Insolvent banks 'should not be liquidated now'

JAKARTA (JP): Forcing problematic banks to liquidate in the midst of the ongoing monetary crisis would further deteriorate confidence in the country's monetary sector and could spark a run on banks, the Econit Advisory Group says.

Econit's director Laksamana Sukardi said yesterday the government should not act hastily in forcing problem banks to liquidate and consolidate because such a measure could create new panic among customers and further damage the banking industry.

"It's likely bank liquidation would be done discriminately with banks owned by politically well-connected businesspeople escaping the axe," Laksamana said.

Such bias would cause uncertainty among people, and might worsen the public's confidence in the banking industry. This would in turn start a massive bank run where customers would move their funds to foreign banks, he said.

"The confidence crisis will soon spread to other banks which are perfectly healthy," he said.

Laksamana said the International Monetary Fund (IMF), which was negotiating with the government on a bailout package to solve the economic turmoil, might demand the liquidation of unsound banks as part of a deal.

But the IMF probably knew very little about the country's economy and the potential political impact of certain measures if taken, he said.

"This is not the United States, where policies are implemented equally. The risk of partiality on the part of the government is big," he said.

Citing Thailand as an example, he said the country's banking sector, which had suffered liquidity problems, had to be suspended because of massive bank runs.

The independent economic think tank predicts that 1998 will be "a year of correction", because there will be a correction in macro and microeconomic sectors from accumulated policy errors.

"The party is over -- now it's time to wash the dishes and pay the bill," Laksamana said.

Econit's director Rizal Ramli said Indonesia must pay the price of the currency turmoil with lower economic growth and purchasing power and a wider socioeconomic gap.

The super-tight monetary policy would affect the money supply next year and would impede investment growth, Rizal said.

Indonesia would enter a "stagflation" phase where economic growth would be slower and inflation would be high, he said.

The slow rate of economic growth next year would be followed by lower market demand and a higher unemployment rate.

Rizal said the government must give Bank Indonesia, the central bank, full autonomy as in other countries to enable it to follow the dynamic activities of the money market.

The monetary council, consisting of the coordinating minister for economy and finance, the finance minister, the central bank governor and the minister/state secretary, only slowed down the decision-making process to cope with the financial crisis, he said.

He said people should not expect the International Monetary Fund to eliminate graft practices in the country, such as corruption, which had been widely blamed as one of the factors that caused a loss of confidence in Indonesia's economy.

The IMF could not make corruption and collusion disappear, Rizal said, adding that it would only be "wishful thinking".

"Everywhere in the world, collusion and corruption are eradicated through domestic reform," he said. (das)