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.