New warning to Indonesia

After the rebuke from the Manila-based Asian Development Bank (ADB) last week, all three multilateral development agencies that have been playing an important role in backing Indonesia's desperate bid to get out of its economic crisis have expressed utter disappointment with the government's reform measures.

The first strong warning was made by the International Monetary Fund (IMF) last December by delaying, for the third time, its loan disbursement. The World Bank followed with a similar reprimand last month through what it termed a restructured lending program which actually boiled down to a sharp cut in loan funds and tougher lending conditions.

The latest warning was harshly conveyed by the ADB, one of Indonesia's largest creditors, which also slashed its loan commitment and reinforced international pressure on the government to push through its long-delayed economic reform measures.

The ADB announced last Friday it was prepared to lend Indonesia between US$600 million and $1.2 billion a year over the next three years under its new lending programs that will focus on poverty alleviation.

Those who are not too familiar with ADB loan pledges to Indonesia over the past 25 years may interpret the announcement as a new vote of confidence in the country. But the real message of the new lending policy, whatever the ADB terms its new program, is a thumbs-down to the government for its inability to implement major projects and its unwillingness to carry through painful reforms to cope with its economic woes. And the bottom line of it all is a sharp cut in the amount of loan funds to be pledged by the ADB within the next three years, starting in 2002.

One may argue that the cut might not be so severe after all, as the higher end of the lending range could still be as much as $1.2 billion, the level of its annual lending over the past decade. But a deeper reading of the requirements attached to the new lending program would show that it would be almost impossible for the government to qualify for that higher range.

The government will qualify to get more than $1 billion a year only if it can develop good governance systems, improve macroeconomic stability, press ahead with reform measures, ensure smooth implementation of the regional autonomy policy and properly execute ADB-funded projects on schedule.

All this is the same as the requirements imposed by the IMF on its $5 billion bailout program for the country. It is also the government's inability to meet these conditions that prompted the IMF to delay in December the third $400 million tranche of its $5 billion bailout fund. They are also the same conditions attached by the Washington-based World Bank to its 2001-2003 lending program, which was announced last month in its country assistance strategy on Indonesia.

The ADB new lending program, as elaborated in its country operational strategy, in fact follows the World Bank's decision last month to slash its annual loan allocations for Indonesia from more than $1.3 billion to only between $400 million and $1 billion for the coming three years.

The impact of the cut will indeed be quite severe because both institutions have until this year contributed more than half of the annual loan pledges made by Indonesia's creditors which comprise the Consultative Group on Indonesia (CGI).

Even though both development aid agencies slightly offset the slash in their loan pledges by giving Indonesia wider access to their interest-free loan windows -- the International Development Association in the case of the World Bank and the Special Funds in the case of the ADB -- the impact on Indonesia's external balance will still be devastating. The resources for the interest-free loans are too small, and the competition among poor countries for the cheap credits is quite keen.

It is thus crystal clear that pushing through the reform measures, however painful they may be, is the only alternative for the nation to get out of its multidimensional crisis. The stance taken by the three multilateral development agencies shows that their prescriptions for curing Indonesia's economic ills are by and large the same. The government cannot turn down the prescriptions of one agency without antagonizing the other two and consequently spooking the international market.