ADB targets $1b loan for Indonesia

JAKARTA (JP): The Asian Development Bank (ADB) expects to extend about US$1 billion in new loans to Indonesia this year, with at least 40 percent of the funds directed to poverty alleviation programs.

ADB deputy director for the Indonesian resident mission, David Jay Green, said on Thursday that the funds were part of ADB's loan pledged during last year's meeting of the Consultative Group on Indonesia (CGI).

Besides poverty alleviation, the loans would also be used to finance projects such as water resource management, road rehabilitation and development of the energy sector.

"The $1 billion is the sum of very different activities. If they are all implemented then we can get those kinds of resources (loans) moved," he told reporters following a press meeting on the Asian development outlook.

The $1 billion loan included a poverty loan package agreed to recently by the ADB and the Indonesian government.

Under the deal, the ADB has committed loans of between $600 million and $1.2 billion annually until the year 2004 but the high range of the lending depends on the government's success in implementing badly needed reforms.

"The ADB will allocate a minimum 40 percent of loan resources for poverty reduction during the period 2001 to 2004," according to a copy of the agreement.

But the actual lending levels would depend on project performance and the nature of the financing needs.

Review

Green said that an ADB team and the government held quarterly meetings to review ADB's ongoing and future programs, as well as decide whether to continue or cancel them.

Over the past three years, he said, this review had prompted the cancellation of ADB projects valued at approximately $1 billion.

"Some of these loans were drafted in 1995, or earlier. The Indonesian economy is very different than the one we thought we were going to see," he explained.

According to him, decentralization, which gives regional administrations more authority over their budget affairs, has often hampered the disbursement of new loans.

He said that the Manila-based bank had revamped its working procedures and added more staff due to the decentralization. "The decentralization is a very difficult environment to work in," he added.

Green said that the ADB would disburse most of its loan toward the end of this year, pending progress made on decentralization issues.

"This year we have not yet approved any new loans," he said.

Another threat that might cause the ADB to revise its loan target was the deterioration of macroeconomic stability.

The IMF's stance on Indonesia was a factor contributing to the ADB's assessment of Indonesia's economic condition, he said.

However, Green expressed optimism that the ADB could meet this year's loan target for the country, despite indications that the IMF would not be ready to disburse its third $400 million loan tranche to Indonesia in April as initially expected.

"There is not a strong signal from our side that we want to delay projects. It's just the opposite. We feel that it is the projects that provide a stronger economy," he explained.

Stabilization

According to him, the government should prioritize stabilization of the country's macroeconomy, then focus on decentralization issues and poverty alleviation.

The rupiah's continued fall, soaring inflation rates and lower than expected tax revenues, are all weighing heavy on the country's economy.

According to the ADB report, economic growth for this year is likely to drop to 4.2 percent, down from last year's 4.8 percent, but may rebound to 4.5 percent in 2002, fueled by recovering export gains.

"In the near term, recovery is likely to be constrained by a less favorable domestic and external environment," the report said.

It also said that security problems cast doubts over the country's economic prospects.

"Towards the end of the year 2002, ADB expects export growth to pick up on the back of a global economic recovery.

"However, continued weakness in the banking sector, the debt overhang in both the private and public sectors, and political uncertainties, limit a faster pace of recovery," it said.

The ADB urged further financial sector reforms to reduce a over-dependence on the banking system.

"These include development of non-bank financial institutions, such as bond and equity markets, and strengthening of the central bank," ADB said.

It further warned that disregard for sustainable environmental protection would "severely weaken the potential for poverty reduction in the coming decades". (bkm)