Oxford Analytica, in its 2006 Report on Monetary Policy Transparency, states that Indonesia's overall score is "Compliance in Progress," which remains unchanged from the previous year. Among the improvements over the period monitored was a new monetary policy framework that is now in line with the Central Bank of Indonesia's (BI) inflation-targeting framework. The BI is considering whether its Board of Governors, which oversees monetary policy, should release its minutes to all stakeholders. As required by the BI Law No. 2 of 2004, a Bank Indonesia Supervisory Board (BISB) has now been established. While the BISB has no role in monetary policy, its principal objective is to provide support to the legislature in conducting its surveillance of the BI's accountability, independence, transparency, and credibility. The agency faces some limitations as it does not have clear terms of reference or an allocated budget. BI Law No. 3 of 2004 requires that the majority of BI's banking supervision responsibilities be shifted to a new, independent institution called the Financial Services Authority Institution (FSAI), but discussions about the establishment of the agency never reached an agreement. This has resulted in the BI retaining its banking supervision activities and deferring the transfer of responsibilities to 2010.

General Overview

In its 2006 assessment of monetary policy transparency in Indonesia, Oxford Analytica (OA) maintained its overall positive assessment of "compliance in progress," and notes that the country had made improvements in the preceding year. Chiefly among these was the implementation of a new monetary policy framework that is now in line with the BI inflation-targeting framework. Furthermore, the BI seeks to improve that framework by establishing an inflation monitoring team that brings together senior officials from government departments and the BI. This is expected to "strengthen overall coordination, so that the inflation target becomes a credible and achievable joint objective" (p. 159). The OA report notes that the BI provides information through press releases and monthly, quarterly, and annual economic reports. The BI also sponsors seminars and discussion groups. In addition, Indonesia subscribed to the International Monetary Fund's (IMF) Special Data Dissemination Standard (SDDS) on September 24, 2003. Based on information provided on the IMF's SDDS website, Indonesia meets SDDS requirements for periodicity, coverage, and timeliness of data, although it does avail of the flexibility option with regard to timeliness and periodicity for employment and unemployment data, and timeliness for data on wages and general government. OA notes that in order to improve its external communications, BI officials are discussing the public release of the minutes of Board of Governors meetings.

Under the original Central Bank Act (CBA) No. 23 of 1999, the BI's main objective is to maintain domestic price stability, but amendments made to the CBA in 2004 gave BI three roles: price stability; lender-of-last-resort; and the regulation and supervision of the banking industry until the new Financial Services Authority Institution (FSAI) is established (now set to occur in 2010). The CBA also empowers the BI to introduce and implement monetary policy, regulate the operation of the payments system, and exercise banking supervision functions. Under the CBA, the BI can employ various monetary policy instruments such as open market operations and the setting of both interest rates and minimum reserve requirements.

The CBA came into law after the collapse of the Indonesian banking sector, when the decision to separate the BI's monetary policy from banking supervision responsibilities was made. The law requires that the majority of the BI's banking supervision responsibilities be transferred to a new institution, the FSAI. There have been tremendous delays in establishing the FSAI as authorities underestimated the difficulty involved in undertaking the task. The transfer was originally set to take place by the end of 2002, but has now been pushed to 2010. There are various constraints to transferring the supervision responsibilities out of BI, such as budgeting, and staffing issues. As required by the 2004 CBA amendments, the Bank Indonesia Supervisory Board (BISB) was established in 2005. While the BISB has no role in monetary policy, its principle objective is to provide support to the legislature in conducting its surveillance of the BI's accountability, independence, transparency, and credibility. According to the OA report, the agency faces some limitations, because it does not have clear terms of reference or an allocated budget.

The State Audit Board (BPK) is constitutionally independent from the rest of the government. It has the responsibility to audit the BI and present its findings to the Indonesian House of Representatives (DPR) twice a year. OA indicates that the reconciliation of fiscal and monetary accounts between the Ministry of Finance (MoF) and the BI occurs only once a year, but government officials were expected to reconcile them quarterly as of 2006. The BI still holds equity in various financial institutions, although by law it should have divested in 2001. With the 2004 amendment of the CBA, the BI has until January 2009 to sell off its equity in these companies.

According to the IMF's 2007 Article IV Consultation with Indonesia, the government should exercise caution in reducing interest rates to ensure that the inflation target for 2008 is met. The BI's main objective remains to achieve a medium-term inflation target of low inflation. The IMF recommends addressing appreciation pressures by introducing a monetary and exchange rate policy that include: more appreciation; a limit on excessively large exchange rate movements, and further interest rate cuts. The IMF further recommends that Indonesia shifts its monetary policy objective to its 2008 inflation target of 5+/-1 percent which can be reached given the 2007 target of 6+/-1 percent which was met. According to the IMF, the BI has indicated that it will change the monetary policy rate to the overnight interbank rate, though a date has not been confirmed yet. The introduction of the new framework will ensure the development of the short end of the yield curve. The change in policy will depend on a stable overnight rate and the development of the interbank market.

The Principles

Clarity of roles, responsibilities and objectives of central banks.

CP

The 2006 OA report rates Indonesia's compliance with this principle as "Compliance in Progress." Initially, under the CBA of 1999, the BI's main objective was to maintain domestic price stability, but amendments made to the law in 2004 gave the BI three roles: price stability; lender-of-last-resort; and the regulation and supervision of the banking industry until the FSAI is established (set to occur in 2010) . The CBA also empowers the BI to introduce and implement monetary policy, regulate the operations of the payments system, and exercise banking supervision functions. Under the CBA, the BI can employ various monetary policy instruments such as open market operations and the setting of both the interest rates and the minimum reserve requirements. Both the government and the BI assume responsibility for the country's inflation framework. An inflation-targeting framework was introduced and implemented in 2005 by the BI in consultation with the Indonesian government. The CBA came into law after the collapse of the Indonesian banking sector, when the decision to separate the BI's monetary policy from banking supervision responsibilities was made. The law requires that the majority of the BI's banking supervision responsibilities be transferred to a new institution, the FSAI. There have been significant delays in establishing the FSAI, as authorities underestimated the difficulty involved in undertaking the task.

For the first time in 2003, the governor of the BI was appointed by the DPR, not the president. The BISB was established in 2005, however, the institution has no budget or a mandate and is temporarily funded by the BI. The BISB plays a supervisory role to help ensure transparency and credibility comprises a five-member board. The BPK still has the responsibility to audit the BI and present its findings to the DPR twice a year. The 2006 OA report indicates that the fiscal and monetary accounts reconciliation between the MoF and the BI occur only once a year, but government officials were expected to reconcile them quarterly as of 2006. The BI still holds equity in various financial institutions which, by law, it should have divested in 2001. With the 2004 amendment of the CBA, the BI now has until January 2009 to sell off its equity in these companies.

Open process for formulating and reporting monetary policy decisions.

CP

The 2006 OA report rates Indonesia's compliance with this principle as "Compliance in Progress." In July 2005, the BI implemented a new monetary policy framework consistent with an inflation-targeting scheme. The new framework has four fundamental elements: the use of a BI's reference rate as an operational target; a forward-looking monetary policy decision process; a more transparent communication strategy; and enhanced policy coordination with the government. These efforts are aimed at enhancing the effectiveness of monetary policy and achieving price stability. Because the public understands consumer price index (CPI) better than core inflation, the BI uses the CPI as its target in determining the country's monetary policy.

In an effort to provide better information concerning the country's monetary policy and future money supply, the BI started targeting changes in the interest rate of its short-term debt certificates as opposed to base money, according to OA. The CBA empowers the BI to establish monetary targets by taking into account the determined inflation rate target, relying on instruments such as open market operations on the rupiah and the foreign exchange money market, the setting of discount rates and the BI reference rate, the setting of the statutory reserve requirements, and/or regulation of credit or financing. The CBA also spells out the organization, structure, and functions of the Board of Governors specifying the selection process involved in appointing board members, rules for voting and on conduct of meetings. The BI Board of Governors is composed of a governor, a senior deputy governor, and at least four (and not more than seven) deputy governors. The governor and the senior deputy governor are nominated and appointed by the president but an approval is required from the DPR. Board members are appointed for five-year terms, with possibility of a second term.

By law the BI's Board of Governors is required to hold monthly meetings regarding monetary policy. An advance meeting schedule for the Board of Governors was issued for the first time in 2005. Press releases are usually issued shortly after the monthly meeting has ended, explaining to the public what decisions were taken and why, but the Board has yet to decide whether to release minutes of its meetings. In addition to its mandatory monthly meetings, the Board also meets weekly and quarterly to appraise the economic climate and review the policy objectives.

Public availability of information on monetary policy.

CP

The 2006 OA report rates Indonesia's compliance with this principle as "Compliance in Progress." Indonesia subscribed to the IMF's SDDS on September 24, 2003. Based on information provided on the IMF's SDDS website, Indonesia meets SDDS requirements for periodicity, coverage, and timeliness of data, although it does avail of the flexibility option with regard to timeliness and periodicity for employment and unemployment data, and timeliness for data on wages and general government. The BI's public information services publish the BI's Annual Report and Financial Report, quarterly publications on economic, monetary and banking developments, and monthly reviews on monetary policy. In an effort to make information available to the media and the rest of the public, the office of the governor added a communications bureau in 1998. In addition, the BI maintains public information services on its website and through the IMF's SDDS site. OA notes that the BI releases data weekly and simultaneously to all interested parties. Annual statements, including balance sheets, and the BI's monetary operations are all available on the BI's website . The BPK audits the BI's financial statement and presents its findings to the DPR. The law requires that the BI disclose monetary information such as its Monetary Policy Reports and Monthly Review on the Economy, to the public.

Accountability and assurances of integrity by the central bank.

EN

The 2006 OA report rates Indonesia's compliance with this principle as "Enacted." By law, according to OA, the BI has to adhere to the principles of accountability and transparency in implementing its tasks. The BI has improved its good governance by strengthening its internal management. The BI has the responsibility to explain to parliament the reason for any gaps between the actual and the target range of inflation and present the remedies it intends to employ. The CBA also requires that the Board of Governors frequently appear before legislative committees to brief legislators on monetary policy and the state of the economy. The BI must disseminate its annual report to all stakeholders including the parliament, the president, and the media.

The 2006 OA assessment of Indonesia's monetary policy indicates that the accounting principles used by the BI are regulated in Bank Indonesia Financial Accounting Guidance (PAKBI). The PAKBI conforms to the Indonesian Financial Accounting Standards, international accounting standards, and best practices in other central banks, as well as the agreements among the BI, the BPK, and the Financial Accounting Standards Board of the Indonesian Institute of Accountants (IAI). The BPK, which is constitutionally independent, audits the BI and releases its findings to the public. Some BPK audit reports have listed abuses and mismanagement of resources. An anti corruption body, Coordinating Team for Combating Corruption (Timtastipikor), was established in 2005. Members are appointed by the House of Representatives. BISB's principal role is to monitor the BI's transparency on behalf of the parliament.