Macroeconomic policy, banking management need reform

JAKARTA (JP): Laksamana Sukardi obviously does not fit the norm. His priority is not the pursuit of wealth and a high office.

He could have stayed in his previous job as managing director of Lippo Bank and moved on to reach the pinnacle of his career in banking.

Instead, he quit his job and joined the Advisory Group in Economics, Industry & Trade (Econit) founding the Reform consulting group, long before anybody seriously discussed economic and political reforms (Reformasi).

In the political domain, he joined the Indonesian Democratic Party (PDI). Following an internal leadership rift in the party, he sided with the Megawati Soekarnoputri camp, which has often suffered at the hands of the government for its outspokenness and sharp criticism.

This transformation was based on Laksamana's hope to have more influence in the development process of his country. This, he believed, could be better accomplished by becoming an economist and a politician.

The 42-year old father of three children graduated as an engineer from the prestigious Bandung Institute of Technology (ITB).

The following is an interview with the former banker.

Question: How do see Indonesia's current financial and banking crisis?

Laksamana: The current problem is how to restructure the banking sector. Unlike in Japan and the United States, there has never been a correction of Indonesia's banking system. All of the problems accumulate. We do not remove the problems, but carry them over and over. Eventually there will be an explosion. Unfortunately, the explosion has occurred at the same time as the political upheaval.

Former president Soeharto, during his rule, could have undertaken a fundamental correction when Indonesia's economy was booming. At that time, it would have been a different situation, much better than it is now, when the banks and the government have lost confidence. Now, the banks are also facing a very difficult time, whilst the government lacks political legitimacy.

Government measures to restructure the banking system are very painful and unpopular. Any painful and unpopular decisions must have legitimation and strong leadership. The government cannot show partiality based on their own gratification. There must be a total solution.

Q: What actions are needed for this total solution?

L: Transparency. We have to be transparent in establishing who has violated the regulations and who has not; who should be prosecuted and who should not.

In the banking system, problems are basically caused by two things -- errors in the macroeconomic policy and banking management. Errors in macroeconomic policy can effect sound banks as well.

With an improper macroeconomic policy, it's not fair to charge the responsibility to bankers alone.

Meanwhile, errors in banking management consist of criminal and non-criminal actions. Over-expansion is a form of ignorance and shows a lack of professionalism. Financing or extending loans to affiliates on the other hand is a crime and must be investigated.

Q: What do you think about the investigations which have begun into some bank commissioners and executives?

L: I think the criteria is unclear. The authorities have summoned bankers without any clear reasoning. There must be clear audits first. Violations must be thoroughly classified as involving criminal activity or ignorance. There must also be total solutions, including improvement in the role of Bank Indonesia (BI), the central bank.

Its role must be reviewed. We understand that in the past, the central bank's governor and directors were selected by the Soeharto family. That is why BI's executives did not have any political power. They pretended that there was never anything wrong.

Also, we have not seen any actions against state-owned banks, where "there are too many skeletons in the closet."

Q: How can we develop transparent criteria?

L: There must be an independent commission, appointed directly by the President and mandated by the House of Representatives (DPR) because the commission is to deal with inter-disciplinary affairs. So, a body like the Indonesian Banking Restructuring Agency (IBRA) should have a mandate from the DPR. The chairmanship of such a commission needs to have real power. If the members do not have power, they will be greeted by closed doors. The problem will never be solved, even though there is a very prudent program supported by expensive foreign consultants. Political backup is necessary.

Q: How bad is the banking problem in Indonesia now?

L: It is bad because we have postponed corrections for such a long time. Now, with political upheavals and lack of a public mandate from the government, any action is always criticized. We still have a long way to go.

Q: Is transparency the most important thing despite an excessive number of banks operating in Indonesia?

L: Yes. I don't see any problem with hundreds of banks operating in Indonesia if there is transparency. In a market economy, there will be natural mergers. But in Indonesia, mergers are very difficult because each bank has its own problems. Banks refuse to merge with each other. There is no consolidation based on market forces.

Q: Is there any other way to solve this problem?

L: There is no other way, but to involve overseas banks. Some members of the House have expressed concern over this prospect, but they have not offered any other solutions. The other problem is that the government does not have the money to recapitalize the banking system.

Q: What do you hope to achieve by inviting foreign banks to Indonesia?

L: Firstly, the main priority is to restore confidence. We have to create a positive environment. Even news about a foreign bank expressing interest in buying a domestic bank creates more positive sentiment. In restoring confidence, the role of foreign banks is very important. If this scheme is workable, it means that a foreign investor trusts in Indonesia. Then the public may also trust the management.

Q: Is this the best way?

L: What can we do in a situation like this to restore confidence in the banking industry? In inviting foreign banks, however, we need to be careful about the creation of employment. This is all about transfer of know-how, so there must be regulations regarding foreign and domestic employees.

Q: What else do you think should be done?

L: It is necessary to conduct an audit of good faith. Bankers (of liquidated banks) can deliver their assets to IBRA to demonstrate their good faith. Other banks must also be audited to avoid a partial solution.

Q: Do you think a person needs a specific character to run a bank?

L: We made a mistake in the past (with a policy encouraging more people to operate banks). There have been so many bankers, but they do not understand the industry, they are not professional. It is only in Indonesia that a banker can also operate a large property business. In the United States, for instance, this would be considered a conflict of interest, so a businessman like Donald Trump cannot run a bank like Citibank. We have to remember that state supervision has also been very poor. Many bankers have violated the legal lending limit. But it would also be foolish to limit the number of people who own banks. The management of the banks, therefore, must become more professional and be able to avoid collusion with the owners. Many of the presidents of domestic banks continue serve their owners interests.

Q: How do you see the role of BI, currently?

L: It's difficult to see that BI's current governor and executives are not part of the old regime. They were appointed by Soeharto. The governor should have been selected by the House of Representatives (DPR) from nominees of the President. The President should not be able to sack the central bank's governor and executives. But, that's it. We have to admit this relates to our political system.

Q: Why so?

L: Firstly, we do not have an independent judiciary system. It is important to create an independent judiciary system. Secondly, we don't have the power of democracy. Without these, anything is possible. Though the central bank is independent, it is very difficult to act properly without democracy. Though BI is independent, the judiciary system is not independent. If there is a legal dispute, the winners are usually those who have the power to intervene in the justice system. Finally, people do not have the motivation to create a better situation and feel useless.

Q: Does this still occur now?

L: The current government is continuing Soeharto's policy. There is also no improvement in democracy. Members of the House and the People's Consultative Assembly (MPR) are not the true representatives of the people. There is no significant progress at all.

In creating solutions for the banking system, the government must also see justice and democracy as very important - meaning that BI must also become a truly independent body with its executives elected by an independent parliament. If there is a legal case, it should go to court, so there will be no trade in justice. But, it is useless if BI's governor is selected by the House if its members are not empowered.

Q: How can we come out from current crisis?

L: In addition to the banking restructure, we need to pay attention to the private debt problem and corruption practices. Nobody will trust Indonesia with such huge debts still outstanding. Meanwhile, we need to establish a body, for instance a presidential commission, for anti-corruption. By these efforts (bank restructuring, private debt solutions and an anti- corruption drive), we will begin the process of confidence building.

Q: How can you be so sure?

L: The issue is beyond the economy. We need to restore confidence. Once confidence is restored, the money should start flowing in, people will start trusting in the banks, the economy will improve, as will exports and the current account and government revenue will increase. Everything will work normally. I have a very high level of confidence in Indonesia in the longer term, but we must regovern this country.

Q: How are you channeling your ideas?

L: I have always intended to channel my ideas to enrich the people. To this end I joined PDI, but it has been very difficult to bring our aspirations to public attention because of government restrictions. That is why I created independent consultancies.

But in this so-called reformation era, I am concentrating on the PDI to channel my ideas. As a treasurer, I can contribute my ideas as the party's platform in the future.

Q: How do you see people's aspirations?

L: People can not be cheated any longer. What is legal according to the government is not supported by the public.

Law is the crystallization of people's aspirations, which are changeable. If there is a law or regulation which is no longer in accordance with people's aspirations, the law must be changed. The problem is that many regulations have been created to stifle people's aspirations. To some extent, this is the source of the current crisis. People do not have an aspiration channel. They feel they are not being represented by the House.

Then they go into the streets. In the meantime, the current government still uses the previous law. Unfortunately, the government feels it is always right. It has no capacity to understand that it is sometimes wrong.

Q: How do you concentrate your activities now?

L: In a situation like this, I concentrate on politics. I joined PDI to comprehend politics. PDI was previously considered like the lowest caste in this country, but now it is very popular. But this is not easy, either. I spend a lot of time working for PDI, supporting Megawati, consolidating and contributing ideas to anticipate and prepare for the general election. For the time being I also pay attention to economic and political affairs and try to find a resolution to the internal conflict within the PDI.

Q: What are your concerns now?

L: I studied engineering to participate directly in development activities in Indonesia. Then, all of a sudden, there were no projects in the early 1980s. I started to think that economists played a very important role in making development projects priorities, and engineers just followed the economists. I had to move on to economy and finance. I studied these subjects when I was working at Citibank. Beginning as an executive trainee, I studied while working at Citibank until I was a managing director. In the early 1990s, when the government imposed a tight monetary policy, I realized that in Indonesia, politicians decided economic affairs. At that time, BI extended a credit facility to BPPC (the Clove Bufferstocking and Marketing Agency) which should not have been funded. I started to think politics was very important. Rather than going to school, I joined PDI to study politics. I chose PDI because I felt I could not learn about politics by joining Golkar. After joining PDI, I was discriminated against by the government and people were apprehensive about meeting with me. Since the crisis the situation has changed.

Q: What is your ambition?

L: I am a very simple person. I want to see Indonesia become a super-power country. The people are the assets of the country, not the liabilities. Human capital is the key to the development of countries. I believe Indonesia has great potential. To be an asset, a human being must be creative. Creativity leads to innovation and innovation creates products. Human beings can only be creative when they are given independence in thinking and freedom of expression. This is a very basic need. To acquire human capital, again, we need the basics: An independent judiciary system and the empowerment of democracy. With a population of some 200 million people, Indonesia has an excellent domestic market. The education system must be reviewed.

Q: How long do you work daily?

L: Starting from breakfast, I begin my work by meeting with people. This lasts until midnight.

Q: How do you have time for your family?

L: Sometimes I still have time for the family. My children often complain and say: "Why did you go into politics and sacrifice your family?" I tell them that we have to be an asset to our country. (icn)