World Bank slashes loan

World Bank slashes loan

The World Bank has finally decided to restructure its lending
programs in Indonesia, slashing its annual loan commitment for
the next three years to only US$400 million, or less than one
third of the previous level, but granting the country access to
its interest-free credit window, the International Development
Association.

The immediate impact of the new loan program will begin
affecting the government's capital inflows only next year. This
is because the $1.3 billion in loans pledged by the World Bank at
the latest meeting of the Consultative Group on Indonesia (CGI)
in Tokyo last October remains available for use this year.

However, starting next year, official capital flows will
decline significantly because the World Bank itself usually
accounts for one third of the combined annual loan pledges from
the members of Indonesia's CGI creditor consortium. In the 1990s
they ranged from $4.5 billion to $4.7 billion.

Though the steep loan cut was made in Washington on Tuesday
only after consultations with the Indonesian government, several
factors seemed to have forced the World Bank to adopt the new
policy. Foremost among them is that the stock of the bank's
outstanding loans to Indonesia is already close to its
concentration limit for a single large borrower, which in this
case amounts to about $13.5 billion. Moreover, the World Bank's
share of Indonesian overseas public debt service already exceeds
20 percent. The country's official foreign debt of around $70
billion is already way above what is considered a manageable
level.

However, the slash in loan will slightly be offset by
additional benefits Indonesia will get from the restoration of
its access to IDA's interest free loan. This was closed in 1981
after the nation's per capita income rose above $925 a year --
the threshold that qualifies a country borrower to that facility.
Indonesia's per capita income has fallen to an estimated $580 due
to the melting of the rupiah value and the economic crisis.

Besides charging no interest, IDA credit also has a much
longer tenure of 35 to 40 years, including a 10-year grace
period. This compares favorably with the 15 to 20 years for World
Bank loans which have an annual interest charge of around 6.5
percent. This is precisely the kind of borrowing Indonesia now
needs, given its severe liquidity crisis and heavy debt service
burdens.

In contrast to World Bank loans which usually go mostly to the
development of basic infrastructure, IDA allocates the bulk of
its credit to poverty alleviation and social-sector programs,
which also happen to suit better the nation's needs today. This
is because the worsening living conditions caused by the economic
crisis have plunged more than 100 million people into absolute
poverty.

However, national per capita income below $925 will not
automatically entitle a country to this facility. The competition
for IDA credit is quite fierce as the demand from poor nations is
always far larger than the supply. Different from the World Bank
which has both the authorization and capability to raise its
lending funds from the capital market, IDA derives its funds only
from government contributions and the World Bank's profits.

The competition lies mostly in borrowers' willingness and
ability to pursue good governance (which means combating
corruption), sound macroeconomic management and bank/corporate
restructuring. The World Bank did promise to eventually increase
its loan and IDA credit to Indonesia up to $1 billion a year if
the country could meet those conditions but this is most likely
a long shot.

Herein lies the greatest challenge that the country is facing.
Though the World Bank did not spell it out bluntly, one could
easily infer from various recent remarks made by its senior
executives that the bank has been disappointed with the poor
record of the government related to the implementation of good
governance and policy reforms and this is also one of the main
reasons as to why it cut its loan program. This poor performance
has also been responsible for the delay of the third tranche
disbursement of the International Monetary Fund's $5 billion
bailout funds from December.

The government therefore would be well advised to see the
retrenchment in the World Bank's loan program more as a friendly
warning from a loyal supporter (which has greatly assisted the
country's economic development since 1968). It should jolt the
government to pursue more persistently its administrative reform
and restructuring programs.

After all, the conditions imposed by the World Bank are not an
attempt to intervene in Indonesia's domestic affairs as often
suspected by some officials and politicians. They are very
similar to those set by the IMF for its bailout funds and also
are the requirements asked for by other foreign creditors and
investors.