WB warning highlights tougher stance on Indonesia
JAKARTA (JP): A stern warning on Friday from the World Bank highlights a tougher stance by Indonesia's major lenders, including the International Monetary Fund, on the government due to its foot-dragging in the implementation of key economic reform programs, an expert has said.
Noted economist at Gadjah Mada University, Sri Adiningsih, said that the international creditors had to be tough on the government because slippage in key reforms would halt the country's economic recovery process.
"The warning from the World Bank is quite strong. The government must do some introspection," she told The Jakarta Post over the weekend.
"The IMF and the World Bank want the government to be disciplined in implementing the economic reform programs because if not the recovery process would be hampered," she added.
The World Bank (WB) warned on Friday that the country's fragile economy could collapse if the IMF-sponsored economic reform program failed to be implemented, and if political instability and social unrest persisted.
"Unfortunately, there is also a significant possibility of a crisis scenario," the bank stated in its latest report on Indonesia.
"A breakdown in the government's extended arrangement with the IMF as a result of major policy slippage, including adequate progress on bank and corporate restructuring, could lead to a rapid erosion of market confidence and deterioration in economic conditions," it said.
"In such adverse situations, the bank would cease all new lending until base case conditions have been restored," it added.
The warning from the World Bank came amid worsening relations between the government and the IMF, which promised the current administration some US$5 billion in a loan to help finance a three-year economic reform program. The fund has so far disbursed about $1 billion.
But the IMF delayed the disbursement of the next loan tranche in December due to concerns over the government proposed bill on the amendment of the central bank law, delay in the sale of government ownership in Bank Central Asia and Bank Niaga, and a poorly designed fiscal decentralization policy.
Sri said the World Bank's warning of a new crisis could become a reality if there was a breakdown in the IMF program.
"Indonesia will suffer more if the IMF suspends its loan," she said, pointing out that loans from other lenders, including the World Bank, Asian Development Bank and bilateral lenders, as well as a debt-rescheduling facility from the Paris Club of creditor nations and private sector investment would also be canceled.
"This will further create a snowball effect on the economy," she added.
Sri said that the government must fix its relations with the IMF immediately because it needed the strong support of the international community amid the lack of domestic support for the embattled administration of President Abdurrahman Wahid, who was censured recently by the legislature over alleged involvement in two financial scandals.
Sri also explained that the IMF had to be tough on Indonesia because it was also facing international pressure.
She said that the IMF had actually been easy and accommodative on the current economic ministers by allowing them to draft the recent letter of intent (LoI), which basically contains a list of the various economic reform programs to be implemented by the government.
Normally, the LoI is designed by a joint team of IMF and government experts. The IMF will only disburse its loan after its board of directors approves the LoI.
"The IMF had previously been too easy on the government, but it now wants to be tougher because the economy continues to deteriorate and confidence continues to dwindle," Sri said.
"The IMF is a huge lender to Indonesia, they also don't want to fail here," she added.
Coordinating Minister for the Economy Rizal Ramli visited Washington last week to lobby the IMF to disburse its loan to Indonesia. Rizal had criticized the fund earlier for being too pushy. (rei)