In BI we trust?

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.