Mon, 10 Jan 2000

BI: Third parties and second opinions

YOGYAKARTA (JP): The government's move to present the Supreme Audit Agency's (BPK) audit of Bank Indonesia (BI) to the House of Representatives last week has sparked a rift between the government and the central bank, leading to more fears in relation to the economy.

Economist Tony A. Prasetyantono of Gadjah Mada University talked to The Jakarta Post on this issue. Here are excerpts of their interview.

Question: How do you see the problem between the two institutions?

It all began in May 17, 1999, when BI became independent... of the government. BPK, by definition, is the government. Now that it has audited BI, the image is that the government seems to be messing around with BI.

...We are talking about two separate institutions which no longer have any relation at all. The government seems to interfere with BI while the latter, on the other hand, tries to defend itself from interference. (The government claimed that the status of Rp 51.7 trillion out of Rp 164.5 trillion in emergency liquidity credit that BI extended to commercial banks during the peak of the crisis in 1997-1998 was unclear.)

BI in this case, feels that it is not the only party responsible for the disbursement of the questioned credits. The fault is not only BI's. We have to state that.

Who else do you think is responsible for the case?

(At the onset of the crisis) customers rushed to banks to withdraw their money. The banks didn't have the money, so they asked BI to supply the customers' withdrawals. BI at that moment had to decide quickly whether or not it would supply those withdrawn funds. (Then president) Soeharto said no clearing should be stopped, meaning that no bank would be closed.

BI, therefore, had no choice except to extend the liquidity support requested by the banks experiencing a rush. Otherwise, many banks would have gone bankrupt. It makes sense, therefore, that BI feels it is not the only party responsible for the uncontrolled disbursement of the credits. But nevertheless it was BI that had the authority to disburse the money.

That's right. There is no doubt about it. But the fact is that the government via Soeharto and the "naughty" banks were also culpable. Soeharto's responsibility lies in asking BI to protect all banks from bankruptcy, while the fault of the banks was that they asked for liquidity support in excess of their assets. Why do you think BI could disburse such a large, questionable amount of funds? BI received so many (requests) ... There were at least 9,000 customers of a single bank withdrawing their money in one day... There were nearly 200 other banks who experienced the same rush. The central bank had very limited time to verify requests and decide whether or not to extend the credits. The time to make a decision, between the withdrawal and the clearing, was only about three hours (in a working day). On one hand the Bank had to give the credits to prevent the banks from collapsing, yet it did not have time to complete proper verifications for the requested credits.

It was only later that BI realized that the credits requested by some banks exceeded their assets ... What needs to be audited presently is the disbursement process of liquidity support and whether there were any irregularities or criminal actions. So how do you perceive the rift between the government and BI?

If this problem continues, each disputing party will increasingly try to damage the other, while BI's credibility has already declined ... With or without the disclosure, the central bank has suffered a blow to its image. Even now, it needs a third party guarantee, namely Japan's, to issue bonds.

(The continuing rift) will eventually disturb the work of each of the institutions ... What is at stake here is the national banking system. It involves trust towards the banking system itself.

Without trust, the government would be forced to extend the blanket guarantee policy applied since 1998, which should have been stopped early this month. This policy gives a full guarantee to all the money saved in banks to help prevent a bank rush. But it cannot be applied too long or it would be very dangerous...

Demands in anticipating the disclosure of the audit has led to a possible postponement of up to six months. We are compelled to do this due to the current crisis of people's trust.

Extending this (blanket) policy is very unhealthy as the banking sector would not be independent. A sick person cannot continually rely on IV. A blanket guarantee is also very costly. Another danger is a potential massive capital flow like we saw in 1998, and this must be prevented. What be the most feasible way out of this problem?

It's now up to the House of Representatives to settle the case -- the government and BI are both obliged to report to the House. The House should then decide whether it would accept BPK's report or whether it needs another opinion.

I think seeking a second opinion on BI's audit is the best course now for the House. BPK claimed that there are irregularities regarding the Rp 51.7 trillion of the liquidity credits BI had extended. BI has said that that figure is too large. So let's accept BPK's report as input, while an independent team of auditors provides a second opinion. Who do you think should be included in the team? Should it comprise foreign auditors for the sake of independence? I don't think so, but the International Monetary Fund would probably prefer foreign auditors. We do have auditors of our own who I believe have the integrity and credibility to be members of such a team.

With BI's condition, what should be done?

We would automatically need a new... central bank. But we should remember... that the new institution would not have a 0-0 balance sheet. It should take into account the entire problem faced by the old institution, including its huge financial loss in relation to the liquidity support (BLBI) it previously issued. It is useless to form a new institution if the old one's problems remain unsolved. It is better to maintain BI's existence and take all reasonable risks rather than to form a new central bank. (swa)