IMF holds key to World Bank loans to Indonesia

IMF holds key to World Bank loans to Indonesia

WASHINGTON (Reuters): Decisions by the International Monetary
Fund hold the key to the approval of more than US$1 billion of
World Bank loans to Indonesia, a senior bank official said on
Friday.

But World Bank Vice President Jean-Michel Severino told a news
briefing he was less pessimistic about Indonesia than many other
commentators.

"Our assessment of the situation is not as dark as many people
make it," he said. "We hope very much that the IMF and the
Indonesian government are going to reach agreement pretty soon
now."

Severino, who is responsible for World Bank operations in Asia
and the Pacific, said the bank would only discuss proposals to
offer Indonesia $1 billion in balance of payments support after
the IMF completed its review of a reform program underpinning $40
billion in international loans.

Other officials had said that the loan would probably be
discussed on March 3, but that the date "kept slipping back."

Severino said a debate between Indonesia and its creditors
about whether the authorities should bring in a rigid currency
board had also slowed disbursement of the World Bank cash.

"While this debate was taking place we came closer and closer
to the date of a formal IMF review," he said. "And we are not
going to do anything while Indonesia and the IMF are reviewing
the program."

Indonesia, the world's fourth-most populous country, has
become the black sheep of the family of Asian countries which
turned to the international community for help after crashing
currencies exposed weaknesses in their financial systems.

The IMF and the Group of Seven rich industrialized states are
strongly opposed to the currency board idea, arguing that it
could be dangerous to introduce it unless the authorities are
sure that banks are strong enough to cope.

A currency board, used in Hong Kong, Argentina and a handful
of other countries, pegs the local currency to the dollar or
another convertible currency and ties the amount of cash in
circulation to the level of central bank reserves.

Severino said approval of another World Bank loan -- between
$300 and $500 million to improve food distribution -- would also
depend on a positive IMF review of the reforms.

"Indonesia needs that help, but we need the (IMF) framework to
go ahead," he said.

But Severino said social policy loans for rural and for urban
areas would not be linked to the IMF disbursements. An team of
IMF experts arrived in Indonesia last week to discuss whether the
government is doing enough to reform the faltering economy and
meet the terms of the IMF-backed plan.

It is not clear how long the review will last but the fund is
due to decide by March 15 whether to hand over a further $3
billion of its $10 billion share of the international rescue
deal. Indonesia received a first $3 billion in November 1997.

Severino said the World Bank, which promised to contribute
$4.5 billion to the international bailout, was also offering
Indonesia technical advice on its debt restructuring and looking
at what needed to be done in the banking sector.

World Bank activities throughout Asia stressed the need to
improve competitiveness to allow the export sector to recover and
on social programs to ease the pain of the IMF reforms, he said.