Bambang defends program for bank recapitalization

JAKARTA (JP): The government has defended its plan to set aside Rp 18 trillion (US$2.25 billion) of the 1999/2000 state budget to recapitalize the country's beleaguered banks, saying it was the least the country could do to help revive the banking sector.

Finance Minister Bambang Subianto said on Monday night the funds were crucial in freeing the country from the banking crisis that had been eating up the economy for over a year.

"There are two choices: recapitalize or close down the banks. Both moves need financial support, but the recapitalization program does not need as much cash," he told a briefing on the draft budget the night before it was unveiled by President B.J. Habibie.

"Recapitalization is the only choice that we think is capable of convincing the people that the banks that survive the crisis will be those that are completely healthy," he said.

The government plans to issue bonds to finance the recapitalization program amounting to over Rp 257.7 trillion. But banks which participate in the program will only be injected with cash from the yearly interest payment on the bonds.

Bambang said the government estimated it would spend Rp 34 trillion in interest payments for the banks for the coming fiscal year.

Only Rp 18 trillion of the amount would come from the state budget, while the remaining Rp 16 trillion would come from the sales of the banks' assets, he said.

Bank Indonesia Governor Sjahril Sabirin said Tuesday after the draft budget was announced by the President that the bond would carry an interest rate of about 20 percent, 3 percent above the government's own projection for inflation this year.

Bambang also claimed the recapitalization sum needed to finance the banks which would make up 29 percent of the country's gross domestic product was relatively small compared to similar programs held in other countries.

In Korea, recapitalization programs took up 17 percent of the GDP, in Thailand 29 percent and Malaysia 17 percent, he cited.

At least 70 out of the 166 local commercial banks would participate in the program, and the government would provide 80 percent of the program's funds.

Those with a capital adequacy ratio (CAR) -- risk-weighted assets ratio -- of less than minus 25 percent are not eligible to participate in the program, and, unless they inject fresh capital, would be closed down.

Banks with CAR over 4 percent do not have to be recapitalized.

Regional autonomy

Also speaking at Monday night's briefing, the State Minister of National Development Planning, Boediono, said the government was determined to loosen control over the provincial and lower levels of administration in the country.

This was reflected in the draft budget in a bid to let the less developed regions benefit from their own resources, Boediono said.

The government will increase the portion of the development budget for the provincial administration, as well as development activities by shifting the budget away from the center.

The amount that will be allocated for the provincial administration as development funds totals Rp 16.46 trillion.

It will let the provincial and lower government bodies authorize approvals for development projects under their jurisdiction, instead of them having to go through the central government.

It will also adjust the block grants for the provinces by taking account of a region's non-renewable natural resources as well as their income.

Boediono said the shift in the emphasis of development toward the less-developed areas of the country was part of the government's efforts to develop stronger social safety net programs and empower small-scale businesses and cooperatives.

The budget, for example, will now be apportioned mostly for smaller-scale infrastructure projects in villages which can employ many people instead of large projects as in the past.

"When we build infrastructure in villages we also provide jobs for the locals," he said.

As part of the government's resolution to strengthen the small and medium scale enterprises (SMEs) and cooperatives this year, the government will set aside a substantial amount in the draft budget.

This includes Rp 629.21 billion for small-scale industry and Rp 4.39 trillion for the farming sector, in addition to the Rp 1.33 trillion apportioned for technical and capital assistance for cooperatives and SMES. The draft budget also earmarks Rp 175.45 billion to support the recovery program in the trade sector.

"This is the most we've ever given to develop small businesses through budgetary support," Ginandjar said. (das)