CGI pledges $3.14b in loans

Berni K. Moestafa, The Jakarta Post, Jakarta

Creditors in the Consultative Group on Indonesia (CGI) stood by their promise to support the country on Thursday, as they pledged a total of US$3.14 billion in loans and $586 million in grants and technical aid to help cover the 2002 state budget deficit.

"The pledges indicate continued support for Indonesia at a critical juncture in its economic recovery, but at the same time emphasize the importance of urgent and resolute policy action," said World Bank Vice President for the East Asia and Pacific Region, Jemal-ud-din Kassum in a press conference following the pledging session of the eleventh CGI meeting in Jakarta Thursday.

The CGI groups together Indonesia's 32 major creditors including 21 countries and 11 multilateral lenders such as the World Bank and the Asian Development Bank (ADB).

Its loans will be used to help contain next year's state budget at 2.5 percent of gross domestic product (GDP).

The ADB committed the largest amount with $1.15 billion, followed by the World Bank with $1 billion and Japan with $720 million.

Kassum said that of the $3.14 billion in loans, some $1.3 billion was tied to progress on policy performance, concerning poverty reduction and good governance.

He reiterated that creditors had taken note of the slow progress so far on structural, legal and other institutional reforms.

Kassum added that in past years, disbursements had fallen significantly short of pledged amounts due to poor policy performance on the part of the government.

Despite showing an understanding of the daunting tasks facing the government, Kassum warned that "inaction or a weak reform effort will carry its own severe cost".

The financial market was heartened by the CGI loan pledge, allowing the rupiah to extend a two-day rebound closing at Rp 10,485 per U.S. dollar Thursday compared to 10,638 on Wednesday.

The eleventh meeting of the CGI ran under the theme of "working together to reduce poverty", highlighting the urgency of governmental reform to fight poverty.

Coordinating Minister for the Economy, Dorodjatun Kuntjoro- Jakti said the government had outlined what he called a poverty reduction strategy.

"A participatory process that will enable the poor to help shape the policies that we will be implementing," he explained.

In addition to a poverty agenda, other key reform areas cover fiscal sustainability, development of small- and medium-sized enterprises, good governance, improvement in the justice system, proper forest management, a better education policy and more effective aid distribution.

On fiscal sustainability, Finance Minister Boediono said it would require extensive tax reform, accelerated asset sales under the Indonesian Bank Restructuring Agency (IBRA), and privatization of state enterprises.

Addressing foreign investors' concerns, Boediono said the government was committed to "resolving the remaining high-profile commercial disputes involving state enterprises to clear the air on investment issues."

This year's CGI loan amount, however, marked a sharp decline from last year's pledge of $4.7 billion.

Underscoring this reduction, is not only a lower deficit target for next year's state budget, but also an aim to reduce future debt burdens, according to Finance Minister Boediono.

For the first time the CGI also discussed corruption issues, which the World Bank's Kassum said the government's response was positive.

He said the creditors also urged judicial reforms and the need for a comprehensive reform strategy with clear milestones to establish rule of law and reduce corruption in the courts.

The World Bank has been championing lenders' anticorruption campaigns ever since it became apparent that a large portion of its past loans had been abused.

Minister Boediono said the government would do its utmost to adhere to best management practices in the use of the loans.

He promised revamping various transaction systems, including those at banks, to gradually adopt internationally-recognized best practices.

Toning down the optimism a bit however was State Minister for National Development Planning, Kwik Kian Gie who said corruption in Indonesia had become a key part of Indonesian life and culture.

"I cannot promise you that some of this new debt will not be misused again as it was in the past," Kwik told CGI participants in his speech.

In spite of this, Japan signaled a strong vote of confidence, as it pledged to provide more than one-third of all Indonesia's external financing needs, estimated at around $7 billion this year.

With only $720 million pledged through the CGI, much of that support is likely to come through debt restructuring talks at the Paris Club meeting next year.

The Japanese ambassador to Indonesia, Yukio Takeuchi said his government was ready to show flexibility during debt rescheduling talks with Indonesia.

Major CGI creditors:

(US$ billion): Asian Development Bank (ADB), 1.15; World Bank, 1; Japan, 0.72; Others, 0.27; Total CGI loans pledged, 3.14.