Debt deal may fall if IMF-RI ties worsen

JAKARTA (JP): Finance minister Prijadi Praptosuhardjo acknowledged on Monday that the Paris Club of sovereign creditors could cancel the rescheduling of Indonesia's official debt if the government failed to reach a new agreement with the International Monetary Fund over the country's economic reform program.

But Prijadi was quick to say that the government would work hard to avoid such a scenario from happening.

"There are concerns that if relations with the IMF are not good ... the Paris Club (debt rescheduling) may also be canceled," he told reporters following a meeting with senior economics ministers.

"(But) we'll make efforts to avoid that ... We'll work hard to reach agreement with the IMF," he added.

A cancellation of the Paris Club debt rescheduling agreement would have severe consequences for the state budget and the overall economy.

The government reached an MOU agreement with the Paris Club's 19 sovereign creditors in April 2000 to reschedule some US$5.8 billion in Indonesia's sovereign debt that will mature between April 2000 and March 2002. The debt principals were rescheduled to 20 years.

Around $2.8 billion of the total debts rescheduled would originally mature this year.

But there has been concern that the Paris Club might cancel the rescheduling of the $2.8 billion debt if the IMF continued to delay its review of the country's economic reform program.

A source said that this concern emerged during a meeting last week between Coordinating Minister for the Economy Rizal Ramli and Bank Indonesia.

"The primary potential obstacle to the implementation of the Paris Club MOU is the delay in the IMF review," the source said.

He said that if the delay continued without a clear time limit, it might prompt the chairman of the Paris Club to decide not to continue with the restructuring of the debt.

"The Paris Club may make the decision later in April," he said.

He explained that if the Paris Club canceled the debt rescheduling agreement, the government would be forced to repay the $2.8 billion debt, and if the government defaulted, it could trigger cross-defaults on other debts.

He said that the government had until the end of March to conclude a new deal with the IMF.

The IMF has promised to provide around $5 billion in loans to the current administration to finance a three-year economic reform program. The Fund has so far disbursed around $1 billion.

But relations with the IMF worsened after the Fund delayed the disbursement of its third $400 million loan tranche last December due to concerns over government-proposed amendments to the central bank law, delays in the key sales of government stakes in Bank Central Asia and Bank Niaga, and the issue of fiscal decentralization.

The Fund will only disburse the loan after it completes its review of the country's economic reform program and if the IMF board approves the review. But it is not clear when the review will start.

Critics have said that the actual objective of the planned amendment of the central bank law is solely to bring about the dismissal of the bank's current board of governors at the expense of its independence.

The IMF has also insisted that the government issue a clear- cut regulation banning provinces and regencies from embarking on a borrowing spree following the coming into effect of the new autonomy law.

Rizal is scheduled to meet with top IMF officials in Washington on Tuesday to discuss the progress of the IMF reform program in Indonesia.

Last week, Rizal complained that the IMF was pressing too hard, saying it was difficult to implement every reform while the country was going through its complex transition to democracy.

Meanwhile, Dipo Alam, a senior aide to Rizal, said on Monday that the government expected the IMF review team to arrive in Jakarta later this month or early next month to start the review.

Dipo said that the review was expected to be completed before the end of March.

Separately, President Abdurrahman Wahid said that he had written a letter to IMF Managing Director Hoerst Kohler defending the government plan to change the current central bank management.

"I have sent a letter to Hoerst Kohler in which I explained the need for a change of management at the central bank," Abdurrahman said at the weekend. (rei)