February 1, 2023

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Explainer: How will new Indonesian finance laws change the central bank?

JAKARTA, Dec 13 (Reuters) – Indonesia’s parliament is expected to pass a bill this week that will allow former politicians to head Bank Indonesia (BI), the central bank, and expand its mandate to include supporting economic growth, moves that critics say could weaken its independence.

The parliamentary commission overseeing the legislation, called the “Development and Strengthening of Financial Sector” bill, and the finance ministry have agreed on a final draft and the wider parliament is set to hold a vote.

Following are details of some of the clauses in the bill.

POSITION ON POLITICIANS AT THE CENTRAL BANK

The parliamentary commission proposed removing an existing provision banning members of BI’s board of governors from being involved in a political party, but the government turned this down during deliberations, said sources familiar with the talks.

A compromise was reached so that a candidate running for BI’s board, including the governor, “must not be an administrator and/or a member of a political party at the time of nomination”. This means a politician can be nominated, but must resign from a party to run for the job, the sources said.

Some economists believe allowing former politicians rather than technocrats to head BI could threaten its independence as party ties would remain strong while there would also be questions about their expertise and suitability.

However, lawmakers defended the clause saying every one, including politicians, had the right to run for such positions.

President Joko Widodo has previously pledged BI would remain independent.

HOW DOES THE CENTRAL BANK’S MANDATE CHANGE?

BI’s current mandate is maintaining the value of the rupiah currency , which officials have said means maintaining inflation at a certain level and a stable exchange rate.

The central bank now also has an additional mandate to maintain the stability of the financial system in order to support sustainable economic growth.

BI will also be allowed to buy bonds directly from the government if the president declares a crisis situation.

From 2020 to 2022, BI received temporary permission to conduct such debt monetisation operations to help deal with the impact of the pandemic. But this raised concerns in financial markets about the risk of the government putting pressure on the central bank to pump such support into the economy, particularly given Indonesia’s history of runaway inflation.

The bill, however, does not include an earlier recommendation that BI adds job creation as one of its roles.

It does include having a digital rupiah as one of the three legal forms of currency, aside from coins and banknotes.

WHAT DOES IT MEAN FOR CRYPTO ASSETS SUPERVISION?

The regulation, supervision and oversight of crypto assets will now be under the remit of the Financial Services Authority (OJK), according to the bill, instead of the trade ministry’s commodity futures trading regulatory agency, Bappebti.

OJK is an independent body and reports to parliament.

OJK will appoint a top official to supervise technology innovations in the financial sector, digital financial assets and crypto assets. OJK’s supervisory role will also expand to carbon exchanges, among other areas.

HOW DOES THE BILL ADDRESS CONSUMER PROTECTION?

The bill introduces more specific rules on financial sector consumer protection, especially in digital platforms, in an effort to tackle the proliferation of illegal fintech firms.

It introduces administrative sanctions including revoking permits for firms that give false advertisements or fail to secure customer data or conduct activities to improve financial literacy, among other infringements.

WHAT HAPPENS NEXT?

Indonesia’s deliberations on the bill have used an “omnibus” mechanism, which simultaneously revises existing laws in a single vote, as used in a 2020 job creation law and the 2021 tax law.

With more than 500 pages, authorities say the financial bill intends to update regulations to address challenges in the digital era, as well as improve the financial sector’s efficiency.

A plenary parliament session is expected to vote on the bill this week, and lawmakers are expected to approve what was agreed by the commission overseeing the bill.

Once passed, the government has two years to complete the implementing regulations.

Reporting by Stefanno Sulaiman; additional reporting by Ananda Teresia; Editing by Martin Petty, Ed Davies

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