World Bank has new loan strategy for RI

World Bank has new loan strategy for RI

WASHINGTON (Dow Jones): The World Bank is likely to cut back
its lending to Indonesia, but provide funds under more generous
terms, under a new development strategy for the southeast Asian
nation that will go before the Bank's board next Tuesday.

The shift reflects a desire to move from a "crisis" approach
to a renewed emphasis on development and poverty alleviation, a
senior World Bank official said Friday.

It also reflects concern more generally over Indonesia's
steepening debt burden and persistent corruption, he said.

Mark Baird, country manager for Indonesia at the World Bank,
met with a group of investors, U.S. government officials and
representatives of nongovernmental organizations groups at
Washington's venerable Cosmos Club to discuss the Bank's views of
one of its biggest, and most challenging, client nations.

Baird told them that Bank staff will advise the board to cut
back the flow of finance to Indonesia that averaged $1.30 billion
a year during the 1990s. Instead, he said Indonesia would benefit
from loans of between $400 million and $1 billion a year,
provided through the Bank's concessional lending arm, the
International Development Association.

IDA loans are interest-free, have terms of up to 40 years and
the borrower faces only a small access charge to draw upon these
funds. Accordingly, IDA loans are only made available to nations
burdened with high levels of chronic poverty, with little hope of
luring private investment or finding the funds to finance
development projects.

Baird said that Indonesia's public debt is at 99 percent of
its annual gross domestic product, largely reflecting the heavy
cost of recapitalizing the nation's shaky banking sector and the
central bank itself.

Indonesia doesn't qualify for debt relief under the terms of
the so-called Heavily Indebted Poor Country initiative -
administered by the World Bank and the International Monetary
Fund - and has already secured a debt restructuring agreement
with both the Paris Club and the London Club of creditors.

The World Bank hopes IDA loans will ensure a continuing flow
of finance for development and poverty alleviation projects
without increasing Indonesia's debt-service demands in the near
term.

"The government has made a good case for access to IDA," Baird
said, adding that per-capita income in Indonesia dropped
significantly to just $580 a year now after the Asian financial
crisis of 1997.

"But there will be legitimate questions at the board as to
whether Indonesia qualifies for IDA now," Baird said.

He pointed to Indonesia's struggle to combat corruption and
its poor record on reform as being stumbling blocks it must
overcome to win not only the confidence of World Bank directors,
but also of foreign investors and donors.

The degree of skepticism and uncertainty surrounding
Indonesia's economic future has been reflected in a steady
decline in Indonesia's currency, the rupiah, which has
deteriorated to Rp 9,450 against the dollar from Rp 7,450 a year
ago.

Baird said the government could have an immediate impact in
reviving investor confidence and the rupiah's fortunes by
immediately tackling problems in the commercial judicial system.

As an example, he cited the problems faced by Canadian insurer
Manulife Finance Corp., which was been frustrated in a legal
battle with its bankrupt Indonesian partner over the transfer of
shares in their Indonesian joint venture.

A few "good judgments" upholding the rights of foreign
companies could swiftly revive investor regard for Indonesia, he
said, adding that this is unlikely without an overhaul of the
judiciary from the Supreme Court on down.

Attracting offshore private investment - whether from asset
managers or in the form of capital spending from industrial
concerns - is essential for Indonesia.

Baird said Indonesia likely experienced gross domestic product
growth of 4.7 percent-4.8 percent in 2000 - after nearly zero
growth in 1999 - with inflation around 10 percent by the end of
the year.

"This is not an economy in crisis anymore. Indeed, in some
parts of the country, they've got a downright booming economy,"
he said.

However, despite the increasingly broad-based nature of the
recovery, Baird said this growth rate is still insufficient to
benefit the more than 100 million Indonesians living in poverty.

"Even at 4.7 percent, it's still lower than is needed to get
Indonesia back to where it was pre-crisis," he said.

As it now stands, the World Bank official said Indonesia is
facing the prospect of rising inflation because of the weaker
currency, more expensive energy prices and an increasing wage
bill.

The World Bank plans to help by changing the mix of its loans
to Indonesia from crisis relief to more community-based
development assistance, Baird said, but its support will hinge on
the government's progress implementing fiscal, financial and
judicial reforms.

These reforms were spelled out in a Letter of Intent the
government signed to secure a $5 billion loan from the IMF.
Jakarta's inability to deliver these reforms has led the Fund to
hold back its third installment of $400 million under the
February 2000 loan agreement.

Baird said argued that while some progress is being made in
some areas of reform, the government is still to deliver on key
aspects of the reform agenda agreed with the IMF.

He said these include guaranteeing an independent and strong
central bank, clearing the dead wood of bad debts in the
financial sector through the activities of the Indonesian Bank
Restructuring Agency, decentralizing government services to the
provincial and district levels and deterring and prosecuting
corruption.