Lending fraud may drag down economic recovery

By Reiner S.

JAKARTA (JP): An alleged scandal in the extension of a multibillion dollar emergency liquidity support for ailing banks has left Bank Indonesia in a corner, and experts are saying it could risk the country's economic recovery.

Bank Indonesia senior deputy governor Anwar Nasution admitted last week that the issue had drained the central bank's energy and time, forcing it to answer laborious and repeated questions from legislators, auditors and the press.

"I should remind you that we also have other priorities. But if we keep dealing with the same old problem, when are we going to move forward," Anwar said on the sidelines of a hearing session with the House of Representatives Commission IX for banking and the state budget.

"I'm now just like an official of a museum," he said, referring to how Bank Indonesia had to repeatedly explain to various parties the same problem, which first arose in 1998.

University of Gadjah Mada (UGM) economist Sri Adiningsih warned the country not to become "trapped" in the liquidity support scandal because there were other, more important, economic agendas that had to be dealt with.

"Don't waste our energy and time in handling only this single problem," Sri said.

"What's urgent for the country now is how to rebuild a working banking industry, and revive the anemic industrial sector in order to provide jobs," she pointed out.

She added that solving the current social and political problems were also crucial to ensure economic recovery.

Between late 1997 and 1988 the government provided some Rp 164.5 trillion (US$23 billion) in emergency liquidity support loans to help ailing banks stay afloat.

But a recent general audit conducted by the Development Finance Comptroller (BPKP) and the State Supreme Agency (BPK) stated that Bank Indonesia had inappropriately channeled part of this liquidity support.

BPK said in its audit report, which was leaked to the press, that the central bank had even violated its own ruling in the extension of some Rp 80 trillion of the liquidity support.

Both BPK and BPKP will implement an investigate audit into the alleged scandal, in which the former will largely focus on the central bank, while the latter will focus on the recipient banks. The audit process is expected to be completed sometime in May.

There have also been allegations that owners of the recipient banks used the massive liquidity supports to speculate on currency, and, in doing so, contributed to the plunge in the value of the rupiah against the U.S dollar to its lowest level of Rp 17,000 in 1988.

Bank Indonesia has welcomed the investigative audit. But last week's accusation by former finance minister Fuad Bawazier that the central bank should be held responsible for the scandal because it had "misinterpreted" the government's policy has clearly irritated key people at Bank Indonesia.

Fuad said that the central bank should have closed down ailing banks that were not continuously injecting the liquidity support.

"What is he saying? Fuad was the secretary general of the DPKEK and the darling of the Soeharto family," Anwar said, referring to the economic and financial council formed by the former president Soeharto in the aftermath of the economic crisis that decided on crucial economic policies.

"I don't understand this accusation. Bank Indonesia was part of the government at the time," said Bank Indonesia's deputy governor Achjar Iljas.

Bank Indonesia only became an independent central bank as of May 1999.

"There's too much political weight in this issue," Achjar said.

"But we should put the issue in proportion, because, if not, how can we concentrate on our monetary policy and other banking problems," he said.

Bank Indonesia has to ensure an inflation level of between 5 percent and 7 percent this year, and create a completely healthy banking sector by 2001.

The emergency liquidity support policy was first agreed to in September 1997 during a meeting between senior economic Cabinet members, including the then Bank Indonesia governor Soedradjad Djiwandono, to provide temporary help for banks facing funding mismatches.

This policy was redesigned in late December 1997 to help all banks facing liquidity problems, amid plunging confidence in the industry after the government liquidated 16 private banks in November.

Soeharto, via the state secretariat, wrote a letter dated December 27 to the central bank to support this liquidity support policy.

The government then launched a blanket guarantee program to prevent widespread panic among depositors.

Achjar said, "The liquidity support is needed to avoid a complete distrust of the banking sector, which could destroy the country's overall economy.

"This is the cost that we must pay to avoid a greater loss," he said, adding that the central bank avoided further closure of banks after the November liquidation to prevent systemic risk in the banking sector.

"To answer the question as to whether recipient banks have abused the liquidity support, or whether the central bank has committed mistakes, let us wait for the completion of the investigative audit," he said.

However, many people believe the liquidity support program has been abused.

"Indonesia is one of the most corrupt nations in the world," Sri said.

Legislator Paskah Suzetta said that the leaking of Soeharto's December letter prompted bank owners to rush to the central bank to demand the liquidity support facility.

Another UGM economist A. Tony Prasetiantono said the sudden rush on the liquidity facility might be one reason why Bank Indonesia could not complete the necessary verification process.

"But the question is, does the central bank have no sophisticated system to overcome this kind of problem or is there serious corruption here," Tony said.

"I think an investigation is the right way to answer this question," he added.