Indonesia expands central bank mandate to support stability, growth

INDONESIA’S parliament widened the central bank’s mandate on Thursday (Dec 15) to include supporting sustainable economic growth, and to formalise its direct purchases of government bonds. Critics fear the legislative move may undermine the bank’s independence.

The new bill, called Development and Strengthening of Financial Sector, specifies that Bank Indonesia’s (BI) is an independent agency, and widens its mandate to include maintaining financial system stability to support sustainable economic growth. Until now, its mandate has been solely to keep the rupiah’s value stable – which has been understood to include curbing inflation.

The more-than-500-page bill aims to address challenges in the digital era, improve financial sector efficiency and promote financial inclusion, authorities said.

But concerns raised by the bill, which goes to President Joko Widodo for his expected signature, include whether it could open the door to politicians joining the bank’s board, and whether the bank could be pressured to stimulate growth.

Finance Minister Sri Mulyani Indrawati dismissed such suggestions, saying that the bill would instead strengthen the independence of BI and other regulators. She also insisted that it would not compromise the central bank’s decision-making.

The legislation requires a politician seeking a seat on BI’s board to resign from their political party when they are nominated. Dr Sri Mulyani said that existing rules required a BI candidate to step down from party politics only if they were elected to the board.

“So this is progress in terms of the professional independence of the board of governors,” she told reporters after the vote, adding that this also applied to the board of the Financial Services Authority (OJK).

BI will now be able to buy government bonds in the primary market if the president declares a crisis, effectively formalising its pandemic-era bond-buying operations. This had raised concerns in financial markets, given past instances of runaway inflation in Indonesia, that the government might pressure the central bank to buy government bonds chiefly to plug the fiscal deficit.

BI did not respond to a request for comment. Governor Perry Warjiyo has said the central bank already takes into account economic growth when formulating monetary policy.

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From 2020 to late November, BI bought more than US$60 billion worth of bonds directly from the government.

“I don’t think it’s a problem when the narrative is (for BI) to maintain financial system stability in order to support growth,” said Josua Pardede, an economist at Bank Permata. “It would’ve been a concern if the main objective is to support growth.”

Since BI’s bond-buying programme would remain restricted to certain conditions, markets should not react negatively to the bill, he said. The rupiah and government bonds were little changed on Thursday.

Barclays analysts said that they doubted the change would make BI more dovish.

“The central bank has always cared deeply about economic growth in addition to its inflation-fighting mandate and has never needed this to be spelled out, in our view,” they said in a note, adding that prioritising stability could make BI focus on threats that the bank might otherwise have ignored.

Parliament had been mulling changes over how BI operates since the start of the pandemic, spooking financial markets at one point with the suggestion of giving government ministers voting rights at its monthly monetary policy review. The new legislation drops that idea.

The bill adds rules covering banking, insurance, fintech and digital assets. It also seeks to tighten governance of financial regulators, including calling for a new supervision body for the OJK.

The law also moves the oversight of cryptocurrency trading to the OJK from a commodity regulator. REUTERS