Indonesia's recovery 'far from assured': WB

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)