Wed, 13 Aug 2003

Liquidity credits cleared

The government and Bank Indonesia finally resolved last week their long-standing dispute over the sharing of the costs of the economic crisis with the issuance ofRp 144.5 trillion (US$17 billion) worth of 30-year bonds to reimburse the emergency liquidity support the central bank extended in 1997 and 1998 to bail out the distressed banking industry.

The bonds, with an annual interest of 0.1 percent would replace the debt instruments worth the same amount the government issued in 1998 and 1999 to the central bank.

This deal resolved once and for all the four-year dispute over the massive liquidity credits that arose after the Supreme Audit Agency found in 1999 that Rp 138.5 trillion of the loans had not been adequately secured with collaterals and quite a portion of these funds, supposed to reimburse depositors during the massive bank runs, had been misused by the recipient banks in currency speculation or lending to their affiliated businesses.

The audit's findings prompted the government to disclaim any responsibility to reimburse the credits and threatened to withdraw the bonds it had issued to the central bank.

Certainly, 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, notably those owned by Soeharto's cronies.

The central bank, which became a politically independent institution in May 1999, even threatened in 2001 to take back all bank loans and assets (collaterals) from closed and nationalized banks that it had transferred to the government through the Indonesian Bank Restructuring Agency (IBRA).

The final resolution should indeed be welcomed as it would theoretically reduce the interest burden of government debts to the central bank from almost Rp 5 trillion annually to a mere Rp 144.5 billion, and would reschedule the bond maturity to 30 years. The previous bonds begin maturing this year.

The caveat, however, is that the final agreement is tied to the condition that the government pays the central bank any shortfall, if Bank Indonesia's capital adequacy ratio (CAR) falls below 3 percent of its total monetary liabilities. But if the central bank's CAR exceeds 10 percent, it is obliged to transfer the surplus to the government as payments to retire the bonds.

The government's payment obligations to the central bank will therefore fluctuate, depending on economic growth, rupiah rate, inflation and interest rate level, which are all the most influential factors to Bank Indonesia's financial performance.

Moreover, the 3 percent CAR threshold that is tied to the agreement will require amendments to the 1999 central bank act as it doesn't specifically mention any CAR ratio. The law stipulates that the central bank's capital shall amount minimally to Rp 2 trillion and that the government is obliged to pay the central bank any shortfall (if its capital falls below that amount).

The final agreement, which was based on a political consensus with the House of Representatives early last month, reflected the government's endorsement of the validity of the credits, with disregard to the Supreme Audit Agency's findings.

Beyond any doubt, the protracted dispute should be resolved. Waiting for further verification of the bad loans and distressed assets transferred by Bank Indonesia to IBRA would be rather an impossible mission, because many of the assets have been sold.

The resolution of the dispute is vital to remove once and for all the uncertainty about the governments fiscal balance sheet and is crucial to enable the central bank to obtain unqualified opinions from the Supreme Audit Agency for its annual financial reports.

However, the agreement is justified only if it is limited to the financial relations between the government and Bank Indonesia. Because, whatever the formula of the burden sharing might be, the taxpayers will always end up as the biggest losers as losses will simply be transferred from one account of the state to another. After all, despite its independent status, Bank Indonesia is still owned by the government. Any losses booked to the central bank will simply reduce the amount of profits (surplus) Bank Indonesia will be able to remit to the government in the future.

That means that the legal aspects of the auditors' findings about alleged misappropriations and misuse of the liquidity credits should further be investigated. The core issue here is justice.

The Supreme Audit Agency said it had submitted to the Attorney General's Office 50 Bank Indonesian officials implicated in credit misappropriation, but only three of them have so far been brought to court. Several former bank directors and owners found responsible for misusing credits have also been prosecuted.

But the public believes there are still many more senior officials and former bankers implicated in the loan scam that remain untouched by the justice system. It is these culprits that should be hunted down and brought to justice.