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.