Bank Indonesia to be recapitalized

JAKARTA (JP): The government will recapitalize Bank Indonesia to prevent it from going bankrupt as a result of having to bear part of the cost of the emergency liquidity support it extended from 1997 to 1999, legislators said on Tuesday.

Hamka Yandhu of House of Representatives Commission IX for the state budget and banking said recapitalization was the only alternative to prevent Bank Indonesia from going bankrupt and being liquidated.

But a reshuffle of the central bank's board of governors is a precondition to the recapitalization, Hamka added.

Legislators estimated the recapitalization cost at about Rp 80 trillion (US$8.8 billion) but Bank Indonesia's Senior Deputy Governor Anwar Nasution put it at only Rp 24 trillion.

"The government and Bank Indonesia have agreed to recapitalize the central bank. And the deputy governors will be replaced," Hamka said.

"We see that Bank Indonesia is no longer healthy because of the BLBI problem," said the Golkar Party legislator, using the acronym for the emergency liquidity support issued to bail out banks.

In agreement was Rizal Jalil, another Commission IX legislator, who said: "It has been decided that Bank Indonesia will be recapitalized."

He said the government would announce the details of the recapitalization plan on Friday afternoon.

House Commission IX has instructed the finance ministry, Bank Indonesia and the Supreme Audit Agency (BPK) to sit down together to resolve the long-standing dispute between the government and the central bank over the emergency liquidity support. The three sides have formed a special joint team and have been given by the House until Friday to come up with a resolution.

The government, via Bank Indonesia, channeled some Rp 144.5 trillion (US$16 billion) in liquidity support between 1997 and 1999 to bail out banks during the height of the country's financial crisis.

The government was to cover the cost of the liquidity support by issuing bonds to the central bank, but the Supreme Audit Agency found in an investigative audit that some Rp 138 trillion of the liquidity support had been misused by the recipient banks.

The agency said this misuse was partly due to the poor supervision of Bank Indonesia, or a result of collusion between central bank executives and the recipient banks.

Legislators said some Rp 80 trillion of the BLBI facility channeled by the central bank could not be accounted for.

Bank Indonesia initially insisted the government must cover the entire cost of the emergency liquidity support because it was a government facility, but it later admitted it had made some mistakes in its supervision and was willing to cover part of the cost.

The special joint team is mandated to decide the cost that must be shared by Bank Indonesia.

Because Bank Indonesia is required to bear such a huge cost, it must be recapitalized or face liquidation.

The central bank's senior deputy governor, Anwar Nasution, said liquidating the central bank should not be an option because of the detrimental consequences this step would have, and the huge cost of creating a new central bank.

"Liquidating Bank Indonesia has more disadvantages," he said late on Tuesday on a talk show.

"If Bank Indonesia is liquidated, what will happen with international contracts. Around 40 percent of the Bank Indonesia SBI promissory notes are held by foreign investors," he said.

Anwar declined to confirm the government had decided to recapitalize the central bank, but he said the existing law required the government to ensure Bank Indonesia had a minimum capital of Rp 2 trillion.

But when asked whether he would agree to step down as a consequence of the recapitalization, Anwar said the law on the central bank approved by the House last year did not require a management reshuffle as a precondition to the recapitalization.

"But whatever the House decides we'll accept it, because the voice of the people is the voice of God," he said.

"What is more important is to resolve this (BLBI) problem immediately," he added.

The head of House Commission IX, Benny Pasaribu, also a speaker on the talk show, said the BLBI problem would be an entry point to create a credible and healthy central bank.

"We want to resolve this problem quickly and once and for all, because it has been going on for nearly two years .... We want to see a new credible central bank so that it can design an effective monetary policy to help resolve the current economic crisis," Benny said.

But he admitted that reshuffling the top management at the central bank would be difficult because according to the existing law, members of the board of governors could not be forced to resign unless they were proven to have committed a crime.

"Naturally, no one will want to voluntarily step down, but it's really up to them whether to choose the easy way (and voluntarily step down) or the hard way.

"The seven deputy governors should not think of their own interests, but the greater interests of the nation," he said.

Benny said the members of the board of governors should resign, after which they could be reappointed if they passed a fit and proper test to be given by the House.

He did say that he personally believes Anwar is "fit and proper" to lead Bank Indonesia.

Anwar, a former dean at the School of Economics at the University of Indonesia, said Bank Indonesia faced difficult times due to a combination of the BLBI problem and the fact that its governor, Sjahril Sabirin, was being detained for his alleged involvement in a bank scandal.

Anwar, who had previously called Bank Indonesia a den of thieves, said the central bank needed the political support of the House to do its job, including cleansing the bank of corruption. (rei)