Donors happy with RI but price stance may nag

Donors happy with RI but price stance may nag

Joanne Collins, Reuters, Jakarta

Happy with Indonesia's fight against terror and its efforts
for peace in Aceh, international donors look set this week to
pledge the US$2.8 billion in aid that the country is seeking.

The World Bank, which chairs a donor body called the
Consultative Group on Indonesia (CGI), has already said the
amount is "doable", although some donors say they are concerned
about signs of government softening in one key reform area.

"The country has done its best to try and bring peace to Aceh
and in arresting perpetrators of last year's Bali bombings,
without a backlash from Islamic groups. So on those things alone,
donors should be happy," said Jakarta-based Standard Chartered
economist Fauzi Ichsan.

But the issue of price increases, the main trigger of
nationwide protests in the past two weeks, could threaten to
unravel some of Indonesia's hard-fought successes.

Donors, at the Tuesday and Wednesday meeting of the CGI's 30-
plus bilateral donors and multilateral institutions, could decide
the government is making too many concessions to the
demonstrators, sacrificing much-needed economic reform in the
process.

President Megawati Soekarnoputri's government has come under
mounting pressure to roll back price rises in fuel, electricity
and phone tariffs introduced at the beginning of the year to
reduce costly subsidies that are a huge drain on the budget.

In response, the government has proposed to delay the phone
charge hike and review its policy on fuel and power. But one
Western diplomat said that had been enough to raise doubts over
Jakarta's commitment to reform.

"Indonesia has kind of blown it with the fuel price issue. It
has really shaken donors," the diplomat said.

Indonesia has been winding back subsidies, introduced by
former president Soeharto, since the late 1990s as part of
International Monetary Fund-led reforms. Subsidy cuts were one
reason Jakarta posted a sharply lower-than-expected budget
deficit last year.

Asked at a news conference last week about the government's
plan to review price increases, the World Bank declined to
comment directly but made clear its support for the rises.

"We very much support the way the government has sought to
clarify why such increases are necessary," said the World Bank's
country director for Indonesia, Andrew Steer.

"If one is spending a lot of government money subsidizing
people who are lucky enough to have electricity or lucky enough
to drive cars, then there will be less money available to pay the
teachers, develop the curriculum and so on," he added.

Aside from the question of whether Indonesia is moving fast
enough on economic and other reforms -- such as improving the
justice system and environmental policy -- the meeting will focus
on rebuilding strife-torn Aceh and the resort island of Bali
following the bombings in which at least 193 people were killed.

Donors' support for the province of Aceh in Indonesia's far
northwest corner follows a landmark peace deal signed last month
between separatist rebels and Jakarta to end more than two
decades of violence in which thousands were killed.

Analysts say donors will also reward Indonesia for cracking
down on terrorists after the Oct. 12 Bali bombings and for taking
measures to minimize their impact on the country's fragile
economy.

Police in the world's most populous Muslim nation have
detained scores of people suspected of having links to the blasts
and have co-operated with international investigators.

In a report released in the lead-up to the CGI meeting, to be
held in Bali, the World Bank said: "The Bali bombing threatened
to sink hopes for higher growth, but that risk has been mitigated
thanks to the remarkable resolve the government has shown in the
aftermath of the tragedy".

The $2.4 billion to $2.8 billion in aid that Indonesia is
seeking from donors is considerably less than what it asked for
last year and around half of what it sought two years ago.
Analysts say this reflects the government's resolve to wean
itself from foreign aid.

"My sense is that the government doesn't actually want to ask
for a very high amount because they are becoming more realistic
and are trying to depend less and less on the CGI," said Jakarta-
based Citibank economist Anton Gunawan.

The World's Bank's Steer also said it was a sign of good
macroeconomic management.

But there is a considerable gap between pledges and actual
disbursements, some of which are pegged to specific reforms. In
recent years, Indonesia has received about half of the aid, which
is dominated by soft loans, it has asked for.

"I imagine Indonesia will get the pledges; pledges are pain
free," the diplomat said.

"It's a major international meeting. Indonesia's biggest trade
and development partners will be there and it's a confidence-
building thing for the government and for donors who will decide
whether they want to pump more money into this country."