A Central Bank Hanging By A Thread

Auditors say Bank Indonesia needs billions for a rescue

Indonesia's battered financial system has received another body blow: The country's central bank could be near insolvency. That's the word from government officials. In early January they announced that a report by Big Five auditor KPMG--ordered up by the International Monetary Fund and Indonesian authorities--disclosed that Bank Indonesia was in the red. Precise figures are still hard to come by. But the officials say the central bank is short at least some $7 billion.

Bank Governor Sjahril Sabirin was quick to dismiss the audit. In an interview with BUSINESS WEEK on Jan. 5, just hours after President Abdurrahman Wahid asked Parliament to fire him, Sabirin said the central bank was not bankrupt and did not need to be recapitalized. Parliament had not then considered Wahid's request.

SCUTTLED PLANS. But Sabirin's protests aren't convincing many. John Dodsworth, senior resident representative of the IMF in Jakarta, says the government will have to promise to recapitalize Bank Indonesia, tighten management control, and adopt international accounting practices in order to continue receiving IMF aid. Jakarta is still expecting to receive $1.5 billion of about $12.5 billion pledged in 1997, says Sabirin, and is due to sign another pact with the IMF on Jan. 20.

Eventually, the government may have to stump up billions to save Bank Indonesia. The audit revealed that it loaned nearly $22 billion to banks that were clearly failing in 1997 and 1998. Coordinating Minister for Finance & Economy Kwik Kian Gie says the government will pay all but $7 billion of that.

The expense of shoring up Bank Indonesia is only a small part of the real cost to Indonesia. For starters, Jakarta's ambitious plans to overhaul the country's rickety commercial-banking system are now in tatters. Fixing Bank Indonesia has to be the top priority. And even that may not be enough to persuade investors to buy the commercial banks Jakarta wants to sell. "That scheme may not be possible anymore," says an Indonesian investment banker. Absent the sales, there is no reform program. "There's no way the bank sector can heal itself," he adds.

This year Jakarta planned to merge all of Indonesia's banks into just six: two for foreigners, two for Indonesian private investors, and two for the government. Selling stakes in those banks would have raised much of the $90 billion that the government says it needs to recapitalize the sector. Jakarta also hoped to secure about $400 million when Bank Central Asia went public sometime early this year; it was Indonesia's largest private bank, owned by the families of former President Suharto and tycoon Liem Sioe Liong, before it was nationalized in 1998. Sabirin says that offering "would not be affected by this audit," but Indonesian bankers say most investors have been scared off.

Another less tangible, but potentially devastating, impact of the scandal will be the discrediting of the Berkeley Mafia. This tight-knit group of U.S.-educated technocrats controlled Indonesia's financial system under former president Suharto, and its disciples are still running Bank Indonesia. The IMF and the World Bank had considered them the country's best hope.

Sabirin acknowledges that the bank did loan the $22 billion to troubled banks. But he says that he was following Suharto's orders; to have refused would have been fatal for the banks. Sabirin also rejects a slew of other allegations from government officials. They have said that the central bank broke its own rules by lending to finance companies instead of banks, that about $200 million of Bank Indonesia's gold reserves are missing, and that the central bank was involved in counterfeiting. "None of this is true," says Sabirin. Still, he acknowledges that in December senior government officials were worried enough to consider simply closing Bank Indonesia and replacing it. Instead, they decided to turn to the IMF for advice.

The only immediate ray of hope is that with Bank Indonesia brought so low, Indonesia and its institutions may have finally reached rock bottom. Even so, the climb out of the abyss will be long and hard.

Before it's here, it's on the Bloomberg Terminal.