Lending fraud may drag down economic recovery

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.