Bank Indonesia to be recapitalized

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)