New warning to Indonesia

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.