the outbreak of bloody riots and unrest in May last year. There are fears violence could recur during the general election set for June 7. "This is not a capital control because you are still free to transfer any amount of money nonphysically," the Bank Indonesia governor told reporters. According to existing laws, physical transfers of more than 5 million rupiah must be reported, but no penalties are imposed.
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Publication:Asian Economic News
Date:Apr 19, 1999
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