16 September 2025 (closed)
Jakarta Composite Index (7,957.70) +20.58 +0.26%
Be aware that there are scammers active on WA pretending to be Indonesia Investments
House Discusses Draft Bill to Change Bank Indonesia's Mandate - Positive or Negative?
A draft law that would amend Law Number 4 of Year 2023 on the Development and Strengthening of the Financial Sector (henceforth: RUU No. 4/2023 P2SK) is currently being discussed by Indonesia's House of Representatives (DPR) and cabinet. If approved, this law would somewhat change the role and power of the central bank (Bank Indonesia).
What Are the Changes?
In the draft law, which is dated 8 September 2025, a couple of interesting changes are proposed. Firstly, regarding the mandate (or objective) of Indonesia's central bank. Under the current law (UU PPSK, Part V, Article 7) we read that:
"Bank Indonesia's objective is to achieve stability in the value of the rupiah, maintain the stability of the country's payment systems, and contribute to maintaining the stability of the financial system in order to support sustainable economic growth".
In the draft law, Bank Indonesia's duties are divided into two parts. In paragraph one Bank Indonesia's duties are still the same as before, namely achieving stability in the value of the rupiah, maintaining the stability of payment systems, and maintaining the stability of the financial system in order to support sustainable economic growth. However, in paragraph two it is stated that in order to achieve the objective that was mentioned in paragraph one, Bank Indonesia has to implement policies and policy mixes that facilitate an economic environment that is conducive to real sector growth and job creation.
The explanatory section of the draft bill states that Bank Indonesia's additional role implies synergizing monetary policy with the government's fiscal and real sector policies, thereby fostering an economic environment conducive to economic growth and job creation, including through the realization of a conducive investment environment, digitalization, export competitiveness, real sector productivity, and the development of an (inclusive) green economy.
Secondly, if the draft bill is approved, then the DPR seems to gain power to have Bank Indonesia board members removed as it can "recommend on the dismissal of board members". Currently, a Bank Indonesia board member can only be removed when (1) he or she resigns, (2) committed a crime, or (3) is permanently unable to attend. However, under the draft bill, the DPR might be able to push for the removal of board members.
What Are the Concerns?
This does give rise to some concern over the independence of Bank Indonesia. Lawfully, Bank Indonesia is independent in carrying out its duties and authorities, free from interference from the government and/or other parties, (except for certain matters expressly regulated by law). True, monetary policy is most effective when it is coordinated with fiscal policy, which is controlled by the government. However, if the cabinet is overly focused on economic growth -and Bank Indonesia has to sacrifice prudent monetary policy in order to synergize with government policies- then it could lead to weaknesses in the monetary domain which could then spread to the financial sector and markets. Ideally, Bank Indonesia's policies are purely data-driven, without political interests.
Moreover, with the DPR perhaps gaining influence to have Bank Indonesia board members removed, concerns grow as this suggests that when Bank Indonesia officials are not doing enough to facilitate economic growth, then they could be removed. The existence of such an article would possibly encourage a sort of 'self-censorship' among Bank Indonesia officials as they know that they could be removed if they prioritize monetary prudence over economic growth.
If the market believes the central bank will give in to political pressure to boost growth (for example, by keeping interest rates low for too long), they will expect higher inflation. This can lead to a self-fulfilling prophecy where businesses and consumers raise prices and demand higher wages, leading to inflation even before the central bank has acted. So, the risk of the DPR managing to remove board members directly undermines Bank Indonesia's credibility and its ability to commit to its long-term goals.
Earlier, we had already seen some degree of independence loss when Bank Indonesia started to significantly ramp up and consistently purchase government bonds during the COVID-19 pandemic in 2020 (directly from the government in what is known as the primary market). This can be seen as monetizing the debt, creating the perception that Bank Indonesia is funding the government's spending habits, which can erode public confidence in the central bank's ability to maintain price stability (which in turn can lead to currency depreciation and capital flight).
An Additional Duty
Meanwhile, RUU No. 4/2023 P2SK also adds new duties for Bank Indonesia that were not previously regulated. Article 57 Paragraph (1) stipulates that Bank Indonesia is to impose education programs, as well as community and environmental empowerment programs.
Statement by Finance Minister Purbaya Yudhi Sadewa
What is interesting is that -commenting on the draft bill- newly appointed Finance Minister Purbaya Yudhi Sadewa stated in Indonesian media that the bill will make Bank Indonesia "more like the US Federal Reserve" as the latter has three main objectives or mandates, namely (1) price stability, (2) maximum employment, and (3) support national economic growth. However, his statement is actually incorrect. The US Federal Reserve has a dual mandate only (namely price stability and maximum employment) but is not actively pursuing economic growth. Sure, when it delivers on its dual mandate, then it has a positive impact on US economic growth. But economic growth itself is not part of the Federal Reserve's mandate. In fact, we have seen US President Donald Trump clashing with Federal Reserve officials as the former believes that current Federal Reserve policy (specifically high interest rates) is undermining US economic growth.
Concluding Remarks
While there is concern over the independence of Bank Indonesia (and the potential impact of this on the Indonesian economy), proponents could argue that a narrow focus of Bank Indonesia on inflation and financial stability alone can lead to a disconnect with the real economy. By adding an explicit mandate for growth and jobs, the central bank would be forced to consider the full picture of economic health, ensuring that monetary policy does not stifle growth unnecessarily.
The "burden sharing" during the COVID-19 pandemic can, in fact, be regarded as an example of successful synergy in action between Bank Indonesia and the government. Without the central bank's direct support, the government's fiscal response would have been severely hampered, possibly leading to a deeper recession and more job losses.
Lastly, Chairman of Commission XI of the DPR, Mukhamad Misbhakun, commenting on the draft bill that its content is not set in stone, and could therefore still be revised before a final draft is made.