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Indonesia's central bank resists new challenge to independence

Wednesday, January 13, 2016 - 18:45
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Indonesia's central bank is resisting calls from lawmakers for an audit of its foreign-exchange transactions, a proposal that could crimp its ability to intervene in the market to stabilize the often-fragile rupiah.

[JAKARTA] Indonesia's central bank is resisting calls from lawmakers for an audit of its foreign-exchange transactions, a proposal that could crimp its ability to intervene in the market to stabilize the often-fragile rupiah.

Unhappy about the rupiah's pace of weakening against the dollar in 2015, some members of parliament's finance commission want the country's Supreme Audit Agency to vet Bank Indonesia's forex activity.

The central bank's chief is pushing back, arguing the additional scrutiny might spook already-shaky markets.

"An investigative audit of BI is not necessary," Governor Agus Martowardojo, who spent two days this week defending his policies in closed-door meetings with the commission, told reporters.

"They (international investors) might perceive there to be a problem when there is not." Misbakhun, a commission member from the opposition Golkar party, maintains the forex trading should be scrutinised. "Who can say they are proven best-practice policies?" he said. "BI says 'stability' but what does it mean when the rupiah fell so much?" Martowardojo, a former finance minister who has won plaudits for steering Indonesia through recent market ructions, has invited parliamentarians to visit the central bank's dealing rooms to learn how market intervention works - an offer that has not been taken up yet.

It isn't certain the commission will vote to order in the state body that already audits BI's balance-sheet every year.

Even if the special audit proposal is derailed, the effort shows there may be increasing political pressure on BI, which by law is independent when it comes to conducting monetary policy.

Vice President Jusuf Kalla has called repeatedly for the central bank to lower interest rates to lift the economy, which the government estimates grew by 4.8 per cent in 2015, the slowest for six years.

Like all other emerging-market currencies, the rupiah has come under pressure as US interest rates start to rise after years and China has moved its yuan currency lower.

In 2015, the rupiah was Asia's second-worst performing currency, falling by 10 per cent against the dollar. At the lowest point in September, the rupiah was nearly 14,800 to the dollar, its weakest in 17 years.

Between March and November, the central bank spent more than US$15 billion of its foreign reserves defending the currency. In the fourth quarter, the rupiah was the best-performing emerging Asian currency, with a 6.2 per cent jump against the dollar.

The rupiah's better performance and a tumble in Indonesia's inflation rate lead a majority of analysts by Reuters to expect the central bank to lower its key policy rate by 25 basis points to 7.25 per cent on Thursday, which would be its first cut in 11 months.

That might get the government off its back, but without blocking lawmakers from pursuing a special audit.

Brokers questioned the case for having auditors peering over the shoulders of central bank dealers, who might hesitate to make routine trades for fear of sanctions.

Andy Asmoro at Mandiri Securitas, a local brokerage, said central bank actions have been appropriate. "I think BI has done things according to the law," he said. "And BI's independence must be upheld."

REUTERS

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