House approves BLBI settlement at taxpayers' expense

M. Taufiqurrahman, The Jakarta Post, Jakarta

After years of high profile political wrangling on how to settle the huge cost of the controversial Bank Indonesia emergency loan scheme, the House of Representatives finally gave up its fight and approved on Thursday a proposed settlement that would greatly benefit the central bank but leave taxpayers footing the bill.

The approval was given during a meeting between House Commission IX on financial affairs and Bank Indonesia Governor Burhanuddin Abdullah, Minister of Finance Boediono and Indonesian Bank Restructuring Agency (IBRA) chairman Syafruddin Temenggung.

In a statement issued following the meeting, the Commission said that the amount of emergency loans (commonly referred to as BLBI) channeled by Bank Indonesia between 1997 and 1999 to troubled banks amounted to some Rp 144.5 trillion (about US$17.6 billion).

The BLBI loans were disbursed to help banks deal with massive bank runs during the late 1990s banking crisis. The government was supposed to cover the central bank's burden but revelations by the Supreme Audit Agency (BPK) in 2000 that much of the loans were misused by the recipient banks prompted the government to demand that the central bank also share part of the burden.

The central bank then later agreed to cover up to Rp 24.5 trillion, with the remainder being covered by the government through the issuance of promissory notes to the central bank. But this burden sharing agreement had been previously rejected by the lawmakers who said that it would impose huge costs on the state budget.

Thursday's deal should pave the way for the Ministry of Finance and the central bank to implement the above burden sharing mechanism. The lawmakers gave the two sides 30 days to work out the details.

Under the plan the government's promissory notes will be interest free, but the Ministry of Finance will have to inject cash into the central bank whenever Bank Indonesia's capital adequacy ratio falls below 5 percent. But if the CAR level is above 8 percent, the excess will be used to reduce the government's liabilities.

Thursday's agreement will benefit Bank Indonesia whose image has been badly tarnished by the scandal. With the settlement of the dispute, Bank Indonesia can now at least get a clean bill of health from its auditor. Without this, the central bank could risk being disqualified from membership of the Bank for International Settlements (BIS) with consequent severe implication to the country's overall economy. This would in turn badly hit confidence in the banking sector with foreign banks refusing to accept letters of credit (L/Cs) issued by local banks.

But the deal will be costly for taxpayers. Bank Indonesia officials previously indicated that over the next two years, its CAR level will likely be below 5 percent, thus the government will have inject around Rp 12 trillion.