World Bank approves $1b loan to Indonesia

World Bank approves $1b loan to Indonesia

WASHINGTON (Reuters): The World Bank on Thursday approved a US$1 billion loan to Indonesia and said an additional $6 billion from international donors should be ready soon.

The $1 billion structural adjustment loan, part of a $4.5 billion World Bank contribution to an existing $41 billion rescue package, will help Asia's hardest-hit crisis economy reform its battered financial and banking sectors and fund imports of food and other key products.

But bank officials said Indonesia would need more help.

Its chief representative in Indonesia told a news conference that the International Monetary Fund and Group of Seven major industrial nations should soon announce new loans of $6 billion on top of the existing package.

"We are very confident that that (new) package will come together," World Bank Indonesia country director Dennis de Tray said. Asked how long it would take to finalize, he added: "Let's say weeks, but not many."

The World Bank and the IMF suspended lending to Jakarta in May when protests turned violent, leading to the resignation of longtime President Soeharto and his replacement by B.J. Habibie.

But negotiations in June between the new government and its lenders set the stage for the bailout payments to resume.

The World Bank then approved a $225 million loan to fight poverty and the IMF and Indonesia signed a new economic accord.

The IMF's board is expected to review the accord and its next payment on its $10 billion loan in mid-July, but officials say no final date has yet been set.

The new IMF accord says Indonesia needs the extra $6 billion because conditions have worsened. The May riots in Jakarta left nearly 1,200 dead, caused millions of dollars in damage and spurred massive capital flight.

While previous agreements had concentrated on economic reform and the dismantling of monopolies, the new IMF deal put much more stress on fighting hunger and deprivation suffered by the growing ranks of Indonesia's poor.

Subsidies for food and essential commodities will now remain in place until the economy recovers.

The World Bank said Indonesia would receive $600 million immediately from Thursday's loan and the rest of the money later this year, assuming authorities met promises on reform.

"We see this loan as a critical component in the overall package of assistance provided by the international community," World Bank President James Wolfensohn said in a statement. "Its objective is to rebuild confidence and help Indonesia make a new start."

De Tray said the World Bank decided to withhold some of the money because of the political and social uncertainties. "The loan is risky because Indonesia is risky," he said, adding: "This is not a time to hold back and wait and see."

But experts say loans from the World Bank and the IMF, while much-needed, will not be enough to repair the damage without more painful reforms in several areas.

"It is going to take more than this," de Tray said, adding that the influence of the World Bank and the IMF were limited.

"We, being the international community, ... cannot by ourselves, I think, regenerate confidence. But we can certainly contribute to that process."

The IMF expects the economy to shrink at least 10 percent in 1998, although some private economists forecast a deeper recession. Inflation was expected to be 80 percent over 1998.

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