WB resumes loans to help Indonesia reduce poverty

WB resumes loans to help Indonesia reduce poverty

WASHINGTON (Reuters): The World Bank on Tuesday resumed lending to Indonesia with a US$225 million loan to reduce poverty.

The announcement was a boost for the country's new President, B.J. Habibie, and his economic team. It was also a tangible sign that the international community was warming to the new government, more quickly than many had thought possible.

Dennis de Tray, the World Bank's country director for Indonesia, told reporters in Washington that the $225 million rural development loan was critically needed in Indonesia, where the bank has estimated the number of poor could swell by 10 million in the short-term.

But de Tray said disbursement of additional World Bank money -- including a $1 billion in structural adjustment loan to help reform the battered economy -- remained on hold, and would require further review by bank and International Monetary Fund staff and management.

"The conditions have changed dramatically," de Tray said. "We have to go back and reassess. We have to put together a consistent framework that we're comfortable with and the government can live with before we take the next step."

But he told reporters: "The bank and the rest of the donor community is looking for ways for resuming assistance to the people of Indonesia in a difficult political and economic environment."

Earlier on Tuesday, a top IMF official said the fund may also be getting ready to resume disbursements put on hold.

"Now that the political transition has taken place, there is a prospect of a return to the IMF program taking place reasonably soon," Stanley Fischer, first deputy managing director of the IMF, told a symposium in Tokyo.

The $225 million poverty reduction loan was part of a much larger World Bank aid package, put on hold on May 18 amid social unrest leading to the resignation of longtime President Soeharto and his replacement by Habibie.

The World Bank said Tuesday's loan would benefit seven to 10 million people living in the eastern island districts of Indonesia, the world's fourth most populous country and largest Moslem state, which had suffered the worst effects of the El Nio weather phenomenon.

De Tray said a joint World Bank-IMF team would assess the economic situation in Indonesia next week and report its findings back to management. The assessment should be completed by June 12, de Tray said. "We'll be having a senior management meeting then to determine what comes next," he said.

De Tray said Indonesia's new government had made good progress on structural reforms. "They are in fact ahead of the game at this stage."

But he added: "The main uncertainty for us right now is the macroeconomic framework."

Weeks of social unrest and political upheaval have dragged the crippled economy further into depression.

The Indonesian government says unemployment this year will hit 15.4 million -- 17.1 percent of Indonesia's 90 million workforce.

It expects the economy to shrink 10.1 percent in 1998, with inflation rising to between 80 and 85 percent and even breaching 100 percent if Indonesia sees a repeat of the riots that ravaged Jakarta in May and left 500 people dead.

The IMF says the economic forecasts underpinning its reform program with Jakarta will have to be redone. "The situation is extremely difficult because of the extraordinary devaluation of the rupiah," Fischer said.

The World Bank warns that medicines are in short supply or prohibitively expensive. So, too, is hospital equipment, such as syringes.

Making things worse, a withering drought last year hit agricultural output, forcing costly imports of rice, the staple of the country's 200 million people, and other essentials. The social unrest and political upheaval have made the situation far more difficult, de Tray said.

"The political crisis that came to a head when Soeharto resigned, it just has exacerbated an already extraordinarily difficult set of conditions," de Tray said.

"We are extremely committed to trying to help cushion the impact of this continuing decline in the economy of Indonesia, and that's what this (poverty loan) program is about."

The World Bank said the loan would finance a project worth $273 million, with the Indonesian government contributing $47 million to the cost.