Set limit on borrowing by regions: IMF

Set limit on borrowing by regions: IMF

JAKARTA (Agencies): The IMF on Friday reported some progress
in negotiations with Indonesia on key issues holding up fresh
loans since late last year, but repeated calls for curbs on
direct borrowing by newly empowered regions.

International Monetary Fund Jakarta representative John
Dodsworth said the IMF was still waiting for the government to
respond on certain issues and pressed it to act on the
politically sensitive issue of borrowing by the provinces.

"Although there is not yet agreement, some progress has been
made in narrowing differences on the issues of decentralisation
and amendments to central bank law," he told Reuters.

His comments come a day after Indonesia's chief economic
minister, Rizal Ramli, complained that the IMF was pushing his
government too hard on some issues which could not be so quickly
addressed while the country was struggling to switch to democracy
after decades of autocratic rule.

Rizal is due to meet IMF first deputy managing director
Stanley Fischer and the new U.S. Treasurer as patience with
Indonesia's recalcitrance over reforms appears to be starting to
wear thin.

New agreement with the IMF is less important for the money --
around $400 million in loans -- than the impact it would have on
the giant southeast Asian country's financial relations with the
rest of the world.

Without a deal, already sagging confidence in the country's
ability to pull out of its economic crisis would sink further.

Also, vital debt rescheduling with the Paris Club of official
creditors would be blocked.

The IMF, along with other major donors, has been particularly
nervous about the impact of poorly drafted new autonomy laws
which took effect in January and which give regions wide-ranging
powers, including the ability to borrow directly.

Dodsworth urged the government to set legal limits that would
effectively block their ability to directly borrow, including
offshore, and adding to Indonesia's already huge pile of debt.

He pointed out that the Finance Ministry, under a recent
regulation, can set a limit on local government borrowing.

"The IMF position is that the ceiling -- excluding borrowing
through the centre -- should be set at zero or a very low nominal
amount for the first year of decentralisation," he said.

Persuading banks not to lend money was useful but not enough.

"The IMF is therefore encouraging the government to set a
legally binding borrowing ceiling as a transitional measure
during the first year of decentralisation," he said.

He stressed that the Fund did not want to prohibit regions
borrowing completely, as long as they did so centrally where the
Jakarta government could exercise control.

He added that the Fund was also waiting for the government to
reply on some other key concerns, mainly relating to bank
restructuring.

The IMF wants the government to sell off two major banks and
also resolve an agreement it made with some of Indonesia's
leading businessmen to help them bail out their banks.

That deal has come under heavy criticism for favouring the
businessmen at the expense of the state.

Asset-backed bonds

Separately, a senior World Bank official said on Friday that
Indonesia's plan to issue bonds backed by the sale of natural gas
to Singapore could contradict the terms of its World Bank loan
agreement.

Although the details have yet to be finalized, Indonesia has
invited several banks to structure a securitized bond issue
valued at up to $1 billion.

World Bank country director Mark Baird said the bank is
awaiting more details of how the deal will be structured, but
said it needed to see how it ranked compared to other sovereign
debts.

"It needs to be worked out, but there is such a potential
threat," he told Dow Jones Newswires, when asked if the bond
clashed with the bank's loan conditions.

In theory, the bank's borrowers are required not to pledge
their "national assets" to other creditors as a condition of
their loans in order to ensure that World Bank loans rank senior,
he said.

The bank recently scaled down its Indonesia program, saying it
will lend around $400 million annually over the next three years,
down from its average disbursement of $1.3 billion during the
mid-1990s.

Indonesia's foreign public debt is already a huge $70 billion,
and the government relies on loans from the World Bank and
bilateral donor countries to balance its budget.

Government officials say their plan to securitize exports of
natural gas from West Natuna to Singapore is an efficient way to
refinance large domestic debts stemming from a costly bailout of
the shattered banking sector.

But analysts say multilateral lenders to Indonesia may be
dismayed by what is effectively a way of raising more debt,
particularly after the IMF froze its lending program over
Jakarta's failure to implement tough economic reforms.

The West Natuna gas sales to Singapore, which started Jan. 3,
are expected to provide between $7 billion and $8 billion in
revenues to the Indonesian government over the next 22 years.