Justice, not burden sharing

Justice, not burden sharing

The Rp 144.5 trillion (US$14.5 billion) in emergency liquidity
credits extended by Bank Indonesia (BI) to bail out the
distressed banking industry in 1997 and 1998 has led to one
debacle after another for the central bank.

Instead of earning high praise for "successfully executing"
its lender-of-last-resort function, the massive liquidity support
program almost drove it into bankruptcy in 2000 and three of its
former directors were put in detention by the Attorney General's
Office. BI's board of governors were so demoralized by the fiasco
that five deputy governors tendered their resignations in
November 2000. To add insult to injury, BI's governor was
languishing under house arrest on charges in a different
corruption case.

Even now, more than four years after the huge liquidity
injection, the central bank is still haunted by what it has
always claimed was a safety measure to deal with the banking
crisis.

A spokesman for Bank Indonesia said on Monday that an
independent team of two Indonesian and two foreign banking
experts were now considering how much the central bank and the
government should each share the burden to recover the Rp 138.5
trillion of the total liquidity credits that were lost.

The dispute over the massive liquidity support arose after an
independent audit by the Supreme Audit Agency (BPK) in 1999 found
that Rp 138.5 trillion of the loans had not been adequately
secured by collateral, as required by law, and quite a portion of
these funds, intended to be used to reimburse depositors during
the massive bank runs in 1998, had been misused by the recipient
banks for currency speculation or lending to their affiliate
businesses.

The auditor's findings prompted the government in 2000 to
disclaim the allegedly misappropriated loans as its debts,
threatening to withdraw the bonds equivalent to that amount it
had issued to the central bank.

Naturally, Bank Indonesia flatly denied any wrongdoing,
arguing that as part of the Cabinet under the authoritarian rule
of then president Soeharto it ought to obey the president's
instruction not to close banks, most notably those owned by
Soeharto's cronies, even though their account balance with the
central bank had been negative. The central bank, which became a
politically independent institution in May, 1999, even threatened
to take back all the bank loans and assets (collateral) from
closed and nationalized banks it had transferred to the
government through the Indonesian Bank Restructuring Agency
(IBRA).

The central bank was prevented from bankruptcy in late 2000
only by a provisional agreement that required the central bank to
bear only Rp 24.5 trillion of the disputed losses. But this
agreement did not hold due to lack of support from the House of
Representatives.

It is beyond doubt that the dispute should be resolved
immediately, otherwise Bank Indonesia will never get a clean bill
of health from its auditors, BPK, and the central bank may
eventually be disqualified by the Basel, Switzerland-based Bank
for International Settlement (BIS) from its membership with
devastating implications for Indonesia as a whole. Such
disqualification will destroy Bank Indonesia's credit rating and
prompt foreign banks to refuse its guarantee of letters of credit
opened by Indonesian banks.

But in so far as the taxpaying public is concerned, they will
always end up as the biggest losers no matter how the burden
sharing is formulated because it will simply transfer the losses
from one account to another account of the state. After all,
despite its independent status, Bank Indonesia is nevertheless
owned by the government. Any losses booked to the central bank
will simply reduce the amount of profits Bank Indonesia will be
able to remit to the government in the future.

The core issue here is justice, not burden sharing. Despite
the auditor's findings, none of the central bank executives or
commercial bank executives allegedly involved in the misuse of
the loans have been brought to justice. True, three former
directors of Bank Indonesia, who were initially interrogated in
late 1998 but were later released, have again been put in
detention by the attorney general. The central bank governor,
Sjahril Sabirin, was convicted by a Jakarta court last month but
in relation to another corruption case totally unrelated to the
liquidity credit scam, but he still essentially free, pending
appeal.

The former president of the now defunct Bank BHS, Hendra
Rahardja, was sentenced by the Central Jakarta District Court to
life in prison and two other executives of the bank each to 20
years in jail late last month after being found guilty of
misusing the liquidity credits.

But this legal process was rendered rather meaningless as they
were tried in absentia and the trial process did not cover the
wider issue of the auditor's findings.

It is therefore most imperative that the attorney general
speed up criminal investigations of Bank Indonesia officials and
commercial bank executives implicated in the huge loan scandal.
The officials of the central bank, as a regulatory agency, cannot
simply disclaim responsibility and hide behind instructions from
the president.