U.S. urges Indonesia to do more on reforms

U.S. urges Indonesia to do more on reforms

WASHINGTON (Reuters): The United States, clearly worried about the course of Indonesia's economic program, said on Wednesday Jakarta should step up efforts to convince markets it was serious about IMF-sponsored reforms.

U.S. Deputy Treasury Secretary Lawrence Summers also told reporters Washington would only hand over money it has promised to troubled South Korea after commercial creditor banks agreed ways to extend the maturity of billions of dollars of South Korean debt.

The International Monetary Fund, criticized for imposing excessively harsh terms on countries seeking financial aid, was acting in an appropriate way, he said.

Summers was speaking amid mounting financial market concern about Indonesia's ability to adhere to a reform package agreed with the IMF, which wants Jakarta to clean up its banking sector, tighten monetary policy and control public spending.

"It will be crucial for Indonesia to carry through on policy commitments that it has made in the context of the IMF program, particularly with regard to measures to reform and clean up the financial system, to adjust monetary policy and to control public infrastructure spending," Summers said.

The U.S. is contributing $3 billion to Indonesia's $40 billion rescue deal, a package of international loans designed to help overcome the problems caused by a plunging currency and a fragile financial sector.

It is an even bigger player in a still larger bailout for South Korean, reflecting Seoul's greater economic and political weight. South Korea, the world's 11th largest economy, has already received $11 billion of IMF money as part of a record- breaking $50 billion rescue deal.

Summers said he was pleased with the progress made by South Korea in sticking to an IMF-backed plan which stresses the need to ease ties between banks and industrial conglomerates and reduce the debt burden.

But he said Washington would only hand over $1.7 billion promised to Seoul on Dec. 24 once banks had agreed to extend maturities of South Korean debts and raise new cash. He hoped this would take place "in the next several weeks".

"The policy statements and actions by the Korean legislature have been generally constructive and voluntary agreement among major banks to maintain exposure levels has contributed to confidence in Korea," Summers said.

Some economists have accused the IMF of using old recipes to try to solve new problems, although they accept that the governments are not blameless.

"The problem here, more than anything else, is that the fund is facing a whole new set of circumstances with which it has had very little experience," said Princeton University economics professor Peter Kenen.

"The governments concerned are still in denial," he added. "They are so tied up in crony capitalism that they are not prepared to take the measures that need to be done."

"The sort of standard remedies that the fund has used in dealing with countries in distress are remedies of somewhat dubious relevance in these circumstances."

A Washington-based international economist said the rescues had failed to provide markets with an anchor of stability. Currencies remained under pressure and information was patchy, both from governments and from the IMF, he said.

The Washington Post newspaper on Wednesday quoted an IMF official as saying the crisis was worrying.

"I think the markets are asking themselves the question of just how much the senior Indonesian leadership is committed to this program and particularly to the major reform measures that affect the (Soeharto) family", the newspaper quoted an IMF official as saying.

The New York Times newspaper said the IMF was urging the Indonesian government to implement its reform package and that the fund had sent Soeharto a "strongly-worded" letter urging him to carry out economic changes.