IMF wants Jakarta action on debt, Bank Bali scandal

IMF wants Jakarta action on debt, Bank Bali scandal

JAKARTA (Reuters): The International Monetary Fund said on
Tuesday Indonesia had to act swiftly to break its private debt
deadlock, and warned lending could again be halted if the key
players in the Bank Bali scandal were not brought to justice.

John Dodsworth, IMF senior representative in Indonesia, told a
press luncheon with foreign correspondents that if the legal
follow up to the Bank Bali scandal was not satisfactory, "we
would have to reconsider the program as we did previously".

The IMF suspended loans to Indonesia last September over the
scandal, but signed a new agreement in January to start releasing
an aid package worth $5 billion over three years.

As part of the agreement, Indonesia pledged to improve
governance and to take steps to force corporates to begin
restructuring their debt and negotiating with creditors.

The country promised a co-ordinated policy involving the
Indonesian Bank Restructuring Agency (IBRA), the Attorney-
General's office and the Jakarta Initiative, a body set up to
encourage private debt restructuring.

But so far, little has been implemented.

"The new strategy announced earlier by the government is only
partly in place," Dodsworth told a media lunch in Jakarta.

He said that while IBRA had shown signs of progress, the
setting up of a special team to investigate corruption in the
judicial system had not yet happened, and the Jakarta Initiative
had yet to put its more aggressive strategy into practice.

Dodsworth said one reason for continued stalemate over private
debt was a failure of the country's bankruptcy courts, which have
thrown out several high-profile bankruptcy suits.

"There is nothing wrong with the bankruptcy law. It's the
application of that law where the problems come," Dodsworth said.
"The bankruptcy court isn't working."

He said that if the attorney-general could successfully push
through a bankruptcy suit in the public interest, and take steps
to improve governance in the judicial system, this would be a key
step forward in encouraging debt resolution.

Despite the government's commitment to stamp out graft,
Indonesia's courts are widely perceived to be corrupt, and
Dodsworth said worries about legal certainty were a major factor
in discouraging foreign investors.

Developments in the Bank Bali scandal have not helped.

The scandal, which helped wreck former president B.J.
Habibie's political career, revolves around a 60 percent
commission (Rp 546 billion) paid by PT Bank Bali to a firm run by
a leading member of the former ruling Golkar party for the
recovery of Rp 904 billion in loans from IBRA.

Earlier this month an indictment against Djoko Tjandra, a
defendant in the case, was dropped by a Jakarta court on a legal
technicality.

In a related case, Tjandra's company was allowed to keep the
payment it received from Bank Bali.

IBRA and the attorney-general have said they plan to appeal.

Dodsworth said that despite the challenges ahead, Indonesia
could expect relatively fast growth this year, with the IMF's
forecast of three to four percent likely to be conservative.

"There is definite upside potential," he said.

But he warned that unless the consumer-led recovery could be
broadened, it could peter out.

"It is important not to be misled by short-term growth," he
said.

"The economy is currently experiencing a consumption-led
rebound from a very low base. The task of the new government is
to convert this catch-up growth into a self-sustaining force that
can improve living standards and reduce poverty over the medium
term."

This would require decisive progress on financial, corporate
sector and legal restructuring, as well as rebuilding trust in
public institutions, to attract foreign investment, he said.

"In the absence of a strong effort by the government in these
areas, the short-term growth that Indonesia is about to benefit
from will dissipate and not be sustained over the medium term."