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)