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.