Political troubles put pressure on reform plan

Political troubles put pressure on reform plan

HONOLULU, Hawaii (AFP): Besieged Indonesian President
Abdurrahman Wahid's political troubles are putting severe
pressure on his country's efforts to restructure a financial
sector ravaged by the Asian crisis, officials said here Friday.

Indonesian Finance Minister Prijadi Praptosuhardjo, who was
attending an Asian Development Bank (ADB) meeting here, said "the
situation has been worsening over the past few months."

But he reaffirmed Jakarta's commitment to wide-ranging reforms
pledged to the International Monetary Fund (IMF).

The stress has raised the cost of restoring the health of the
banking and corporate sectors, and forced the government to delay
reforms which comprise the terms of the IMF-led bailout package,
he added.

"The political uncertainty that Indonesia's nascent democracy
brings along with it has increased the perception of the
country's risk," Prijadi told a forum on the sidelines of an
Asian Development Bank meeting here.

"This has driven the rupiah down and domestic interest rates
up" to about 10.5 percent as of last month, he added.

Edwin Gerungan, chairman of the Indonesian Bank Restructuring
Agency (IBRA) set up by the government to clean up the wreckage
of the 1997 crisis, said the interest rate was now above those of
fixed-rate bonds issued by the government to recapitalize the
banking system.

"The outlook for the banking sector is positive. However, we
also understand that the interest rates must be lower than at
current levels because many of the banks were recapitalized with
fixed-rate bonds which are yielding only 10 percent," Gerungan
said.

Forty percent of the banking system's total assets are in
government bonds, he told the same forum.

The banks finally turned a profit last year, but now "if the
interest rates continue to be at higher levels, some of the banks
could be suffering from negative spreads."

Prijadi said the political crisis will force the government to
ask parliament to review the fiscal 2001 budget.

"With one third of our budget expenditures allocated to
servicing interest on the recapitalization bonds and higher debt
service payments due to higher domestic interest rates and weaker
rupiah," the fiscal deficit could rise to six percent of gross
domestic product (GDP), he said.

Indonesia's debts amount to Rp 1,206 trillion, roughly
equivalent to its 2000 GDP, compared to a debt level of 50
percent of GDP in 1997.

The country's economic managers are working with the IMF to
put together a package to bring the deficit back to the original
target of 3.7 percent of GDP, Prijadi added.

"We have been following the IMF program for more than three
years," he said. "We will continue to remain committed to the
program."

He admitted that the difficulty was partly owing to "our
failure to implement some of the measures the government proposed
to parliament," including expansion of the tax base and reducing
fuel subsidies.

"The social tension in the country simply ran too high" to
risk implementing them, said Prijadi, but added that legislators
were now more receptive to the package of amendments.

"We are quite pleased that parliament has understood the need
to quickly approve a package proposal through a budget revision,"
he said.