World Bank projects RI external debt to balloon

World Bank projects RI external debt to balloon

TOKYO (Reuters): Indonesia faces a difficult task of
revitalizing its frail banking system while controlling its
ballooning public debt, the World Bank's chief economist for the
East Asia and Pacific Region said on Monday.

The economist, Masahiro Kawai, also said debt reduction was
not a realistic solution for the new government of President
Abdurrahman Wahid, who arrived in Tokyo on Monday for a two-day
visit.

Kawai said Jakarta's external debt is expected to swell to 98
percent of gross domestic product next year, doubling from 48
percent at the end of 1997, as more public money needs to be
injected into the banking system.

Indonesia's foreign debts are estimated at US$150 billion, of
which around $70 billion is owed by the public sector (government
and state companies).

"Recapitalization of the banking sector is estimated to cost
Indonesia about 30 to 40 percent of GDP, putting the country's
finances in a very severe condition," said Kawai.

Indonesian banks' non-performing loans are estimated by
analysts to exceed 60 percent of their total loans, while the
nation's foreign debt already stands at nearly $70 billion.

Still, debt relief cannot solve Indonesia's problems, as such
a move would trigger a decline in the inflow of fresh foreign
money into the Southeast Asian nation, Kawai said.

"If new money kept pouring in after a debt cut, all debtor
countries would ask for such a move," Kawai said. "But
Indonesia's largest creditor, Japan, is saying that it in
principle could not give fresh loans to countries receiving debt
relief from it. So it would be difficult for Indonesia to insist
on a cut in its debt."

Former Japanese Vice Finance Minister Eisuke Sakakibara said
on Monday after a meeting with Wahid that they agreed external
debt restructuring, both public and private, was very important
for Indonesia.

The two did not touch on specifics of debt restructuring,
Sakakibara said.

Kawai also said the advice given Indonesia by the
International Monetary Fund (IMF) and the World Bank will be more
important in coming months than before, as many ministers in the
Wahid government are inexperienced in economic policy.

"The new government seems to be trying to give an impression
that the economy will improve under a clean, corruption-free
government," Kawai said. "But being clean and being able to
conduct sound economic management are different matters."

Indonesia moved a step closer to receiving new loans from the
IMF and the World Bank after meetings in Washington on Friday
between senior managers from the two lending bodies and Wahid.

An IMF spokesman said the IMF mission in Jakarta will start
discussing a new loan program early this week. The fund hopes to
sign a letter of intent with Indonesia sometime in December, the
spokesman said on Friday.

Japanese government sources said recently that if Jakarta
strikes a deal with international lending bodies on new loans, a
Paris Club meeting of international creditors could be held early
next year to discuss rolling over Indonesian foreign debt
maturing in April 2000 and after.

The Paris Club meeting, originally planned for September, had
been delayed due to political uncertainty ahead of the Oct. 20
presidential election.