RI donors wary of new loan pledges, World Bank says

Berni K. Moestafa, The Jakarta Post, Jakarta

Indonesia's poor track record in meeting reform targets may inhibit donor countries from pledging greater loan support needed to finance next year's state budget deficit, according to the World Bank on Monday.

The World Bank, in a report preceding a donor meeting of the Consultative Group on Indonesia (CGI) this week, warned of the consequences of the snail's pace reforms of the government.

"Official creditors are becoming increasingly wary of pledging support for policy reforms when the track record gives little comfort," the bank said.

This year alone, it said, donors were likely to withhold some US$900 million of $2.6 million pledged, as conditions for the loans had yet to be met.

It said disbursements from ongoing and new loans pledged in the CGI depended on Indonesia's policy performance.

"So their disbursement should not be a foregone conclusion," the World Bank reminded.

From 1998 to 2001, poor policy performance cost Indonesia over $6 billion in delayed or canceled program financing, the bank said.

Another $3.1 billion was delayed in project financing, loans whose disbursement is directly linked to development projects.

"Slow progress with reforms has cost Indonesia dearly in terms of resource availability that might have boosted development spending for the poor," the bank said.

A vital reform target is this year's fiscal sustainability, which the government hopes to limit to a deficit of 3.7 percent of gross domestic product (GDP).

Amounting to some Rp 51 trillion (about $4.67 billion), the deficit is financed through privatization, state asset sales, and foreign loans.

But now, the three-month-old government faces shortfalls on all three funding sources, causing concern over its ability to achieve fiscal sustainability.

The appetite for Indonesian assets remain low, due in part to negative market sentiment, the World Bank said.

It cited two reasons for this, the first being legal uncertainties prevailing at local courts.

" ... there is a clear perception that actions by authorities reflect a systematic bias against foreign investors and an unequal application of the law in favor of domestic debtors," the bank said.

The second reason was Indonesia's reaction to the U.S. military strikes against Afghanistan, combined with television images of demonstrations by anti-U.S. groups.

Analysts said Indonesia had failed to back up its verbal support for the U.S. war against terrorism with concrete actions.

Although market sentiment was negative, the World Bank urged the government to proceed with its privatization program.

On Wednesday, the CGI will meet to discuss further loans for financing the 2002 state budget deficit.

The government has said it was seeking new loans of around $3.5 billion to finance next year's budget.

In spite of the current shortfalls, major donor countries have shown continued support for Indonesia.

Japan, one of Indonesia's largest donor countries, said it remained committed to supporting Indonesia's budget needs.

Hiroshi Ogushi, the Japanese Embassy's first secretary for financial affairs, said last week Japan would show greater flexibility.

He also did not rule out the possibility of Japan accepting Indonesia's request to defer interest payments during the Paris Club meeting next year.