The $17.5b controversy

The politics involved in resolving the four-year dispute between the government and Bank Indonesia with regard to who is responsible to recoup the Rp 144.5 trillion (US$17.5 billion) in emergency liquidity loans extended by the central bank to bail out banks in 1997 and 1998 seems to have gone all the way back to square one.

While the finance ministry, the central bank and the House of Representatives are finalizing an agreement to resolve the dispute, Chairman of the Indonesian Bank Restructuring Agency (IBRA) Syafruddin Temenggung asserted at a hearing with the House finance commission last week that his agency did not accept the base amount used for the burden-sharing.

Syafruddin contended that when the government took over responsibility for the loans from the central bank and transferred them to IBRA only Rp 129.42 trillion of the total were backed up by collateral, and of that amount only Rp 12.34 trillion had any commercial value.

Syafruddin's bone of contention could jeopardize the provisional agreement that the finance ministry, the House and Bank Indonesia are about to finalize within the next few days because the House seems to be having second thoughts now about the formula for the burden-sharing.

The three parties had previously agreed, in principle, that the government would reimburse Rp 134.5 trillion of the total liquidity loans to the central bank by issuing perpetual promissory notes.

These debt instruments, called capital maintenance notes, would not bear any interest, but whenever the central bank's capital adequacy ratio (CAR) fell below the minimum 5 percent of its monetary liabilities the government would pay the shortfall to Bank Indonesia to bring its capital back to the minimum standard. But when the central bank's CAR was higher than 8 percent of its monetary liabilities, the excess would be used to retire some of the perpetual notes.

This solution would spare the government the equivalent of billions of dollars annually in interest and principal payments to the central bank because the perpetual notes would replace the interest-bearing bonds the government had issued to the central bank.

Yet more important is that the resolution of the dispute would remove once and for all the uncertainty about the government fiscal balance sheet and would enable the central bank to obtain an unqualified opinion from the Supreme Audit Agency for its annual financial report.

But the case now seems to be going back to the old disputes that arose after an investigative audit by the Supreme Audit Agency in 1999 found that Rp 138.5 trillion of the loans had not adequately been secured by collateral and quite a portion of these funds, supposed to be used to reimburse depositors during the massive bank runs in 1998, had been misused by the recipient banks for currency speculation or lending to their affiliate businesses.

Further verification of all the liquidity loans now, as Syafruddin demands, would be an impossible task as it would require investigation into thousands of loan documents from 48 banks, many of which have already been shut down.

Moreover, whatever new findings such additional verifications might make, they would be meaningless if they were not accepted by the central bank. A protracted dispute might even force the central bank to reclaim all the securities it had transferred to IBRA. If this was the case, an incredibly chaotic situation would ensue because the bulk of the assets (securities) have been disposed of by IBRA to domestic and foreign investors.

However the burden-sharing is finally formulated, the taxpayers will always end up as the biggest losers because it will simply transfer the losses from one account to another account of the state. After all, despite its politically independent status, Bank Indonesia is nevertheless owned by the government. Any losses at the central bank will simply reduce the amount of profits it will be able to remit to the government in the future.

It is beyond doubt that the dispute should be resolved immediately, otherwise Bank Indonesia will never get a clean bill of health from its auditors, the Supreme Audit Agency, and may eventually be disqualified by the Basel, Switzerland-based Bank for International Settlement (BIS) from its membership with devastating implications on Indonesia as a whole.

Such disqualification will destroy Bank Indonesia's credit rating and prompt foreign banks to refuse its guarantee of letters of credit opened by Indonesian banks.

The core issue here is justice, not burden-sharing. It is of some comfort to learn that several former deputy governors of the central bank and former bank directors and owners found guilty of misusing the liquidity loans have been punished with jail sentences.

But the public believes there are still many more senior officials and former bankers who should also be 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.