BI executive stands by Sjahril

JAKARTA (JP): Central bank senior deputy governor Anwar Nasution said on Thursday it would be completely unfair to suspend Bank Indonesia's governor Sjahril Sabirin from duty for alleged irregularities in the extension of emergency liquidity credits to commercial banks.

Anwar told reporters that the alleged abuse of the liquidity support from the central bank took place before Sjahril took over from the previous governor, Soedradjad Djiwandono, in February, 1998.

"I fully support the investigative audit on Bank Indonesia currently conducted by the Supreme Audit Agency. But the fact is, most of us (board of governors) were only appointed after most of the liquidity credits had been extended," Anwar said.

Anwar, who will take over the governorship if Sjahril is unable to perform his duty, was commenting on rumors that President Abdurrahman Wahid is considering recommending to the House of Representatives that Sjahril be replaced.

The issue first surfaced early this year, after a general audit on the central bank by the Supreme Audit Agency concluded that Bank Indonesia was almost insolvent due to huge losses incurred by the abuse of its liquidity support to ailing banks between late 1997 and early 1998.

The audit alleged that Rp 80 trillion (US$11 billion) of the Rp 164 trillion in emergency liquidity support extended by the central bank was not according to procedures.

Most of the emergency loans were extended between December, 1997, and early 1998, amid massive runs on many banks, as the public lost confidence in the banking industry after the closure of 16 banks in mid-November, 1997.

The report also accused the governor and deputy governors of being lax in bank supervision and accounting standards. However, both men flatly denied any wrongdoing in the extension of the liquidity support and asserted that the central bank remained highly solvent.

Shocked by the revelation, the House made its own investigation into the case and recommended an investigative audit on the central bank, which is currently underway.

However, the rumors of the imminent replacement of Sjahril became stronger early this week after Minister of State Enterprises and Investment Laksamana Sukardi stated his willingness to replace Sjahril.

Laksamana, formerly an executive director of Lippo Bank, confirmed on Thursday that the President was considering recommending him to replace Sjahril.

Speaking to reporters after a hearing with the House, Laksamana said he was ready to hold the position (of central bank governor) because he used to be a banker himself.

The new Central Bank Law, enacted in May, 1999, guarantees Bank Indonesia's independence from executive control. The law stipulates that only the House can remove a central bank governor and only when the official is found to have violated Indonesian law.

Anwar said the policy on emergency liquidity credit was made by the government when the central bank was still led by Soedradjad.

"I hereby call upon those responsible for setting the policy to come forward, be magnanimous and make the plunge and account for that policy," Anwar added.

Anwar said he himself was still flabbergasted by the question as to why the central bank had extended liquidity support to outrightly insolvent banks.

Steve Hanke, who acted as a special adviser to former president Soeharto in early 1998 when Indonesia was considering adopting a fixed exchange rate system under a currency board, also asserted in an article in the Asian Wall Street Journal on Wednesday that the central bank had massively abused its lender- of-last resort responsibility.

Hanke, a professor at Johns Hopkins University in Baltimore, U.S., after reviewing Bank Indonesia's books at the request of Soeharto in February, 1998, concluded that the central bank had extended the equivalent of $37 billion in liquidity support between December, 1997, and the end of January, 1998.

Hanke added that Soedradjad was abruptly fired by Soeharto in mid-February, 1998, because of his disclosure on the massive abuse of liquidity credits, not due to the governor's opposition to the planned currency board, as widely reported at the time.