IMF seeks new investigation into $13b liquidity assistance

Berni K. Moestafa and Dadan Wijaksana, The Jakarta Post, Jakarta

Stepping up pressure against corruption, the International Monetary Fund (IMF) demanded the government launch a new probe into the alleged abuse of some Rp 138.4 trillion (about US$13 billion) in central bank emergency liquidity loans, as part of reform targets under a new lending agreement with the IMF.

Bank Indonesia internal finance director Bun Bunan Hutapea said the IMF and the government had agreed to appoint an independent consultant to perform the investigation.

"Chances are high that this (probe) will be included in the upcoming LoI (Letter of Intent)," Bun Bunan told reporters after a meeting between the government, the central bank, and the IMF on Saturday.

The LoI is the IMF's lending agreement that contains a set of economic reform targets.

An IMF team is in Jakarta to work on the fourth LoI, which the government hopes to sign by the end of the year.

The inclusion of the high-profile corruption case signaled the IMF's impatience over the slack progress Indonesia has made in solving the case.

Two separate investigations over two years have failed to lead to the return of the abused funds or a single prosecution.

The case centers around the extension of some Rp 144.5 trillion in Bank Indonesia emergency liquidity loans to 48 local banks during the peak of the 1997 financial crisis.

As lender of the last resort, Bank Indonesia channeled the loans to banks with liquidity problems arising from massive runs. The emergency loan facility was needed to avoid a systemic collapse in the banking sector.

But an audit by the Supreme Audit Agency (BPK), revealed last year that Rp 138.4 trillion, almost all the money, had missed its target.

In a report, BPK said that banks had used the loans to speculate against the rupiah, acquire fixed assets, and even to rechannel them in the interbank market.

Defying risk management, Bank Indonesia extended the loans without securing adequate collateral from the borrowing banks.

BPK heaped the blame for the abused funds on Bank Indonesia.

"This amount (Rp 144.5 trillion) has now become the state debt to the central bank with an annual interest of 3 percent," BPK's report said, adding that none of the banks had thus far returned the loans.

Around Rp 100 trillion of the loans went into five banks with close ties to former president Soeharto.

The government issued bonds, which Bank Indonesia assumed in exchange for lending the money.

Servicing the interest payments on these bonds has put a heavy lid on the state budget, crippling its spending ability.

BPK's findings also sowed a protracted dispute between the government and the central bank, over who should bear the responsibility of the abused funds.

Without the government shouldering some of the burden, the central bank is certain to go bankrupt.

The finding led to legislators and the previous government pushing for an amendment of the central bank law.

An amendment would allow them to replace the current board of governors, whom they held as most responsible for the loan scam.

Yet the plan has faced resistance from the IMF, reasoning the move could undermine Bank Indonesia's hard-won independence.

The IMF, which some blamed for failing to prevent the loan abuse from occurring, was criticized for its stance.

Bank Indonesia was under the IMF's direct supervision when the emergency liquidity support scheme got out of control.

Legislators concluded their own probe last year, in which they named several top central bank officials as possible suspects.

They include Bank Indonesia Deputy Governor Miranda Goeltom and the now non-active Aulia Pohan.

Bank Indonesia director, Bun Bunan said the central bank was open to any new investigation.

"This needs to be done and be over with," Bun Bunan said.

Meanwhile, legal banking expert Pradjoto said the independent consultant in charge of the new probe needed a clear guiding agenda.

"The challenges they are about to face in resolving this case are enormous. But the main prerequisite needed for them to work effectively is that they ought to have the ability to conduct a trace-back system towards all those accounts relating to the liquidity supports given by the government," Pradjoto told The Jakarta Post over the weekend.