Residents, whose livelihoods have been affected by the Covid-19 pandemic, queue to receive government cash handouts in Surabaya on July 19, 2021. (Photo: Juni Kriswanto / AFP)

Residents, whose livelihoods have been affected by the Covid-19 pandemic, queue to receive government cash handouts in Surabaya on July 19, 2021. (Photo: Juni Kriswanto / AFP)

Will the New Financial Omnibus Law Compromise Bank Indonesia’s Independence?


The Joko Widodo administration’s repeated renewal of a bond programme for burden-sharing with Bank Indonesia during the pandemic raises questions about whether the new financial omnibus law will constrain rather than strengthen the economy.

Indonesia’s parliament has finally passed the much-awaited Financial Omnibus Law (Law No. 4 of 2023). A hefty code with 819 pages of preamble and text, the ambitious all-encompassing law sets out Indonesia’s regulatory framework for the financial sector.  

A key goal of the wide-ranging revision was to address some longstanding problems with previous finance laws and regulations, some of which had not been updated for decades. The bill aimed to remove regulatory ambiguities arising from overlapping laws. For example, oversight over Indonesia’s numerous small savings and loans cooperatives, which was under the Ministry of Cooperatives and SMEs and indirectly overseen by the Financial Services Authority (OJK), is now placed solely in OJK’s purview. The bill also sought to tackle newer regulatory challenges arising from digital financial innovations such as crypto-currencies as well as carbon trading. Several old clauses were simply deleted.

So far, the part of the new law that has attracted the most attention has been the wider mandate given to the country’s central bank, Bank Indonesia (BI), to buy government bonds in the primary market in the event of a crisis.

The rationale for this move can be traced back to the COVID-19 pandemic.

At the start of the pandemic in early 2020, the Indonesian government was concerned about its ability to finance the dramatic rise in public health spending. For instance, the government had to pay for the hospitalisation and vaccinations for Indonesians struck with COVID-19, and to provide aid to disadvantaged communities across the archipelago during government-imposed lockdowns.

At the time, the Widodo government worked out a burden-sharing arrangement with BI: BI would buy government bonds specifically issued to finance these dramatic public health and pandemic expenditures. This move, however, raised investor concerns that the central bank’s independence could be compromised if such an arrangement were to be extended beyond the pandemic.

When implementing the bond arrangement, Joko Widodo’s government assured the public that this was a one-off and temporary programme, limited to one year. Since the pandemic started, however, this “burden-sharing” programme has been renewed twice; the third round ended in December 2022.   

The decision-making process to activate the bond programme must follow a certain protocol, which limits the Indonesian president’s discretion.

With the new financial omnibus law taking effect in 2023, investor concerns about BI’s independence have resurfaced. It appears that in the new law, there is scope for such a burden-sharing bond programme to recur, if the president declares an economic crisis. Whether this option will be responsibly used going forward is a critical question.

Article 36A (1) through (4) of the new law may allay some concerns about the potential misuse or over-extension of this bond arrangement. The decision-making process to activate the bond programme must follow a certain protocol, which limits the Indonesian president’s discretion. While an economic crisis can be declared by the president, this decision (for the bond purchase) must be reviewed and approved by the Financial System Stability Committee (KSSK). The minister of finance and BI’s governor decides on the mechanism for bond-buying.

The current KSSK members are the finance minister, BI’s governor, and the heads of the OJK and the Deposit Insurance Agency (LPS). The differing objectives of these regulatory bodies provide some additional checks and balances. In addition, the risk of personal or political connections jeopardising objective decision-making is reduced, as the appointments of the BI and OJK heads, while recommended by the president, are ultimately subject to parliamentary approval.

Yet concerns about the central bank’s independence remain, partly given the central bank’s activist role in the past.

During Suharto’s presidency, BI was responsible not only for running the country’s monetary policy but also for regulating banking. The Ministry of Finance (MOF) monitored other financial sectors like pension funds, insurance, financing, leasing and security companies. During this period, BI would occasionally play a more active developmental role by providing funding to priority sectors through selected state bank loans.

It was only years after the 1997-98 Asian financial crisis, as the bond market matured and tighter oversight over the banking sector was needed, that Indonesia established its Financial Services Authority (the aforementioned OJK) in July 2012. OJK took over bank supervision responsibilities from BI and oversight over non-bank financial institutions from the MOF.

This separation of monetary policy and financial regulation made BI more independent by allowing it to focus solely on monetary policy. Since OJK’s establishment, Indonesia has kept inflation at a 3-4 per cent range, although inflation in January 2023 rose to 5.3 per cent.

The challenge Indonesia’s policymakers now face, given the new Omnibus Law’s provisions allowing BI to basically fund the government’s fiscal stimulus programme, is to ensure that any such implementation is objective and not done for populist reasons. In essence, the KSKK must first clearly identify and confirm that Indonesia is in a major economic slump before recommending and approving the president’s exercise of discretionary powers to launch the bond programme.

The linking of monetary and fiscal policy makes sense in deep recessionary events, where there is sufficient idle capacity in the economy. However, Indonesia’s regulatory bodies must also impose a time and a monetary limit to ensure that the central bank’s stimulus funding does not overshoot. Otherwise, this linkage could easily exacerbate inflationary pressures in the future, which Indonesia can ill afford.


Manggi Taruna Habir is a Visiting Fellow at the Regional Economic Studies Programme, ISEAS – Yusof Ishak Institute.