Commentary: The poor, the unemployed and the inflated promises

Vincent Lingga , THE JAKARTA POST , JAKARTA Fri, 06/26/2009 1:05 PM Headlines

The second round of presidential debates Thursday evening presented a slightly livelier exchange of views, especially between Jusuf Kalla and incumbent president Susilo Bambang Yudhoyono, concerning what they would do to alleviate poverty and unemployment.

While Megawati Soekarnoputri continued to spout ideological rhetoric but didn't say anything substantial about job creation and poverty reduction, both Kalla and Yudhoyono demonstrated their mastery of the problems, succinctly articulating the connection between investment, economic growth, employment, purchasing power.

Like in the first round of debates, Megawati in her opening statement of vision and mission, haphazardly rambled from one subject to another, citing the importance of the traditional mutual-assistance spirit (gotong royong), then jumping to the problem of water, food imports, food sovereignty and the need for farmers to keep informed about weather forecasts.

Though her campaign slogans centered on what she called people-based economy, she didn't present any concrete policy measures on how she would cope with the problems of poverty and unemployment, failing miserably to show the vital role of economic expansion to create jobs and generate purchasing power.

Megawati failed to answer directly the moderator's questions about income, inflation, fuel subsidies. She repeatedly asserted the vital role of mutual-assistance spirit in attacking poverty and unemployment but failed to explain how. But both Yudhoyono and Kalla candidly enlightened the public on how poverty would never be reduced without fairly high economic growth, emphasizing the crucial importance of stimulating private investment through a better business climate.

As the incumbent president, Yudhoyono enjoyed the advantage of being able to articulate what his government has been doing and his achievements over the last five years.

Encouraging also was that both Yudhoyono and Kalla realized the need for multi-pronged policies in addressing poverty and unemployment, combining pro-growth policies with government intervention through populist programs specifically targeted at the impoverished people.

Economist Aviliani, who moderated the debates, deserved credit for her probing questions to each of the candidates, prodding them to debate each other's views.

According to the school of thoughts of Yudhoyono and Kalla, the fundamental goals of poverty and unemployment reduction strategy are to increase the opportunities available to poor families, reduce their vulnerability to economic shocks and empower them to address their own specific problems.

"We should not only provide them with fish, fishing hook and canoe but we should also produce fishing rods and canoes," Kalla said in emphasizing the importance of national economic resilience and minimizing dependence on imports.

According to Kalla, economic growth should reach at least 8 percent a year to reduce the poverty rate (currently 15.4 percent) by 150 basis points (1.5 percentage points) a year.

The three candidates, however, failed to present a clearly firm stance on whether they would be willing to raise fuel prices according to international price levels.
Nor did they reply explicitly to the moderator's questions about whether they would ask for foreign debt reduction or restructuring.

"I will increase tax receipts, improve austerity and efficiency to plug the budget deficit. But I will not sell or privatize state companies," Yudhoyono said, apparently in teasing Megawati who sold several state firms during her 2001-2004 presidency. The three candidates shared the same view about the need to revise the 2003 labor law to make it more flexible in order to encourage new investment but none of them elaborated how they would achieve the badly-needed amendments.

"We also need to make our fiscal incentives for investment comparable to those offered by other ASEAN countries," Kalla pointed out. So all in all, don't expect any policy breakthroughs, whoever of the three candidates eventually win the July 8 presidential election.The basic policies will remain the mixture of market-based economic management to spur growth and government intervention through well-targeted programs for the impoverished people.

Special Report: Reforms in place to root out rent seekers

Vincent Lingga , The Jakarta Post , Jakarta Tue, 04/28/2009 12:54 PM Headlines

 

Limited financial resources and inadequate institutional capacity have forced the government to go slow in reforming the civil service.

Since bureaucratic reform is also about abolishing or reducing rent, it faces strong opposition from those whose rents are at risk.

Given its complexity, civil service reform therefore requires a long, tedious and modest implementation in several small steps, in which the correct sequencing of reform is crucial.

No wonder, then, that the structure, work attitude and values of most civil servants seem to have remained largely unchanged despite the introduction of the new civil service law 10 years ago and the decentralization of more than two-thirds of civil servants from the central government to regional administrations under the 2001 local autonomy law.

World Bank reports and studies by various other international agencies have cited unpredictable and low-quality services from civil servants and arduous licensing processes as some of the main barriers to doing business in the country.

However, the situation is not so hopeless. The big bang reform, launched in 2007 by building "islands of integrity and competence" at three institutions - the Finance Ministry, the Supreme Court and the Supreme Audit Agency (BPK) - has produced fairly impressive results.

These institutions were selected for their strategic roles in law enforcement and in safeguarding state revenue, minimizing state losses. Most of these strategic functions happen to fall with the Finance Ministry, such as tax, customs and excise duty collection, budget allocations, treasury management and the oversight of the capital market and non-bank financial service industry.

But why does the civil service reform cost so much?

Most studies have concluded one of the main causes of the bureaucratic problems and inertia is gross underpayment. Civil servants always point out their rock-bottom salaries as an excuse for their poor performance, corrupt practices or absenteeism.

Therefore the redesigning of the civil service system with modern personnel management requires exponential increases in their pay, often by as much as five times, to make their living conditions comfortable enough to resist the temptation of corruption.

The reform at the three institutions alone, for instance, cost about US$5 billion.
But the state budget cannot at once afford massive, across-the-board large pay increases for all civil servants. Hence the incremental approach for the bureaucratic reform.

The generous pay introduced under the reform is nevertheless worthwhile, as it are based on a comprehensive personnel management system with clear-cut job classification, job descriptions for key positions and guidelines for recruitment, firing and promotion based on clear-cut performance criteria.

The recruitment system in most other institutions now is largely flawed and corrupt, requiring bribes to enter the civil service or get promoted. The pay system is devoid of any built-in performance criteria.

Riding confidently on the success of the three pilot projects, the administrative reform ministry is now extending the islands of integrity and competence to the President's Office, the National Police, the Indonesian Military and the Attorney General's Office.

Bureaucratic reform, however, has been taking place not only in the central government.
The 2001 regional autonomy law, which requires the direct election of governors, regents and mayors, has forced an increasing number of regional administrations to implement wholesale reform of their civil service and set up one-stop licensing centers for businesses to woo investors.

Reform-minded regional administrations realize businesses create jobs, which in turn provide wages, which in turn generate purchasing power to fuel local economies.
Regional chiefs have increasingly realized that natural-resource endowments, though important, are not the only key assets to attract investors.

A conducive investment climate, including the ease of doing business, is no less important for wooing businesses. And a good portion of a good business atmosphere is related to the public administration service.

As regional competition for investment has now become much more fierce, more regional administrations have issued pro-business policies.

At present, more than 50 district and municipal administrations, or 10 percent of the total, have set up one-stop service centers for business licensing as the competition for new investment grows keener.

The main question, though, in view of the false starts of similar reforms in the 1970s, is how to make the civil service reform sustainable - how to extend the islands of integrity and competence into an archipelago of best governance practices amid the succession of government every five years.

Previous attempts to reform the civil service failed because the initiative and drive depended mainly on the heads of the institutions concerned. And when the reform-minded heads were replaced, it was again back to business as usual.

Here lies the importance of establishing a politically independent National Civil Service Commission, as called for by the 1999 Civil Service Law. The National Civil Service Agency, in charge of managing government personnel, also needs further empowering.

SG’s misguided investment

Vincent Lingga , JAKARTA Tue, 03/24/2009 10:00 AM Opinion

The failure of state-owned PT Semen Gresik (SG), the country’s largest cement maker, to control its “renegade” PT Semen Padang subsidiary should be blamed partly for the flight of almost US$340 million capital when Mexico’s Cemex cement group quit Indonesia in 2006.

Cemex, the world’s third largest cement group, was so fed up with years of political, legal and business harassment by Semen Padang that it finally decided in late 2006 to sell its 25 percent holding in SG for around $340 million to the Rajawali Group, a domestic conglomerate.

The publicly-listed SG, riding high on the back of a 42 percent increase in net profits and a cash balance of around $250 million last year, is again moving to take hundreds of millions dollars of much-needed capital out of the country.

SG Vice President Heru Adiningrat said last Tuesday that the company had hired Credit Suisse Group as an adviser for its plan to acquire a 40 percent stake in a cement company that operates in Malaysia, Vietnam or the Philippines in a bid to maintain its revenue growth amid the expected slump in cement demand due to the global economic crisis. 

But given the global credit crunch, the thin margin generated by cement exports and Indonesia’s hunger for new foreign direct investment, this corporate move is misguided. Why a state company is initiating a move that will result in such a large amount of capital flight at a time when new foreign direct investment in Indonesia is getting harder to come by is mind-boggling.

It is hard to comprehend how by holding a 40 percent stake in a cement company that operates in one of the three target countries SG would be more profitable than if it invested in resource-based ventures in Indonesia, especially because the investment will partly be funded by costly borrowing from the capital market (bonds) or banks.

Yet what is even more questionable is how such an investment could contribute to SG’s synergy. After all, its brand-name is relatively unknown internationally, while the giant world-class cement groups have long operated in the three target countries.

Another big question is how SG’s 40 percent holding in a cement company would contribute to strengthening its competitiveness against its two strongest competitors in the domestic market: Heidelberger-controlled PT Indocement and Holcim-controlled PT Semen Cibinong.

The blunt fact is that although it already utilizes 98 percent of its designed production capacity of 18.5 million tons and controls 44 percent of the domestic market, SG is not the most efficient cement producer in the country.

Why doesn’t SG simply focus its resources on implementing its long-delayed $785 million plan to build two new cement plants with a combined capacity of 2.5 million tons in C. Java and S. Sulawesi?

These investment projects would be timely and quite promising because by the time the domestic economy returns to its usual robustness, expected in 2011, SG’s new units would be on stream to meet the increased demand for building materials. 

SG’s plan to invest hundreds of millions of dollars in a cement company in another ASEAN country looks strange, because Indonesia, as Southeast Asia’s largest economy, will remain the region’s largest market for cement and its derivative products.

By initiating an investment overseas, a domestic company could create the impression that Indonesia, endowed with such a rich variety of natural resources and potential market of over 235 million people, no longer offers viable business opportunities.

This is irrespective of how cheap the prices of cement companies in Southeast Asia might be, as SG CEO Dwi Soetjipto touted last week.

Minister for State Companies Sofyan Djalil, who, with a 51 percent holding, is the government nominee shareholder at SG, as well as the investing public, which has a 25 percent stake, should oppose the overseas investment plan which the SG management will propose at a shareholders meeting scheduled this May.

Karen should be as brave and no-nonsense a leader as Sri Mulyani

Wednesday, February 11, 2009 Vincent Lingga, The Jakarta Post, Jakarta

Only time will tell whether the government is really serious about reforming Pertamina by giving its new CEO Karen Agustiawan full mandate to run the country's largest state company.
But it is good to know that Karen herself has pledged from the outset of her tenure she will reject, at any cost, any undue political intervention that could harm the US$28 billion oil firm.

This means the 50-year-old oil mining technology expert could choose to resign from her post rather than succumb to meddling from vested interest groups and rent seekers within the government and political parties.

But that is much easier said than done.

Karen must be as brave and no-nonsense a leader as Finance Minister Sri Mulyani Indrawati, "the Iron Lady" who has launched a big-bang reform to remove leeches from the customs and taxation offices, long perceived to be one of the most corrupt public institutions in Indonesia.

Political intervention and corruption and collusive practices by rent-seekers who want to make Pertamina their cash cow have always been among the oil company's biggest enemies, even after the fall of Soeharto's authoritarian government in May 1998.

In fact, Karen's appointment last Thursday to abruptly replace Ari Soemarno, who had only been at Pertamina's helm for less than three years, was not free from political meddling, as Sofyan Djalil, the minister of state enterprises, himself admitted that Soemarno's firing had nothing to do with his performance.

Soemarno, the fifth CEO at Pertamina in the past 10 years, had brought about significant improvement in the corruption-riddled domestic and foreign logistics departments of the company's upstream and downstream oil operations.

But he ran into bad luck.

He incited President Susilo Bambang Yudhoyono's ire, after temporary shortages, though not pervasive, of liquefied petroleum gas (LPG) and gasoline in several areas over the past few months occurred at a time when long lines of people at gasoline stations were scenes mostly despised by a president facing an election.

Judging from her decades of experiences working at Mobil Oil (now ExxonMobil) and the Halliburton oil service company, Karen seems to possess the basic character of a person able to stand up against undue intervention, even at the cost of her highly rewarding, yet "hot" corporate position.

Her high technical competence and integrity gives her the advantage of being able to forfeit her corporate position, instead of compromising on good corporate governance principles.
Karen rightly listed securing smooth distribution of fuel and LPG and further development of upstream operations as her top priority programs.

Downstream operations, notably domestic fuel marketing, are a piece of cake. Despite the liberalization of the oil industry and market, Pertamina still virtually holds a monopoly over the downstream operations, due to the advantages of the nationwide network of storage, haulage and refining facilities it has developed over the past five decades.

However, as Soemarno's bitter experiences have shown, fuel distribution is so socially and politically sensitive that it can make or break the career of the Pertamina chief.

The government seemed to pin high hopes on Karen to bolster Pertamina's upstream operations as the state company remains a small player with a daily output of 150,000 barrels, or just around 15 percent of the national production.

The rationale is that Pertamina's survival as a commercially viable company depends largely on its upstream operations, because oil refining and distribution generate only very thin profit margins.

However, increasing oil production is not only a highly risky business that needs a lot of investment and high technology, but also has a long payback period because the time lag between exploration and production, if any commercially feasible volume of oil reserves can be discovered, often takes more than five years.

Hence, as higher oil output was set as one of the key parameters to assess Karen's performance, she and her board of directors should be given a secured term of office at least of five years.

But a secured term of office will not mean much if the cash-strapped government continues squeezing Pertamina by demanding an annual dividend payout of more than 50 percent, as it did over the past few years.

Dividend payouts of more than 30 percent will adversely affect Pertamina's capacity to finance upstream operations.

Unless there is real commitment by the government to give a full mandate to Karen, then all the talk of transforming Pertamina into an internationally competitive oil company like Malaysia's state-owned Petronas is only hot air and Karen's tenure will simply depend on the outcome of the upcoming presidential election.

Tax cuts the most sensible component of the stimulus package

Monday, February 02, 2009 Vincent Lingga, The Jakarta Post, Jakarta

Of all components of the Rp 71.3 trillion (US$6.5 billion) fiscal stimulus package Finance Minister Sri Mulyani Indrawati reported to the parliament last week, tax cuts and waiving of payroll taxes make the most sense as long as they are designed for those who will most likely spend, rather than, save.

Different from the other component of the stimulus-the Rp 10.2 trillion in additional infrastructure spending, which will take far longer to implement as the tendering process alone sometimes takes as long as one or two months - tax cuts can be put to work within weeks.
Their effects also can percolate into the economy much quicker.

Many businesses may not realize it and those that are aware of it may be reluctant about acknowledging that they are actually enjoying the fiscal stimulus in the form of tax cuts resulting from the enforcement of the 2008 Income Tax Law starting last month.

In fact, I assume the Rp 43 trillion (US$3.6 billion) in tax savings, or 60 percent of the Rp 71.3 trillion pump priming package, will be derived from tax cuts brought about by the new income tax law throughout this year.

The new income tax law reduces tax rates for individuals from five to four layers, with the highest level down from 35 percent to 30 percent, and sets a flat rate of 28 percent for businesses for 2009 and 25 percent in subsequent years, down from the highest rate of 30 percent under the old law.

The new law also increases tax allowances for low-income earners by more than 15 percent by raising the maximum income exempted from tax from Rp 13.2 million to Rp 15.8 million a year for a single taxpayer and from Rp 18 million to Rp 21.04 million a year for a married taxpayer.


The tax cuts resulting from the new income tax law take effect immediately and permanently because they apply to each additional rupiah of income that an individual or company earns.

Likewise, the Rp 6.5 trillion in waived payroll taxes to be provided also as part of the Rp 71.3 trillion stimulus will help bolster businesses as they will inject more income into the corporate system by reducing the employer contribution to employees' income taxes.


These payroll tax cuts and the other Rp 6 trillion-worth of waived value-added taxes and import duties to be granted to selected businesses will immediately cut the operating or production costs of enterprises and increase their income.

Further down the road, the cost of labor will decline, thereby encouraging hiring, and profits will encourage businesses to expand.

Unfortunately, as Sri Mulyani said last Wednesday, her ministry was still working on the technical details over which companies in which sectors will be eligible for the Rp 6.5 trillion cuts in payroll taxes and the Rp 6 trillion in waived value-added taxes and import duties on basic materials and capital goods.

It is regrettable, though, as to why the distribution mechanism for the payroll tax cuts and import duty relief has not yet been set up, whereas the government has been talking about the stimulus package since last October.


The finance minister demonstrated the government's full understanding of the uphill challenges the economy is facing when she said after the House's approval of the 2009 state budget last October that the stimulus would be extended in the form of tax cuts and import duty relief and much bigger spending on basic infrastructure and poverty alleviation programs.

Put briefly, the stimulus is rightly designed to increase people's purchasing power and the competitiveness of businesses facing the economic downturn.


All this is needed because the global downturn is adversely affecting Indonesia's economy on all fronts, from slumping demand for exports and slowing down flows of investment, to weakening consumer purchasing power.


The government pump priming, therefore, would take up the slack, otherwise private investment and the economy as a whole will plunge even more.

But almost four months later, the operational mechanism of the stimulus package remains on the drawing board. What a sense of urgency to cope with the sharp global downturn that is already hitting hard on our economy!

Fiscal stimulus key for economy

Monday, December 22, 2008 Vincent Lingga, The Jakarta Post, Jakarta

Government and private sector analysts have a consensus prognosis: Indonesia's economic growth will markedly slow down next year because of the international credit crunch and the deep recession in the United States, Europe and Japan.

However, with the news on the global economy getting worse every week, they differ on the extent of the downturn. The government, the central bank, the World Bank, the International Monetary Fund and the Asian Development Bank still expect the gross domestic product (GDP) to grow by between 4.5 and 5 percent, while private sector analysts forecast an expansion ranging from 2.5 to 4.5 percent.

Depressed demand in the world's economic powerhouses has begun to hit Indonesian exports, pushing down commodity prices and forcing manufacturing companies to reduce employment. In the third quarter the economy grew 6.1 percent -- the slowest in the past six quarters -- as declining prices for palm oil, rubber and coal slashed the value of exports.

Growth in the last quarter could be less than 6 percent with the second round impact of the global economic downturn hitting all sectors of the economy harder.

Although overall growth for the whole year could still hover at 6 percent thanks to robust expansion in the first half, the economic landscape next year will be bumpy and jagged.

Private consumption, which accounts for 65 percent of growth, will slacken because of steep falls in commodity prices and the erosion of consumer purchasing power by the estimated 11.30 percent inflation this year and the 20 percent depreciation of the rupiah over the past two months alone.

Exports, already hurt by depressed demand in the developed world, will further be hindered by the tighter credit markets, making it more difficult for companies to secure working capital and payments for international shipments.

This is different from the 1997-1998 economic crisis when export-oriented businesses continued to do very well. Companies depending largely on export markets will suffer because of the recession in the developed economies.

In fact, manufacturers have begun feeling the pinch, as evidenced by the wave of employee layoffs that started last month and which, it is feared, will escalate next year as the full impact of the global crisis makes itself felt.

Political spending during the parliamentary elections in April and the following presidential election will be an additional boost to private consumption but surely not as strong as in the 2004 elections because of the negative impact of massive wealth destruction on the Jakarta stock market in October.

According to the Central Statistics Agency, between July and September, the contribution of foreign trade (exports and imports) to economic growth was virtually negligible.

Even though the country is not largely dependent on foreign trade (which contributes only about 20 percent of GDP), given the size of the economy ($400 billion), it will still feel the brunt of the global downturn via the financial channels -- both from higher risk aversion on the part of investors as well as extremely tight liquidity conditions (due to the credit crunch).

The crash of the Jakarta stock market in October, which shaved off almost 60 percent of market capitalization as the composite index collapsed from 2,800 early this year to as low as 1,100, reflected the withdrawal of foreign portfolio capital and at the same time spelled the end of the investment boom.

This also means that the nearly 400 listed companies can no longer rely on the stock market for long-term funds. Consequently, they will slash capital expenditure, thereby reducing the possibilities for investment and job creation.

The only good news is moderate inflation, probably controlled at 6 percent for the whole of next year.

But even though inflationary pressures have eased because of the falling prices of food and fuel, there is not much leeway for Bank Indonesia (BI) to ease its monetary policy substantially.

So don't expect a significant lowering of the BI rate from its current level of 9.25 percent because of the international financial volatility and the vulnerability of the rupiah to speculative attacks.

The high interest rates will further hit consumer spending and new investment.
Weaker domestic demand and an expected slowdown in manufacturing exports will reduce imports, but the risk of imported inflation will remain high if the rupiah remains highly vulnerable to speculative attacks.

The biggest challenge for both the government and the central bank, therefore, is maintaining public confidence in the rupiah. With an 8.25 percentage-point differential with the U.S. funds rate, rupiah financial assets are still attractive for depositors and investors.

But given all the volatility and the uncertainty in the international financial market and the risk of the crisis taking a sudden turn for the worse, the rupiah could be severely hit as people may lose confidence in it.

In such circumstances, the interest rate differential would become less meaningful as depositors and investors may simply move their money to safer places (flight to safety).
Here lies the issue of the government guarantee for bank deposits, which is still limited to Rp 2 billion ($165,000) per account compared with the blanket 100 percent guarantee available in Hong Kong, Singapore and Malaysia.

But this issue is also directly related to the condition of the banking industry.
The Finance Ministry, which oversees the Deposit Insurance Corporation, seems not fully comfortable yet with the quality of the central bank's supervision of the 125 city-based banks and hundreds of secondary (rural) banks.

Introducing a blanket guarantee without strong supervision of the banking industry could put taxpayers at risk of having to pay out for another huge bailout as they did after the 1997-1998 banking crisis.

Banks will also have to brace for a new wave of nonperforming loans (NPLs), especially in areas such as plantations and mining, due to the steep fall in commodity prices between August and October.

This risk could slow down the pace of new bank lending, but not to the point of a severe credit crunch.

Given the grim prospects for private consumption and investment, government spending should take up the role of the locomotive of growth. An aggressive fiscal stimulus package must take up the slack, or the economy will plunge into the worst-case scenario of growth below 4 percent.

Fortunately, the government has fully understood the urgent need for pump priming to offset the anticipated sharp decrease in the growth of private consumption and investment.

The Finance Ministry has been accelerating the implementation of its investment program in labor-intensive projects such as infrastructure (for example, highways and rural infrastructure), with total spending expected to reach Rp 200 trillion within the next two months alone.

Most analysts agree that with a government debt-to-GDP ratio of less than 30 percent -- compared with more than 100 percent at the height of the crisis in 1998 -- and with a fiscal deficit of just around 1 percent of GDP, the government has a lot of leeway to increase its deficit spending next year.


Larger budget spending is needed not only for the construction of infrastructure but also for expanding the social safety net into public-employment works and providing assistance to financially distressed businesses in anticipation of a sharp economic downturn.

The problem is that almost half of the country's population of 227 million still lives on less than US$2 per day (the international poverty line). They live on the edge of the absolute poverty line, so that even a slight downturn in the economy could plunge a hundred million poor into abject poverty.


Given the tight international and domestic liquidity conditions, which make borrowing costs punitively high, the government made the right move in approaching the World Bank, Asian

Development Bank and bilateral sovereign creditors such as Japan and Australia for larger standby loans.


All in all, the economy will muddle through at a much slower pace next year. Growth could still hover at more than 4 percent if the government succeeds in implementing its pump priming measures and takes forceful and credible steps to maintain stability in the banking industry and the rupiah exchange rate.

Commentary: Distrust among banks the cause of liquidity problem

Vincent Lingga , The Jakarta Post , Jakarta Tue, 11/25/2008 7:14 AM Headlines

Almost one week after Sinar Mas Multi Artha, the financial unit of the powerful Sinar Mas business group, signed a preliminary agreement to acquire 70 percent of Bank Century, this small bank remained in a liquidity crisis, forcing the central bank to put it under the control of the state-owned Deposit Insurance Corporation last Friday.

Sinar Mas’ commitment to take control of Bank Century should have reignited market confidence in this small bank and enable it to get access to interbank loans. But it didn’t.

The big question is then: Is liquidity in the banking industry so tight that this publicly listed bank was unable to secure interbank loans to resolve its illiquidity even with the strong support of the Sinar Mas Group?

The answer is a resounding “No”.

Analysts and bankers estimate that Bank Indonesia’s lowering of the minimum reserve requirement at banks last month from 9.5 percent to 7.5 percent unleashed between Rp 50 trillion (US$4.5 billion) and Rp 70 trillion in new lending resources. Moreover, the pace of bank lending has slowed down from its annualized rate of 35 percent in the first three quarters.

But why are many banks still complaining about tight liquidity and businesses groaning over what they claim to be a tightening of credit?

“The problem is not liquidity because industry-wide the level of liquidity is adequate. But banks awash with liquidity are reluctant to lend to others out of fear their money will not be repaid,” Bank Indonesia’s research and regulatory director Halim Alamsyah said.

He revealed there had been suspicions among money market players, notably between small banks, as one bank did not trust the soundness of another bank, hindering interbank lending.“That is why we (Bank Indonesia) have recommended that the government introduce a blanket guarantee on all liabilities of banks, including interbank loans and letters of credit,” Bank

Indonesia Deputy Governor Hartadi Sarwono said.

There seems to be information asymmetry within the banking industry.

Theoretically, banks that are not under the special surveillance of Bank Indonesia (the central bank) are assumed to be sound.

But the suspicions between banks have spread widely. This condition is, to a limited extent, similar to the environment in the financial market in the United States since September, when the financial crisis turned into a total crash following the bankruptcy of the Lehman Brothers investment bank.

Such mutual distrust should not have hit banks in Indonesia because they do not own, or have not bought, the toxic assets (subprime mortgages and derivatives) that fueled the U.S. financial crisis.

Several bankers said the segmentation within the banking industry has widened to the point where big banks are increasingly uncertain about the quality of small banks’ assets.

Faced with huge difficulties of their own, banks have tightened their purse strings, lending less and driving up the cost of credit to consumers and corporations — thus compounding the already grim outlook for the world economy.

Uncertainty about the depth and length of the global slowdown is making things much murkier. But the combination of a battered banking system and shell-shocked consumers suggests things could get particularly tough for many businesses. So banks prefer to secure as much cash as they can now to make sure they can see their operations through the downturn.

Many bankers also are nervous that borrowers who look solid today may turn out not to be so solid within the next few weeks or months. In the current environment, bankers are nervous that other banks might shut them out, out of fear, and stop extending them short-term credit.

Doesn’t this mean a distrust in the quality of banks under the supervision of the central bank?Certainly a blanket guarantee, as recommended by the central bank and most businesspeople, will with one stroke remove the clog within inter-bank lending.

But this may simply encourage reckless lending practices and bad bank governance practices, further exposing taxpayers to the risk of having to pay for another big bailout.

However, if banks fully trust the integrity and reliability of Bank Indonesia’s bank oversight, it should be possible and easier for them to better identify which banks are reliable.

In normal times, banks have several mechanisms for providing the necessary information, such as accounting disclosures, quarterly balance sheets and credit rating agencies. But the financial situation now is irrational and volatile.