Government nears deal with BI on loan dispute

Dadan Wijaksana, The Jakarta Post, Jakarta

The government and Bank Indonesia are close to ending a two-year dispute over the billions of dollars in liquidity support channeled to troubled banks in the late 1990s.

An independent team assigned to find alternative solutions to the dispute suggested the government issue special bonds, called perpetual promissory notes (PPN), to Bank Indonesia to cover nearly Rp 200 trillion in funds channeled by the central bank. Details of the plan have not yet been made available.

Under this mechanism, the government will not have to pay interest on the bonds, to the limit where Bank Indonesia's capital condition is not jeopardized.

The government and Bank Indonesia have yet to reach a final agreement over this new proposal.

"Discussions are still underway, but the main objective of the scheme is to reduce the burden on the state budget in terms of debt repayment, without disrupting Bank Indonesia's balance sheet," Minister of Finance Boediono said on Friday.

The government launched in 1998 a program to guarantee the obligations of banks that had been closed. As part of this policy, the central bank provided massive amounts of liquidity support to banks facing rushes by their customers, at a time when confidence in the banking industry was at its nadir.

But an audit by the Supreme Audit Agency found that about Rp 144.5 trillion of the liquidity funds had been misused by the recipient banks. Some bank owners used the funds for currency speculation, to buy property assets and to lend to affiliated firms.

Because of these findings, the government declined to cover the losses, putting Bank Indonesia at risk of bankruptcy.

Through the mediation of the House of Representatives Commission IX for the state budget and finance, Bank Indonesia and the government "agreed" to a revenue-sharing scheme, under which the central bank would cover some Rp 24.5 trillion of the liquidity support funds.

But this agreement has never been realized, putting Bank Indonesia under a continued cloud of uncertainty because of the risk of bankruptcy.

The International Monetary Fund (IMF), which is providing a multibillion dollar bailout package for the country, asked the government to set up an independent team to help resolve the dispute. The four-member team consists of an independent Indonesian economist and banking law expert, and two foreign banking experts.

The government also has been under pressure from the IMF to reach a speedy burden-sharing deal with the central bank.

But the government is also facing pressure to find ways to ease the burden on the state budget in covering the interest on more than Rp 430 trillion worth of bonds issued to recapitalize banks. The interest rate burden of the bonds has created a huge deficit in the 2002 state budget, estimated at 2.5 percent of gross domestic product.

The perpetual promissory notes are expected to help ease the financial burden on the government.

Bank Indonesia Governor Sjahril Sabirin in general welcomes the new plan.

"What is important for BI, the government, which has been under heavy pressure to repay its interest debts, would benefit from the plan, while there is also a guarantee of BI's long-term financial condition."

But he was quick to say that by issuing the PPNs, the government would still have to pay interest, the amount of which would depend on the central bank's capital condition.

"If Bank Indonesia's capital does not meet the minimum requirements, there will be charges to the government to fill the gap. But if (its capital) exceeds (the requirements), BI would surrender it to the government with the proceeds to be used to redeem the remaining bonds," he said.