Government urged to use CGI loans for recovery

JAKARTA (JP): Economists urged the government on Thursday to use the US$5.9 billion in loans pledged by the country's major donors primarily for programs to accelerate economic recovery.

Sri Adiningsih, an economist at the prestigious Gadjah Mada University, said that part of the new loans should be channeled to provide liquidity for the country's cash-strapped real sector.

"The loans should be mainly focused on restoring the economy, particularly to revive the real sector," she told The Jakarta Post.

"Unless the real sector can be reactivated, the economy won't recover."

Indonesia's 30 major donor institutions and nations pooled under the Consultative Group on Indonesia (CGI) pledged on Wednesday some $5.86 billion in new loans to help finance the current fiscal year state budget ending March 2000 at the end of a two-day meeting in Paris.

Adiningsih said that although the current state budget would be heavily burdened by the government's costly bank restructuring and recapitalization program, part of the new loans should be used to help provide working capital for businesses, as the banking sector is still reluctant to lend money.

She said that funding should be directed particularly to exporters, resource-based companies, and for restructuring the real sector.

The banking sector completely halted lending to the real sector last year as it was badly hit by the economic crisis, sending companies into bankruptcy or prompting severe cuts in production capacity.

Despite the sharp decline in the central bank benchmark interest rate to the current level of about 13 percent compared to more than 35 percent early this year, banks are still reluctant to resume lending or lower their lending rates to affordable levels.

Bank Indonesia officials have said that some banks still need up to a further three months to adjust their lending rates because they raised the funds when time deposit rates were still relatively high.

Analysts have also said that banks still perceive a high risk in investing their money in the real sector.

Economist Umar Juoro of the Center for Information and Development Studies (CIDES) agreed.

"The loans must not be used to finance mega projects which are not related to the acceleration of the economic recovery," he said, adding that the new loans would add to the country's already high debt burden of around $70 billion.

Both Adiningsih and Umar highlighted the importance of the participation of non-governmental organizations in the control of the use of the foreign money to prevent misuse or embezzlement.

"So long as the state audit agencies can't work properly, there's nothing wrong with the involvement of parties outside the government," Adiningsih said.

Several non-governmental organizations (NGOs) and opposition parties had earlier demanded that both the World Bank, the coordinator of the CGI, and the government delay the meeting until the country take on a new government later this year.

The NGOs also feared embezzlement of the foreign loans by government officials.

An internal World Bank memo leaked to the press last year said that some 20 percent of the Bank's loans to the country had been misappropriated.

Local press reports have also reported misallocation of overseas funds supposed to be used to help the poor in surviving the current economic crisis. (rei)