WB warns of new crisis scenario

WB warns of new crisis scenario

JAKARTA (JP): The World Bank said on Friday Indonesia would
likely "muddle through" and maintain macroeconomic stability, but
warned there was also the significant possibility of a crisis.

The World Bank said Indonesia's fragile economy could collapse
if the International Monetary Fund-sponsored economic reform
program failed to be implemented, and if the political
instability and social unrest in the country persisted.

"Unfortunately, there is also a significant possibility of a
crisis scenario," the bank said 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 inadequate
progress on bank and corporate restructuring, could lead to a
rapid erosion of market confidence and deterioration in economic
conditions," it said.

"A similar outcome could result from political instability or
a widespread deterioration in law and order. In such adverse
situations, the bank would cease all new lending until base case
conditions have been restored."

The World Bank said it would help prepare contingency plans in
the event of another macroeconomic tumble in the country.

The warning came amid deteriorating relations between the
government and the IMF, and continued unrest in the country,
including a wave of ethnic clashes in Sampit, Central Kalimantan,
which have thus far have left more than 140 people dead.

The IMF delayed in December the disbursement of its next
US$400 million loan to Indonesia, because of concerns with the
government-proposed bill on the amendment of the central bank
law, the country's fiscal decentralization policy and a delay in
the privatization of Bank Central Asia (BCA) and Bank Niaga.

The release of the IMF money is seen as crucial to helping
revive investor confidence in the ailing economy.

The economy contracted by more than 13 percent in 1998
following the 1997 Asian financial crisis, and remained flat in
1999. But the economy grew by about 4.8 percent last year, helped
by strong exports and private consumption.

"Clearly, we have high expectations the government will be
able to reach an agreement with the IMF ... because this is a
precondition for restoring investor confidence," World Bank
country director Mark Baird said.

In Washington, the International Monetary Fund said on Friday
that talks with Coordinating Minister for the Economy Rizal Ramli
were still continuing to resolve their differences.

Describing Wednesday's meeting between Rizal and IMF first
deputy managing director Stanley Fischer as "productive", IMF
spokesman Vasuki Shastri told The Jakarta Post by phone that "the
two sides agreed to intensify discussion and remain in touch in
the coming days."

Baird urged the government to speed up its economic reforms,
particularly its corporate and bank restructuring programs.

"Many of the issues of concern to the IMF are also of concern
to us," he said.

The World Bank report said Indonesia was striving to emerge
from a severe economic crisis, complete its transition to a
democratic society and embark on an ambitious program of
decentralization.

"Together, they constitute a highly complex agenda for
Indonesia ... the stakes are high -- not just for Indonesia but
also for the international community," the report said.

The bank said the administration of President Abdurrahman
Wahid inherited an economy with deep structural flaws, weak
institutions and an entrenched bureaucracy.

"Corruption is still rampant and infects the very institutions
(the police and judiciary) that are supposed to tackle it.

"Regional unrest and political and ethnic tensions threaten
national unity and continue to preoccupy the government ....
Investors remain wary of political uncertainty, the weak legal
and judicial system and uneven policy implementation," the bank
said.

The World Bank launched on Friday its new loan package for
Indonesia, totaling $400 million per annum over the next three
years, compared to an average of $1.3 billion per year from 1990
to 1999.

The bank said about one-third of the new loan would be highly
concessional credits from the International Development
Association (IDA), which are repayable over 35 years, have no
interest and come with a small administrative fee of 0.75
percent.

"The proposed amount ... will enable Indonesia to borrow money
for poverty programs on much softer terms and avoid adding to its
large external debt," it said. (rei)