U.S. worried about RI, may block next handout

U.S. worried about RI, may block next handout

WASHINGTON (Agencies): A senior U.S. official said on Tuesday Washington would oppose additional rescue funds for troubled Indonesia unless reforms were clearly back on track.

Deputy Treasury Secretary Lawrence Summers, briefing lawmakers on a U.S. request for new money for the International Monetary Fund, said Indonesia had to meet promises on banks, budgets, monetary policy and structural reform before the United States would approve additional IMF cash for Indonesia.

He said action on "crony capitalism" -- the system of favors which has enriched politically-well connected businesspeople and family members of political leaders -- was needed to stabilize the ailing rupiah currency.

"Appropriate policies would be a prerequisite for (U.S.) support," Summers told lawmakers, making clear that Washington would not encourage the IMF to bend its rules when it debated whether to pay another installment of its Indonesia loan.

Summers was speaking hours after a meeting in Jakarta between Soeharto and former vice president Walter Mondale, President Bill Clinton's special emissary to Indonesia.

Mondale, charged with discussing political and economic issues, has also insisted on the need for Indonesia to adopt IMF- backed reforms.

"The central step for restoring confidence is full, demonstrable and vigorous implementation of IMF reforms," Mondale told a Jakarta news conference on Tuesday.

Summers and Treasury Secretary Robert Rubin said they had received an initial cable from Mondale about his meeting but were waiting for fuller information.

The IMF, which handed over $3 billion when it approved its share of a $40 billion rescue deal last November, must decide by March 15 whether to make more money available, and a team of IMF experts is already assessing the situation.

Indonesia turned to the IMF for help last year after the rupiah's collapse exposed weaknesses in the banking system.

But the currency remains weak, private sector debt is rising and the international community remains worried about the situation.

"Indonesia is a very troubling and complicated situation," Rubin told the same subcommittee hearing. "Indonesia is a very difficult situation, but one of great consequence, economically and geopolitically."

International demands on Indonesia include opening up the economy, breaking up monopolies and strengthening banks, but analysts say some changes have been slow to take effect.

"What is ultimately decisive, what we're watching very carefully and what will determine our response is the kind of policy commitment there is to doing the things that are necessary to make a stable currency possible," Summers told lawmakers.

"The IMF is going to have to make a very difficult judgment in mid-March," Rubin told the Senate panel.

But he added that Indonesia will have to do more than simply abandon the currency board concept in order to win U.S. support.

"The currency board issue is one issue and then the criteria they need to meet is a separate issue.

"The IMF faces a very difficult issue. On the one hand, you do have to have compliance with their conditions.

"On the other hand, I don't think any of us should have illusions about the seriousness of the decision because Indonesia is in a very difficult situation, and there are all sorts of very serious consequences that can come from that situation.

"This is a very complex situation, a very great moment in terms of its possible consequences," Rubin said.

"I'm somewhat persuaded right now that we (should) cut Indonesia off right now," said Democratic Congressman Barney Frank, from Massachusetts, a member of the House Banking Committee and the author of a bill that would reform the IMF.

Soeharto, distressed at the weak rupiah, has infuriated the IMF by flirting with the idea of a rigid currency board, which would peg the rupiah against the dollar and tie cash in circulation to central bank reserves.

The IMF says Indonesian banks are too weak to cope with a currency board, which has been used in a handful of countries to restore stability and rein in inflation.

Summers said Indonesia needed a stable currency, but he added: "In order to achieve a stable currency it is necessary to attack some of the problems of crony capitalism."

The administration wants Congress to approve $18 billion of additional funding for the IMF, which has faced unprecedented demands for capital from the Indonesian rescue deal and similar international packages for Thailand and South Korea.

"Thailand and Korea are on a constructive path of reform, though there are great challenges ahead, and this is the best path for Indonesia," Rubin said.