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.