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."