World Bank seeks Indonesia's action on corruption

World Bank seeks Indonesia's action on corruption

SYDNEY (Reuters): Indonesia's new president may enjoy an
economic honeymoon as deals with the IMF and the Paris Club
creditors fall into place, but the World Bank wants to see clear
steps on issues like corruption before increasing its aid.

Mark Baird, the bank's Indonesia country director, said on
Monday he was hopeful the new government of Megawati
Soekarnoputri would sign an IMF deal by end August, freeing up a
$400 million tranche needed to restore investor faith in the
ailing economy.

That in turn would pave the way for a "successful" September
10 meeting with the Paris Club of creditors on rescheduling
US$2.8 billion in debt payments due this year, and for a
gathering in November of the Consultative Group for Indonesia, a
number of donors who last year pledged some $4.8 billion in
loans.

"That I think is a sort of schedule of events over a six month
period that hopefully will sustain the good news in the short
term and in that sense extend the honeymoon period," Baird told
reporters in Sydney.

"But it will leave open the question of how committed is the
government to the more fundamental reforms."

Baird also tried to discourage any notion of further debt
relief beyond what was already on the table with the Paris Club.
Additional debt relief was neither needed nor desirable, he said.

The appointment of Megawati ended months of political chaos
and brinkmanship as her predecessor Abdurrahman Wahid fought off
lawmakers trying to oust him over his erratic 21-month rule.

The naming of her economic cabinet last week, which contained
a good balance of private sector professionals and economists,
further boosted confidence and was welcomed by the World Bank.

The developments may open the door to a revival of relations
with donors and lenders, like the International Monetary Fund,
which had soured as Jakarta's economic reform process stalled.

The IMF signed a draft letter of intent over the $400 million
with Jakarta in July, subject to approval in Washington.

The Paris Club agreement is dependent on the IMF deal.

And the World Bank, which agreed to $422 million in new loans
in June after slashing its aid from $1.2 billion in January, says
it may restore the higher levels if the IMF funds come through.

But Baird said the bank needed to see two concrete steps
before increasing its commitment in Indonesia.

The first was on "fiduciary control" -- the management of
procurement and government audits. That may involve the setting
up of an office of public procurement.

"This to us is very critical if we are to be satisfied and if
our shareholders are to be satisfied that past problems with
corruption are being seriously looked at," Baird said.

The other area was a reshaping of the government's poverty
reduction strategy, away from targeted subsidies and towards a
more general appreciation of the impact of policies on the poor.

Baird said good progress was already being made with a
recognition that fuel subsidies do not help the poor.

He said further debt relief, as suggested by the Australian
Foreign Ministry last week, was not a solution.

Indonesia should safeguard its access to international capital
markets, be very careful about new borrowings, tackle corruption
to make sure expensive loans do not go to waste and strengthen
its future capacity for debt servicing, he said.

"The key is not to solve Indonesia's law and order problems
today because it is not possible, or to have a bureaucracy that's
not corrupt, to have a financial sector that works properly,
because that is not possible," he said.

"The key is to show that the government is moving in the right
direction and with that I believe there will be enough
international goodwill and support to see them through the
transition and into a sustainable period of recovery."