Government nears deal with BI on loan dispute

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.