Plans To Overhaul Indonesia’s Financial Laws

South China Morning Post are reporting on an article published by Bloomberg that suggests Indonesia is ready to legislate sweeping changes to the country’s financial sector regulation as soon as this week, after two years of thwarted attempts and market resistance.

The proposed law seeks to expand the central bank’s mandate and cement its authority to buy government bonds during times of crisis, as it had done in the past three years to shore up Indonesia’s economy.

By the end of 2022, the central bank would have bought IDR 1,144-trillion (approx. USD 73-billion) in debt papers. The bill also seeks to bring regulations in step with the rapidly evolving fields of financial technology and cryptocurrency.

Parliament is expected to vote on the measure this week, after the bill was approved by the finance commission on December 8. South China Morning Post say Indonesia is reforming its financial laws because existing regulations are complicated, and often overlapping if not contradictory. They’re also out of date, given the recent boom in fintech and the central bank’s plans for a digital rupiah.

The government expects the changes to help deepen the local capital markets to finance the requirements of the economy.

It’s also in line with President Jokowi’s goal of reforming legislation to cut red tape and simplify rules, especially to make sure financial authorities can respond to crises faster.

According to South China Morning Post reporting, if the law is passed we can expect to see Bank Indonesia, as the central bank, be given the authority to come to the government’s aid through bond buying when the president declares a crisis, cementing its unprecedented move during the pandemic which the central bank and the finance ministry had described as a “one-off” measure.

As part of the proposal, lawmakers want the central bank to “participate in maintaining financial system stability in order to support sustainable economic growth” as well as maintain payment system stability on top of its existing mandate to ensure rupiah and price stability.

An earlier push to explicitly include job creation and economic growth in Bank Indonesia’s mandate, which analysts said poses risks to its independence, was dropped from the latest bill.

According to South China Morning Post, the bill spells out how Bank Indonesia could finance state debt during times of crisis.

Aside from allowing it to directly buy long-term sovereign bonds in the primary market as it had been doing since the pandemic, the central bank can also purchase securities held by private companies through banks and redeem reverse-repurchase notes held by the deposit insurance agency.

The purchase of government notes from the deposit insurer could be done to address any banking liquidity issues.

The reporting says that it remains to be seen how Bank Indonesia will carry out its expanded mandate if the law is approved, especially in the area of economic support and since Jokowi had sought to add job creation in Bank Indonesia’s remit just a few months ago.

What is clearer is that even with an expanded responsibility of buying government bonds when necessary, lawmakers provided measures for the central bank to maintain independence and reject interference.

The draft law would ban politicians from being nominated to the central bank’s board of governors while reinstating a prohibition on the members of the board from joining political parties.

The bill also introduces the digital rupiah as legal tender and recognises cryptocurrency and digital assets as regulated financial securities, say South China Morning Post.

The proposed financial reform would include insurance policies under the coverage of the deposit insurance agency.

The draft law also sets out the framework for carbon trading in exchanges and bullion services.

Source: South China Morning Post

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