Bank, corporate restructuring key to recovery: IMF

Bank, corporate restructuring key to recovery: IMF

JAKARTA (Dow Jones): Indonesia needs to urgently make progress
in several key areas of economic reform if it is to qualify for
the next installment of an International Monetary Fund loan due
for disbursement April 4, a senior IMF official said on
Wednesday.

"The next two to three weeks are critical in terms of
(economic) program implementation and constitute a major test for
the government," said IMF representative to Indonesia, John
Dodsworth.

Dodsworth told a business luncheon that if Indonesia can meet
these requirements, the IMF will wind up its review of the
country's economic program and approve around $400 million in
loans April 4.

However, "slippages will be damaging for market sentiment" and
would make it difficult for the IMF executive board to approve
the loan, he added.

Indonesia will seek to reschedule sovereign debt through the
Paris Club of Creditor Nations April 12, Dodsworth said, although
he indicated that securing a deal would be difficult if IMF
financial support for the country is held up.

"I can't talk for bilateral governments as to whether they
would say yes or no, but clearly it would be better if we had a
good agreement ahead of the Paris Club meeting," Dodsworth said.

Indonesia is seeking to restructure around $2.1 billion
through the Paris Club, a group of richer countries that meets to
reschedule debt with poorer countries on equal terms.
The club normally only takes action on debt rescheduling after a
country has signed up for an IMF or World Bank program, which
would make it near impossible for the Paris Club to reach
agreement with Indonesia if the IMF is holding up loans.

Dodsworth outlined four main obstacles to a sustained recovery
in Indonesia: the lack of a functioning banking system; the
mountain of large unrestructured private corporate debt; a lack
of confidence in public institutions, including the courts; and a
lack of available capital, both domestic and foreign.
A lack of progress on key issues such as bank and corporate
restructuring is stifling the economy and blocking new
investment, he said.

"Growth this year may well be much higher than current
projections, but the government should not be misled," Dodsworth
said. "At this stage, this is a consumption-led boom from a low
base. This is not a recovery, the economy is still sick."

He warned that the very fact that there are glimmers of growth
in Indonesia will drive the already deeply-felt opposition by
"vested interests" to economic reforms.

But "without real structural change, the consumption-led
recovery will dissipate and Indonesia will face a long period of
stagnation," Dodsworth said.

He urged the government to "educate policy makers" on the need
for economic reform, particularly given the large lobby - often
of highly indebted business people - against IMF policy
prescriptions.

The IMF agreed to a new $5 billion loan for Indonesia in
January, to be disbursed over a three-year period.
The loan agreement accompanied an ambitious new economic program
agreed to by President Abdurrahman Wahid's government, that
brought with it a sense of optimism that Indonesia was finally
prepared to tackle its structural weaknesses.

However, Dodsworth's comments reflect a general sense of
frustration with the efforts of Wahid and his economic team.

He said the Cabinet's effectiveness is being limited by
lobbying from political and business quarters.

"I tend to think (the Cabinet) agrees with the overall
strategy of the program, but you also have a powerful lobby
that's against many things we're proposing," he said.
He also referred to the problem of a lack of coordination of
economic policy.

Wahid has set up various advisory councils to help him
formulate economic policy, which some analysts reckon has damaged
the authority of the Cabinet's economic team, under Senior
Economics Minister Kwik Kian Gie.

But analysts also say Kwik - who had no background in
government prior to this post - isn't proving effective at
driving the government's economic policies.

Dodsworth said "one major element" that still hasn't been
agreed with the government is a firm policy to jump-start
corporate restructuring.

Officials within the Indonesian Bank Restructuring Agency - as
well as private creditors - say private debt deals won't
materialize until the government cracks down on some of the
larger debtors, something that Wahid's team appears reluctant to
do.

Dodsworth said the IMF wouldn't likely object to a government
plan to provide export credit guarantees to the scandal-hit
Texmaco group of companies, despite allegations that it misused
such credits when it last got them in late 1997.

IBRA is seeking to restructure over Rp 19 trillion (US$2.5
billion) Texmaco debt transferred from state-owned Bank Negara
Indonesia (P.BNI).

Dodsworth noted that Texmaco needed working capital in order
to maintain the value of its assets.

"I can see a good reason why credits would be given to Texmaco
to preserve its assets during restructuring," Dodsworth said.