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.