Southeast Asia
Bank Indonesia: Changing of the guard Feb. 21, 2003
By Bill Guerin
A new governor of Bank Indonesia (BI) must be chosen and elected by May 17 when Syahril Sabirin, the current central bank governor, will end his term, although it remains legally possible for him to be re-elected.
President Megawati Sukarnoputri has submitted the names of three candidates to the House of Representatives (DPR) within the mandatory period of three months before election of a new governor. The three are deputy governor Miranda Goeltom, former chief economics minister Burhanuddin Abdullah, and senior central banker Cyrillius Harinowo.
Though the president has the right to nominate candidates, the final decision rests with the DPR. If her three nominees were all rejected, for example, Megawati would have to submit a list of new candidates to the legislature. If the DPR rejected the new nominees, then, under the terms of State Decree 23/1999 on Bank Indonesia, Sabirin would be reappointed.
Two other names command attention: BI deputy governor Aulia Pohan and Sabirin himself.
Miranda, 54, has been a deputy governor on monetary policy since 1999 and often lectures at home and abroad on monetary issues. She was one of five out of the bank's seven deputy governors who ostentatiously resigned in 2000 over a fallout with the government of Abdurrahman Wahid. The government and the politicians ignored their resignations.
Wahid had wanted the central bank to pick up the tab for some Rp24 trillion of the total bailout funds from the Bank Indonesia Bank Liquidity (BLBI) program, estimated then to be Rp144.5 trillion. If he had succeeded, Bank Indonesia would have been technically insolvent.
Burhanuddin, 55, started work in the central bank in 1981. He did a stint with the International Monetary Fune (IMF) in Washington and a year as a BI deputy governor before serving for only a month as Wahid's coordinating minister for the economy.
The youngest of the three, Harinowo, 50, started his career at the central bank in 1978 and has also worked with the IMF in Washington. He knows the ins and outs of central-bank mechanisms, and is respected in government circles and within the IMF and World Bank.
Sabirin was called back from a post with the World Bank in Washington by former president Suharto and appointed as a Bank Indonesia managing director, together with three others, just before Christmas 1997. On February 17, 1998, he replaced Sudradjad Djiwandono as governor of Bank Indonesia.
On March 13, 2002, Sabirin was sentenced to three years' imprisonment after being found guilty of stealing Rp904 billion (now equivalent to about US$102 million) of Bank Indonesia funds, though he was later exonerated by the Jakarta High Court and now awaits a "final verdict" from the Supreme Court.
Sabirin was involved in a scandal - Baligate, as it was dubbed - that became a major issue for the government of president B J Habibie.
A 20-man team of specialists from PricewaterhouseCooper (PwC) armed with sophisticated money-laundering software took less than three weeks to trace about 70 percent of more than US$70 million diverted from local Bank Bali to a company run by Setya Novanto, a leading figure in the ruling Golkar party, for the recovery of loans from the Indonesian Bank Restructuring Agency (IBRA).
After Novanto took responsibility for collecting the loans, for which he was paid a handsome commission of 60 percent, the central bank and IBRA approved repayment of the loans. Officials say the loans were guaranteed by the government and should have been repaid without the need for third-party help. The public believed that the money was plundered for Habibie's re-election war chest. Sabirin accused PwC of harming the central bank's reputation by saying the bank hadn't fully cooperated in the investigation.
Major issue as it was, domestically and internationally, Baligate turned out to be only the prelude to widespread fraud perpetrated through the BLBI program. Several former deputy governors of BI are still on trial for graft and allegations of corruption related to BLBI.
The central bank, under Sabirin's stewardship, channeled some Rp165 trillion in government funds into the banking sector under the BLBI scheme. When banks had liquidity problems during the financial crisis, they received an injection of funds from the central bank. Once they had received such support, banks were not allowed to enact further loans to third parties. Time after time, however, funds were imbursed to companies under the same ownership, to pay obligations, whilst the endless money supply flowed from BI.
Faced with massive deposit withdrawals, the banking industry was in crisis at the time and the closure of 16 insolvent private banks on November 1, 1997, marked the first stage of an economic-stabilization program and a hoped-for recovery.
These were the only banks protected from withdrawals by a government guarantee and the closures, even to this day, spark criticism that the IMF was at fault for giving incorrect advice to Indonesia, leading it to raise interest rates so high that the economy collapsed.
Indonesia, Thailand, and South Korea were the only countries in the region to seek IMF support. Malaysia squared up to the crisis on its own and introduced capital controls, though before being sacked and later imprisoned the then minister of finance Anwar Ibrahim had been a champion of the IMF's stringent monetary policies.
Market confidence had crashed and IMF support was seen as the only way to restore the battered currency markets. Thailand signed its first letter of intent on July 2, 1997, Indonesia on October 31, and South Korea on December 1. Korea was then granted standby support under the Emergency Financial Mechanism (EFM).
Indonesia, amid pressure from Suharto and his family, had chosen a managed float rather than the rigid pegged system preferred by Thailand and South Korea. Eventually all three moved to a floating foreign-exchange system.
Regional sovereign credit ratings were quickly downgraded by international rating agencies, thus fueling the poor market sentiment and triggering panic selling of foreign-owned local assets in 1997. Indonesia in that year alone saw capital inflows of $10 billion replaced by a massive outflow of $12 billion.
The IMF-supported program for Indonesia was put to paper in a Memorandum on Economic and Financial Policies (MEFP) submitted by Jakarta to the IMF in its first ever Letter of Intent (LOI) on October 31, 1997. The basic goal of the program was to deal with insolvent and weak banks and strengthen financial infrastructures, as part of a comprehensive policy to restore confidence and stem the decline of the rupiah.
BI has always argued that after the government had stated that it would close no more banks, the central bank had little choice but to carry out the conflicting functions as lender of last resort and guardian of the payments system on the one hand, and monetary manager on the other.
Most errant bankers defended themselves by saying the weakness of the BLBI procedures resulted in involuntary violations (ie, they claim they did not know they were breaking regulations). Another maneuver was to book losses from foreign exchange transactions to get further chunks of BLBI allocation.
The atmosphere at the peak of the crisis was one of panic, with truckloads after truckloads of rupiah being delivered round the clock to banks. There was no evaluation of criteria, nor was it likely anyone was doing the sums. The "emergency support" involved no fewer than 43 banks and started as early as July 1, 1996.
Numerous banks were allowed to continue operating (thus receiving more money from an innocent consumer public) although they had violated rules set by BI themselves. Banks with negative balance sheets (ie, in the red) continued to receive support and facilities from BI.
Instead of banks being closed down immediately when suspicions arose, the BI money machine continued to fill their coffers indiscriminately. One of the most publicized examples involved Bank Dagang Nasional Indonesia (BDNI).
From the outset of the monetary crisis, this bank was onthe rumor list of banks for immediate closure, but BI continued giving support.
The serious charges and criticisms against BI are that it patently failed to exercise judiciously its overriding task of banking supervision.
The issue of how to apportion responsibility between the government and BI for the massive cost of the bailout continues to blight relationships between the government and fiscal authorities and the central bank itself.
BI and the government last week finally agreed to a comprehensive deal whereby the total amount of funds in the BLBI operation would be written down to Rp159 trillion, though both parties agreed not to verify the accuracy of that figure.
Under the proposal, if BI's capital ratio falls below 5 percent, the government will be obliged to inject funds from the state budget to meet the minimum 5 percent requirement.
Local economists have waxed positive over the fact that the three nominees for governor are banking professionals. They believe it shows an intention to protect the central bank from political interference.
Certainly several members of the House Commission IX on financial affairs have made a point of saying that the next governor should be independent and capable of inspiring market confidence. But House of Representatives Speaker Akbar Tanjung, like the incumbent BI governor a convicted felon, was the first to point out the political realities.
The 1999 Law on Bank Indonesia gives the House the right to reject any candidate, though the politicians must first conduct their version of a "fit and proper test" on each candidate.
"Theoretically, it is possible for the House to reject those candidates. If that happens, the term of Sabirin will be extended," Tanjung said.
This will be the first time a new governor has been selected since the bank became a politically independent institution through the central-bank law in May 1999 and is seen as a major chance for the central bank to break away from its past. Re-electing Sabirin, who presided over the worst period in the central bank's history, would be a giant leap backward into a past where BI was synonymous with corruption and collusion.
An investigative audit carried out by BPK, the National Audit Agency, and made available to the DPR in August 2000, estimated "misappropriation" of Rp54.56 trillion in the BLBI scheme, figures calculated by BPKP (the Financial and Development Control Agency), most of it linked to "corruption and criminal offenses".
The audit also cited Miranda and Aulia in a list of 80 current and former BI officials suspected of being involved in abuses of the BLBI funding.
Senior deputy governor Anwar Nasution is above suspicion, as his appointment coincided with the granting of independent status to BI in 1999, though strangely enough, his name has not been put forward as a potential governor.
Sabirin told local reporters this week that he would prefer another job, perhaps with the World Bank or IMF in Washington, but emphasized he was ready to "sacrifice" that chance if he were re-elected.
In the run-up to the 2004 elections, however, it seems fanciful to imagine that politicians will not bring political and party loyalties into play during the selection process. The commission has said it will invite the public to give input concerning the three candidates but the battles and wheeling and dealing will be in the corridors of power at Senayan, where the magnificent DPR building stands.
Harinowo's loyalties are to the president's Indonesian Democratic Party of Struggle (PDI-P), Burhanudin has been championed by no less than Vice President Hamzah Haz, chairman of the PPP (United Development Party), and Aulia is close to Tanjung and thus to Golkar.
Though not quite as momentous as the puffs of smoke from the Vatican that signal the selection of a new pontiff, the smoke signals from Senayan will be eagerly awaited by those who dream that the right choice of governor will bring an end to the political interference that has taken its toll on Indonesia's hopes of economic recovery.
(�2003 Asia Times Co, Ltd.) ===================================================================================
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