Japan reportedly will shift focus of aid to Indonesia

Japan reportedly will shift focus of aid to Indonesia

TOKYO (Reuters): Japan, Indonesia's biggest aid donor, is planning to shift the focus of its financial aid to Jakarta away from pumping money into the bust economy and towards providing technical expertise, government sources say.

The change in approach is based on Tokyo's view that the effectiveness of the multi-billion dollar loans it has committed to Indonesia is being blunted by a lack of legal know-how and the country's shattered banking system.

"We need to offer a type of assistance that would help Indonesia develop sound clearing banks that would allow aid loans to flow smoothly to industries needing money," said an official at the Japan International Cooperation Agency (JICA).

Japan will start talks on economic cooperation with the new government of President Abdurrahman Wahid at the end of November, the sources said. Wahid is scheduled to visit Japan and meet with Prime Minister Keizo Obuchi next week.

Tokyo has committed US$2.78 billion to Indonesia as part of its $30 billion "New Miyazawa Initiative" financial aid package for troubled Asian nations announced in October last year.

But Indonesia's paralyzed banking system is preventing the money from filtering through to industries that desperately need it, sources in Tokyo involved in development assistance said.

"Indonesian banks are so burdened by bad debts that they have literally lost credit-extending functions," said one source.

Indonesian banks' non-performing loans are estimated by analysts to exceed 60 percent of their total loans.

A major obstacle to the revitalization of Indonesia's banking system was a lack of people with required skills in financial and legal professions, analysts said.

Keishi Sugiura, senior economist at Fujitsu Research Institute, said that while South Korea's bankruptcy law had been highly effective in speeding up bad loan settlements, Indonesia had suffered from a lack of expertise.

"Indonesia also has a bankruptcy law. But the problem is, there aren't enough legal experts such as receivers to run the system. As a result, the whole process of cleaning up bad loans has stalled," Sugiura said.

To help Japan's aid loans perform their intended role, Tokyo will focus its efforts on providing Indonesia with financial know-how, officials at the Ministry of Finance and the Foreign Ministry said.

JICA, a government-affiliated agency which conducts technical cooperation in Japan's overseas aid programs, plans to send about 50 Japanese financial experts from the private sector to Southeast Asian nations, including Indonesia, before the end of March next year.

To help Indonesia boost its exports, which account for about 40 percent of the nation's gross domestic product, JICA is also conducting a joint study with Indonesia on export promotion.

The sectors being studied are food and beverage, wood products, textile, electronic parts, machinery parts and auto parts.

"If Indonesian exporters succeed in taking advantage of the rupiah's weakness, that could considerably contribute to an improvement in its balance of payments," the JICA official said.

JICA plans to complete the export study and produce a set of proposals by next February.

Analysts said Japan's plan to focus its aid on technical assistance could help ease Indonesia's heavy foreign debt burden, which already stands at nearly $70 billion.

Fujitsu Research' Sugiura said: "I wouldn't say that infrastructure projects are useless, but efforts to hold down external debts are more important for Indonesia at this moment."

Since 1968, about three-quarters of Japan's bilateral development aid loans to Indonesia have been in the form of project loans, used to improve social and economic infrastructure.