House approves BLBI settlement at taxpayers' expense

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.