World Bank urges Indonesia to stick to reform program

World Bank urges Indonesia to stick to reform program

WASHINGTON (Reuters): The World Bank urged Indonesia on Thursday to stick to its tough program of reforms, and predicted growth could return in the medium-term.

The lending agency also said the government must move quickly to resuscitate the country's banking sector and restructure debts. It called on international donors to increase their commitments to support Indonesia's budget.

"With firm, consistent implementation of the reform program and adequate foreign financing, there are good prospects that Indonesia will return to sustained growth in the medium term," the bank said in its annual report on Indonesia's economy.

But the bank said recovering from this "desperate situation" would be slow and difficult.

"Much will depend on whether the nation can achieve the necessary political stability for implementing a difficult and complex agenda of economic reforms, and whether it will receive the necessary financial support from the international community," according to the report, which will be presented at a meeting of donors in Paris July 29-30.

The bank expects Indonesia's economy to contract this year by 10-15 percent. Inflation could exceed 80 percent and the number of poor could well double, the bank said.

The report said the government must ensure the availability of food and other essentials at affordable prices.

"This means subsidizing key commodities, especially rice, and ensuring effective distribution," the bank said. "The government needs to preserve the availability of key social services, especially basic health and education."

The report said falling government revenues, subsidies and spending on social program would boost the budget deficit to about 8.5 percent of gross domestic product.

"Indonesia now has no option but to choose between curtailing subsidies and critical social programs, and seeking additional foreign financing," the bank said.

Indonesia's foreign financing needs are expected to be about $8 billion more in fiscal year 1998/99 than they were in fiscal year 1997/98. Foreign financing roughly equal to the fiscal deficit will also be needed in 1999/2000, it said.

"To achieve this level of disbursements it is critical that donors consider providing their additional financial support in the form of program rather than project loans," the bank said.

"This will not only provide much needed foreign exchange but finance the fiscal gap without fueling inflation."

The bank urged authorities to deal with the country's private sector domestic and external debts.

"The overhang of the private sector domestic and external debt, together with depreciation of the rupiah, has paralyzed many enterprises," the bank said. "Thus restructuring it is one of the highest priorities of government."

The bank also urged the government to speed the pace of banking sector reforms.

"The worsening crisis has increased the banking system's financial troubles to the point where the viability of the rest of the economy is threatened," it said. "Reestablishing credit flows and dealing with the problems of troubled banks is more pressing than ever."

The bank said the government should implement measures to help relatively sound banks restore credit flows.

"This could entail new equity from foreign strategic investors and additional capital injections from existing owners," it said.

"Both forms of equity could then be supported further by tier- two capital from the government."

The World Bank said authorities should place the Indonesian Bank Restructuring Agency (IBRA) on "a sustainable footing," by providing more resources.

"IBRA needs a clear charter supported by adequate funds needed to meet the claims of depositors and creditors of IBRA banks, restructure non-viable IBRA banks, and recapitalize those banks under IBRA management that will be restored and privatized," the report said.

The bank said authorities should also take steps to ensure that IBRA's asset management unit is up and running as quickly as possible.

In addition, the new government must improve governance and transparency. "Improving governance will need to be a policy priority that extends well into the medium term," the bank said.

The report's chief author was Vikram Nehru, its lead economist for Indonesia.