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.