World Bank predicts RI contraction will reach 15%

World Bank predicts RI contraction will reach 15%

SYDNEY (Reuters): A World Bank executive said yesterday that the contraction in the Indonesia economy could be up to 15 percent, higher than forecast by policymakers two months ago.

"The worst (of the Asian nations) will be Indonesia at 10-15 percent," Jean-Michel Severino, World Bank vice president for East Asia and the Pacific, said in a speech.

"Right now we are running the numbers (on the final forecast)," Severino said.

The country's latest budget, agreed with the International Monetary Fund in April, projected an economic contraction of five percent and inflation of 45 percent in 1998.

But the IMF has since said the forecasts will need to be revised. Its top Asia expert Hubert Neiss has said he had no reason to doubt forecasts of a contraction of 10 percent or more this year.

The Asian economic crisis, which began with sharp currency declines in mid-1997, has led to bailout packages led by the International Monetary Fund for Thailand, Indonesia and South Korea totaling more than US$100 billion.

Indonesia will receive than US$40 billion but disbursement has been delayed by upheaval in the country earlier this year which saw Soeharto replaced as president by B.J. Habibie following social unrest and concerns over commitment to economic reform. Severino said hardship in Indonesia was growing.

"We see an additional 20-30 million people in Indonesia below the poverty threshold which is a dollar per capita per day."

Asia

Severino yesterday also urged G-7 nations to do more to help smaller Asian economies, saying such aid would also assist Japan's recovery.

In an interview with Reuters Television, Severino said East Asia was an important market for Japanese exports and also noted Japanese banks are by far the largest lenders to the region.

"I think the key is that East Asia matters for Japan and Japan matters for the G-7," said Severino.

The Group of Seven nations is holding a meeting of its deputy finance ministers and central bank officials, along with representatives from the Asian Development Bank, World Bank and IMF in Tokyo on Saturday.

Severino, who earlier told an Australian business group the G- 7 should help to finance budget deficits among weaker economies in the region to avoid the risk of depression, said such aid was in the G-7's interests.

He said regional governments should be running budget deficits over the next two to four years, with these deficits needing soft loan funding. To do otherwise would force up domestic interest rates.

"This money has to come from the G-7 and from the developed countries in the region," Severino said.

"The ADB and the World Bank have more or less reached their head limits," Severino said, adding it was critical that funds be found for high levels of social expenditure in the region.