Why BI Independence Matters
Why should the central bank be separated (independent) from the government as the authority of fiscal policy? Generally, there are at least two answers.
At the end of August, the House of Representatives (DPR) discussed plans to amend the Bank Indonesia (BI) Law. In it there is a plan to form a kind of board tasked with determining monetary policy and led by the finance minister. The BI governor is one of its members.
This idea is practically 180 degrees opposite to Article 9 of Law No. 23/1999 on BI, which is currently in effect. This article forbids any form of interference by any party, including the government, in the duties of BI in setting and implementing monetary policy. The plan to abolish Article 9 and to form a monetary board can be read as an effort to uproot BI\'s independence as the monetary authority. Revoking BI\'s independence, regardless of who proposed the plan, is not the right step. It could even be said to be a step back in the governance of our macroeconomic policies.
Why should the central bank be separated (independent) from the government as the authority of fiscal policy? Generally, there are at least two answers. First, the independence of the central bank is important, so that monetary policy is credible, in the sense that it can be trusted by economic actors (companies and households, owners of production factors) as the basis for their economic decision-making.