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.