Financial System Safety Net

The Government has issued a series of emergency pieces of legislation. These pieces of legislation are Government Regulation in Lieu of Law or Perpu. A Perpu operates as the interim law with respect to the subject matter until such time as it is passed into law by the House of Representatives (DPR). The ongoing global financial crisis is unlikely to pass Indonesia by no matter how confident the government is that the fundamentals of the Indonesian economy are strong. The issuance of these interim laws is testament to the fact that the government has some concerns, particularly about liquidity and solvability.

The considerations of the interim law is explicit in stating that the purpose is to face the potential threat that the financial crisis poses and to ensure that there is stability in both the financial system and the national economy. The interim law sets out the legal foundation for government action and this is expected to ensure that Indonesia is in a position to weather the worst of the storm.

The interim law establishes Financial System Stability Committee (Komite Stabilitas Sistem Keuangan / KSSK). The Committee is the Minister of Finance as the Head and the Governor of Bank Indonesia as a member. The KSSK will be assisted by a Secretariat. The primary duties and functions of the KSSK are to determine policy and put that policy into play. The basic policies will deal with issues of prevention and handling of the economic crisis.

The KSSK is to meet at least four times per year.

Both prevention and handling are enumerated in the interim law. The provisions as they relate to handling state that the government can provide liquidity assistance to those in need. The history of the government providing liquidity assistance through Bank Indonesia has not always been smooth sailing. The fact that the government and BI have failed to resolve the last big liquidity assistance venture will ensure that the provisions governing any liquidity assistance this time will have extensive checks and balances in place to avoid any repeat of the losses sustained during the previous scheme.

The interim law also allows for the provision of incentives and facilities to the private sector. These incentives and facilities are designed to provide liquidity and solvability support.

In order to ensure funds the government can draw from the budget, state debenture certificate, and cash.

There are three basic crisis stages. The area of concern, the chosen mechanism, and the legal foundation for dealing with each are listed in the following table.

National Financial Safety Net System

Source: Financial System Stability Committee

The interim law has been in force since 15 October 2008.