In BI we trust?

Rightly or wrongly, the well-publicized row between the Supreme Audit Agency (BPK) and Bank Indonesia (BI) is undermining the credibility of the central bank, and possibly the country's entire banking and monetary systems. Those who are pursuing this struggle should realize they are treading a dangerous and potentially destructive path.

There could not be a worst time for this row to break out. The banking system has barely recovered from the devastation caused by the poor management of commercial banks, which was exposed by the financial crisis which struck in 1997. The government has since been forced to spend Rp 200 trillion (US$29 billion) to recapitalize dozens of commercial banks to save them from bankruptcy, which, if allowed to happen, would have undermined confidence in the banking system.

Since the recovery of Indonesia's fragile economy hinges on this costly bank recapitalization program, one wonders whether we can afford another major scandal -- this one involving Bank Indonesia -- without risking everything, including the precious few gains made over the past year. The recapitalization program has been delayed by various factors, including the Bank Bali scandal, which made Indonesia's economic recovery the slowest in Asia.

Airing the dirty laundry of Bank Indonesia, which is what BPK is doing by filing its report on the condition of the central bank, certainly has its merits. Auditing Bank Indonesia, which became independent of the government in May, does not violate the law. BI is subject to public scrutiny through the House of Representatives. BPK was assigned to audit the central bank's books to assess its condition as of May 17, the date BI became independent, and present the report to the House.

BPK chairman Satrio "Billy" Joedono presented on Friday the results of the audit to the House, with the "disclaimer" that auditors were unable to form an opinion because of grave problems with the figures supplied by the bank. A summary of the report, given to the press, said auditors found irregularities in BI's books and that internal controls at the bank were weak.

It also disclosed a major dispute between Bank Indonesia and the Ministry of Finance over a Rp 51.7 trillion ($7.3 billion) claim the bank has made on the government. This money was part of Rp 164.5 trillion in emergency liquidity credit extended by Bank Indonesia to commercial banks during the peak of the financial crisis. Claiming that some Rp 51 trillion did not meet the criteria of the government's blanket guarantee for commercial banks, the government is refusing to reimburse Bank Indonesia.

The biggest blow to public confidence in the central bank is BPK's finding that Bank Indonesia is technically broke, with its equity in the negative. Minister of Finance Bambang Sudibyo has confirmed that the government is seeking the House's approval to recapitalize BI.

Bank Indonesia's board of governors fired back at BPK on Sunday for going public with its findings before the bank had the opportunity to respond to the accusations. The central bank said it had no intention of deceiving the auditors, but stressed that BPK had not been asked to form an opinion, only to state the bank's balances as of May 17.

The central bank said auditors used accounting practices which differed from the standard, which explained the discrepancy with its own figures. On the outstanding liquidity credits, the board said the central bank and the government were still discussing the criteria used in disbursing the loans. But it noted that the loans were given out in accordance with guidelines from the government of then president B.J. Habibie.

BPK's report was originally intended to be a fresh start for Bank Indonesia, providing it a clean break from its past role as a government agency. Instead, the report has sparked a row that has left the public perplexed about the condition of the central bank, supposedly the last bastion of the institution of trust which underpins the entire monetary system. Remove that trust, and we will be left with no system at all.

Bank Indonesia has survived the severe economic crisis of the past two years chiefly because people continued to place their trust in the institution, even as they lost confidence in the banking system, the currency and the government. Has the central bank abused that trust as claimed by BPK? Whatever the outcome of this dispute, we hope the BPK auditors and central bankers realize the potential effects of their actions, and act accordingly to spare the nation from a potential catastrophe.