Indonesia's recovery 'far from assured': WB

JAKARTA (JP): The World Bank warned Indonesia on Wednesday that its economic recovery was far from assured, despite heartening progress in economic stabilization efforts.

The bank cited the huge unresolved debts of the private sector, widespread corporate distress, continuing difficulties in the banking sector, an unacceptably low level of output, and increasing poverty as the most pressing problems facing the country.

"This is no time for complacency," said World Bank country director for Indonesia Mark Baird when releasing the bank's annual country report on Indonesia.

The report recommended three policy priorities to consolidate stabilization gains in the short-term, including pressing ahead with bank and corporate restructuring, protecting the poor, and careful management of fiscal balances.

The report -- titled "Indonesia From Crisis to Opportunity" -- will serve as a briefing report for the upcoming July 27-28 Consultative Group on Indonesia (CGI) donors meeting in Paris.

The report said the proximate cause of the country's economic crisis -- the large amount of short-term private sector unhedged external debt -- remained unresolved.

"Most of these debts are owed by distressed corporates, many of which are insolvent or have ceased operations," the bank said.

Indonesia's private sector has some US$72 billion in overseas debts.

"The banking system, despite some restructuring, continues to labor under the weight of nonperforming loans and inadequate capital," the report said.

"This, together with the collapse in domestic demand, has meant that output continues to be at unacceptably low levels and the increase in poverty has undone a decade and a half of progress in poverty reduction," it added.

The bank said the economy was still operating at 15 percent to 20 percent below capacity.

"Resolving these challenges will require steady and determined economic reforms, placing a premium on policy continuity as the country goes through political transition."

The bank stressed that in the banking sector the main focus should be on restructuring state banks, strengthening bank supervision, and accelerating the recovery of various assets under the Indonesian Bank Restructuring Agency.

For the corporate sector, priority should lie in strengthening institutions that facilitated voluntary debtor-creditor negotiations, improving the credibility of the bankruptcy threat and emphasizing corporate governance, the report said.

The bank also stressed the need for Indonesia to manage fiscal balances carefully by placing greater emphasis on domestic resource mobilization and reduced borrowing, especially from abroad.

"To a large extent, these policy priorities already constitute the central elements of the government's reform program, and the report highlights their importance, urging the authorities to stay the course as the nation undergoes political transition," noted World Bank economist Vikram Nehru.

The report identifies three medium-term policy priorities: develop and deepen institutions, especially the legal and judicial system and the civil service; strengthen markets and market institutions; and ensure growth is environmentally sustainable.

The bank said public (government) debt had jumped from 24 percent of gross domestic product (GDP) at the end of June, 1997, to 60 percent at the end of June, 1998, and was expected to reach 102 percent by end-1999, or a fourfold increase from the pre- crisis period. Official foreign debts alone are now estimated at almost $70 billion.

A full 16 percentage points of this increase was a direct result of the rupiah's depreciation and the impact of inflation on GDP, 11 percentage points were generated by a rise in external debts and 52 percentage points by the expected consequences of a domestic treasury bond issue to finance the bank restructuring.

CGI loans

The World Bank chairs the CGI donors grouping.

Baird stressed that it was important for the upcoming CGI meeting to proceed as scheduled, particularly to ensure financing for the current state budget ending in March 2000.

Baird confirmed an earlier statement by the government that it would need between $5.5 billion to $6 billion from the CGI grouping.

Much of the external financing for this fiscal year was committed by CGI members earlier this year. One of the functions of the meeting was to confirm the amount, and ensure that financing needs in the fiscal year would be fully met, Baird said.

Several non-governmental organizations and opposition political parties have demanded the CGI meeting be delayed until a new government -- a consequence of the June 7 elections -- is formed later this year.

But Baird said proposals had been made to arrange another meeting with the next or new government in six months time.

Chairman of the National Development Planning Board (Bappenas) Boediono said the government would not propose another debt rescheduling at the upcoming CGI meeting.

"We realize that this is the authority of the next government," Boediono said at the same news conference on Wednesday.

However, he added that the current administration would comprehensively brief major creditors on the debt situation.

The CGI meeting usually includes discussions about the country's sovereign debt situation, which would be the basis for further talks at the Paris Club of creditor nations in September.

Last September the government managed to obtain approvals from the Paris Club official (sovereign) creditors to reschedule by 11 to 20 years some $4.7 billion in debts falling due between August and March 2000. (rei)