Mantik Kusjanto, Jakarta – President Suharto made a surprise move on Friday to restore fading confidence among Indonesians in their government by guaranteeing a pay-out on all legal deposits in 16 banks liquidated last year.

The government had previously said it would cover up to 20 million rupiah in each account of the 16 banks which amounted to 1.7 trillion rupiah.

"The government has decided to return all the money blocked in the liquidated banks amounting to 3.1 trillion rupiah," Finance Minister Mar'ie Muhammad told a parliamentary banking committee.

He said the government had no legal obligation to do so, but it was a personal decision by Suharto.

The government closed down the ailing banks last November 1 as part of a reform programme for the banking sector agreed with the International Monetary Fund.

Mar'ie said the funds would come from the central bank because the budget could not take on this burden. The government would reimburse the central bank over 10 years.

He said the Finance Ministry and the central bank, Bank Indonesia, were working on the technical details and planned to move quickly on returning the funds to depositors.

Political analysts said the move suggested Suharto wanted to regain diminishing public confidence in the government's ability to overcome the nation's worst economic crisis in decades.

There was a run on privately owned banks after the closure of the 16 institutions, with depositors fearing a collapse of the system and a loss of their savings.

"This is an all-out attempt to regain people's confidence. This is good news, but I think we need more to calm people and recover confidence in the system," a chief treasurer with a major bank said.

He said there was broad concern in the country over escalating unrest as prices rose after the plunge in the rupiah, which was trading on Friday around 9,200 to the dollar from 2,400 last July before the crisis broke.

"We also need IMF and international back-up to sort things out. It's not good to be in a war of words with them," the chief dealer said. The government and the IMF have been at loggerheads over an Indonesian proposal to institute a fixed exchange rate through a currency board. The fund and its Western backers say Indonesia is not ready for such a scheme.

German Finance Minister Theo Waigel said in Jakarta on Wednesday Suharto had promised to rethink the plan amid growing calls for the scheme to be put on hold.