BI: Third parties and second opinions<\/p>\n
YOGYAKARTA (JP): The government's move to present the Supreme
\nAudit Agency's (BPK) audit of Bank Indonesia (BI) to the House of
\nRepresentatives last week has sparked a rift between the
\ngovernment and the central bank, leading to more fears in
\nrelation to the economy.<\/p>\n
Economist Tony A. Prasetyantono of Gadjah Mada University
\ntalked to The Jakarta Post on this issue. Here are excerpts of
\ntheir interview.<\/p>\n
Question: How do you see the problem between the two
\ninstitutions?<\/p>\n
It all began in May 17, 1999, when BI became independent... of
\nthe government. BPK, by definition, is the government. Now that
\nit has audited BI, the image is that the government seems to be
\nmessing around with BI.<\/p>\n
...We are talking about two separate institutions which no
\nlonger have any relation at all. The government seems to
\ninterfere with BI while the latter, on the other hand, tries to
\ndefend itself from interference. (The government claimed that the
\nstatus of Rp 51.7 trillion out of Rp 164.5 trillion in emergency
\nliquidity credit that BI extended to commercial banks during the
\npeak of the crisis in 1997-1998 was unclear.)<\/p>\n
BI in this case, feels that it is not the only party
\nresponsible for the disbursement of the questioned credits. The
\nfault is not only BI's. We have to state that.<\/p>\n
Who else do you think is responsible for the case?<\/p>\n
(At the onset of the crisis) customers rushed to banks to
\nwithdraw their money. The banks didn't have the money, so they
\nasked BI to supply the customers' withdrawals. BI at that moment
\nhad to decide quickly whether or not it would supply those
\nwithdrawn funds. (Then president) Soeharto said no clearing
\nshould be stopped, meaning that no bank would be closed.<\/p>\n
BI, therefore, had no choice except to extend the liquidity
\nsupport requested by the banks experiencing a rush. Otherwise,
\nmany banks would have gone bankrupt. It makes sense, therefore,
\nthat BI feels it is not the only party responsible for the
\nuncontrolled disbursement of the credits.
\nBut nevertheless it was BI that had the authority to disburse the
\nmoney.<\/p>\n
That's right. There is no doubt about it. But the fact is that
\nthe government via Soeharto and the \"naughty\" banks were also
\nculpable. Soeharto's responsibility lies in asking BI to protect
\nall banks from bankruptcy, while the fault of the banks was that
\nthey asked for liquidity support in excess of their assets.
\nWhy do you think BI could disburse such a large, questionable
\namount of funds?
\nBI received so many (requests) ... There were at least 9,000
\ncustomers of a single bank withdrawing their money in one day...
\nThere were nearly 200 other banks who experienced the same rush.
\nThe central bank had very limited time to verify requests and
\ndecide whether or not to extend the credits. The time to make a
\ndecision, between the withdrawal and the clearing, was only about
\nthree hours (in a working day). On one hand the Bank had to give
\nthe credits to prevent the banks from collapsing, yet it did not
\nhave time to complete proper verifications for the requested
\ncredits.<\/p>\n
It was only later that BI realized that the credits requested
\nby some banks exceeded their assets ... What needs to be audited
\npresently is the disbursement process of liquidity support and
\nwhether there were any irregularities or criminal actions.
\nSo how do you perceive the rift between the government and BI?<\/p>\n
If this problem continues, each disputing party will
\nincreasingly try to damage the other, while BI's credibility has
\nalready declined ... With or without the disclosure, the central
\nbank has suffered a blow to its image. Even now, it needs a third
\nparty guarantee, namely Japan's, to issue bonds.<\/p>\n
(The continuing rift) will eventually disturb the work of each
\nof the institutions ... What is at stake here is the national
\nbanking system. It involves trust towards the banking system
\nitself.<\/p>\n
Without trust, the government would be forced to extend the
\nblanket guarantee policy applied since 1998, which should have
\nbeen stopped early this month. This policy gives a full guarantee
\nto all the money saved in banks to help prevent a bank rush. But
\nit cannot be applied too long or it would be very dangerous...<\/p>\n
Demands in anticipating the disclosure of the audit has led to
\na possible postponement of up to six months. We are compelled to
\ndo this due to the current crisis of people's trust.<\/p>\n
Extending this (blanket) policy is very unhealthy as the
\nbanking sector would not be independent. A sick person cannot
\ncontinually rely on IV. A blanket guarantee is also very costly.
\nAnother danger is a potential massive capital flow like we saw in
\n1998, and this must be prevented.
\nWhat be the most feasible way out of this problem?<\/p>\n
It's now up to the House of Representatives to settle the case
\n-- the government and BI are both obliged to report to the House.
\nThe House should then decide whether it would accept BPK's report
\nor whether it needs another opinion.<\/p>\n
I think seeking a second opinion on BI's audit is the best
\ncourse now for the House. BPK claimed that there are
\nirregularities regarding the Rp 51.7 trillion of the liquidity
\ncredits BI had extended. BI has said that that figure is too
\nlarge. So let's accept BPK's report as input, while an
\nindependent team of auditors provides a second opinion.
\nWho do you think should be included in the team? Should it
\ncomprise foreign auditors for the sake of independence?
\nI don't think so, but the International Monetary Fund would
\nprobably prefer foreign auditors. We do have auditors of our own
\nwho I believe have the integrity and credibility to be members of
\nsuch a team.<\/p>\n
With BI's condition, what should be done?<\/p>\n
We would automatically need a new... central bank. But we
\nshould remember... that the new institution would not have a 0-0
\nbalance sheet. It should take into account the entire problem
\nfaced by the old institution, including its huge financial loss
\nin relation to the liquidity support (BLBI) it previously issued.
\nIt is useless to form a new institution if the old one's problems
\nremain unsolved. It is better to maintain BI's existence and take
\nall reasonable risks rather than to form a new central bank.
\n(swa)<\/p>",
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