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MNI INSIGHT: New Bill No Threat to Bank Indonesia Independence

MNI (Sydney)
SYDNEY (MNI)

Planned Omnibus Bill an attempt at building market credibility, not undermining central bank.

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Indonesia's planned Omnibus Bill is a step in Jakarta's effort to gain greater credibility in global financial markets and not an attempt to undermine the independence of the central bank, MNI understands.

Although draft provisions require the bank to take economic policies into account in its decision making, the Finance Ministry holds that the bill will maintain Bank Indonesia's independence in the interests of the country, MNI was told.

The government is pitching the bill as an attempt to modernise the central bank and the country's investment regime. It is its second such attempt. An omnibus bill was shelved in 2020 due to concerns over the independence issue.

The bill is expected to create a new panel to oversee BI, above the current Board of Governors, whilst adding new responsibilities to its mandate, such as maintaining the stability of the financial system and promoting employment.

CONFLICTS

BI is concerned about the legislation, especially as it coincides with the creation of Indonesia's sovereign wealth fund, the Indonesian Investment Authority, MNI understands.

The Minister of Finance will also chair a supervisory board for the fund, which Jakarta will seed with around USD5 billion. However, the fund will differ from other such national funds in that it will seek foreign inbound investment.

BI's current mandate is to maintain the stability of the rupiah and target inflation and some bank officials are concerned there may be conflicts of interest between the new mandate and those of the new fund.

Foreign investors, for example, may in some circumstances prefer a lower rupiah to make investments attractive, and this may conflict with BI's long standing mandate.

The omnibus bill is also believed to include provisions to allow Bank Indonesia to directly purchase government debt. The bank already holds 23.1% of Indonesia's sovereign debt compared with 22.9% held by foreign investors, according to data released this week by Bloomberg.

OTHER AMENDMENTS

Changes enabling BI to purchase government bonds directly, effectively financing the government, have also raised the potential for a conflict of interest. However, sources at the Finance Ministry told MNI that the bill is designed only to modernise the role of the central bank in the economy, and will not compromise its independence.

Other planned financial reforms in the omnibus bill dealing with labour and investment have been welcomed by both domestic and foreign investors. The government maintains its goal is to improve Indonesia's investment regime and make it more attractive, not alienate investors or introduce uncertainty.