Indonesia’s new financial laws broaden the role of the central bank.

by Mapping Returns
Indonesia's new financial laws broaden the role of the central bank.

The central bank’s mandate has been expanded to include promoting sustainable economic growth and formalising its debt monetisation operations, according to financial legislation that was approved by the Indonesian parliament on Thursday.

The new laws, officially known as the “Development and Strengthening of Financial Sector” bill, are also perceived as giving former politicians the opportunity to lead Bank Indonesia (BI), raising questions about the institution’s independence.

The more than 500-page bill, according to MPs, aims to modernise legislation to meet issues from the digital era, boost financial sector efficiency, and encourage financial inclusion.

Sri Mulyani Indrawati, the finance minister, told MPs following the vote that the new law removes outdated rules, some of which had been in force for thirty years.

Political party members are expressly prohibited by the new law from standing for any office at BI, including governor.

Politicians can, however, be nominated for BI’s top positions after leaving their party, according to people engaged in the decision-making process.

Allowing former politicians to lead BI rather than technocrats, according to some economists, may endanger the organization’s independence because party links would still be strong and there would be concerns about their qualifications and experience.

The legislation emphasises that the central bank will remain an independent body, but expands its existing single duty of maintaining the value of the rupiah to also include maintaining financial system stability in order to foster sustainable economic growth.

The bank’s bond-buying activities during the pandemic era have now been formalised with the addition of authorisation for BI to purchase government bonds in the primary market in the event that the president announces a crisis situation.

Financial markets have expressed alarm over the possibility that the government may exert pressure on the central bank to inject such support into the economy, especially given Indonesia’s history of out-of-control inflation.

A request for comment from the central bank received no response.

New regulations for banking, insurance, fintech, and digital assets are also included in the statute. Additionally, it calls for the creation of a new oversight committee for the Financial Services Authority in order to improve the governance of financial regulators (OJK). The law also transfers control of cryptocurrency trading from a commodity regulator to the OJK.

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