Legislators question perpetual notes issuance

The Jakarta Post, Jakarta

Legislators questioned on Tuesday the government's plan to issue promissory notes without maturity dates or interest rates under a burden sharing scheme to replace trillions of rupiah in Bank Indonesia loans abused by ex-bankers.

Reasoning the scheme was burdensome to the government, legislator Paskah Suzetta called for a review of the planned issuance.

Paskah said that he and a group of legislators, after meeting with the Supreme Audit Agency (BPK), agreed the government should only partially replace the abused Bank Indonesia loans.

Also, the government first should verify exactly how much of the abused loans Bank Indonesia must shoulder, said Paskah, a member of House of Representatives Commission IX for financial affairs.

Bank Indonesia distributed Rp 144.5 trillion (about US$16 billion) in emergency liquidity loans to avert a wave of collapsing banks in the wake of the 1997 economic crisis. To replace the funds, Bank Indonesia received interest earning government bonds in the same amount.

But a BPK study showed that bankers abused Rp 138 trillion of the loans, prompting calls for a burden sharing scheme.

Under the scheme, the government would issue perpetual promissory notes worth Rp 144.5 trillion to replace the state bonds in Bank Indonesia.

Without maturity dates or interest rates, the promissory notes would virtually lift the debt burden off the state budget.

But according to Paskah, the scheme merely delays the bonds payment by an indefinite period, which contradicts the burden sharing idea since the government will end up shouldering the entire cost.

He suggested that Bank Indonesia gradually shed the government bonds it holds by an amount reflecting its share of the burden.

"Even if it takes 100 years, payments can be extracted from Bank Indonesia's surplus," Paskah said as quoted by detik.com. "We must declare this payment as a loss that BI must bear."

Bank Indonesia is a nonprofit institution but it earns money through various activities that add to its reserves as surplus.

The central bank's capital is set at Rp 2 trillion, and anything above this amount is categorized as surplus. The government must recapitalize the central bank whenever its capital falls below Rp 2 trillion.

Paskah said by allowing Bank Indonesia to pay off the losses through installments there would be no need for recapitalization.

A preliminary agreement in 2000 between the central bank and the government set a burden-sharing mechanism, under which the central bank would shoulder Rp 24.45 trillion of the abused loans. The deal fell through because of a lack of support from Bank Indonesia and the House.

Last year, the International Monetary Fund (IMF) called for a fresh approach, saying the ongoing interest payments on bonds the central bank was holding was burdening the state budget.

A settlement of the Bank Indonesia burden sharing issue is among the reforms set out under the letter of intent (LoI) the government signed with the IMF. The LoI targets a settlement this year.