15 September 1999: Aid hold-up threatens Indonesian economy

The suspension of inter-national aid to Indonesia because of corruption and the killings in East Timor may have only a limited short-term impact but could delay or even foil the nation's economic recovery, economists and bankers said yesterday.

Both the International Monetary Fund and the World Bank have suspended loans until the government resolves the scandal over abuse of government funds paid out to Bank Bali, a private bank.

A senior official earlier this week implicated President B.J. Habibie, one of his advisers and two senior ministers. An audit by PwC has chided the central bank for failing to co-operate, and found part of the government funds had ended up in accounts of senior officials.

"There are several indications that Bank Bali was not an isolated incident," said Mark Baird, the World Bank's Indonesia director.

The Asian Development Bank said yesterday it might withhold Dollars 530m (Pounds 329m) in loans to Indonesia due in the first quarter of next year because of its pessimism over the Bank Bali investigation.

The US, Australia and others have also threatened to withhold aid unless Indonesia allows peacekeepers into East Timor quickly.

The Paris Club of creditor nations has already delayed discussion of some Dollars 6bn in debt relief until next year.

However, few of the donors mention that their suspension is unlikely to last more than two months. By early November Megawati Sukarnoputri, the popular opposition leader, is expected to be elected president and form a new government, and diplomats have said the world will be only too eager to support her.

Indonesia had asked for a Paris Club meeting in September but only to discuss debt payments coming due after April 2000, as earlier dues had already been rescheduled. The central bank claims Dollars 15.7bn in net reserves and the rising oil price should boost government revenues in the third quarter.

"There is not really a strong demand for quick disbursements," said Umar Juoro, economic adviser to President Habibie. "We can handle it up to November. But the biggest problem is the negative signal the IMF gives to the business community." Both the rupiah and share prices have been hit but both markets remain very thin, limiting the actual outflow of funds.

One western consultant to the government countered that the aid suspension had scared off several potential investors who had been looking at buying seized assets from the Indonesian Bank Restructuring Agency (Ibra), which is at the centre of the Bank Bali scandal. Ibra had also left corporate debt rescheduling and restructuring of the state banks on hold, he added. "The recovery is very fragile, mainly based on a recovery of agriculture. Industry has to contribute but no credits are forthcoming.

"In the banking sector a lot can still go wrong too," he added. "The recapitalisation of all these banks has not been completed." Moody's, the rating agency, has estimated recapitalisation will cost at least Rp732,000bn, or about Pounds 55bn. Part of this bill comes in next year, when the first batch of government bonds issued for the recapitalisation start bearing interest.

The Bank Bali scandal has highlighted the abuse of a government guarantee on most bank liabilities, offered in early 1998 to halt a run on the banks. The guarantee restored depositor confidence but it lapses in January, and members of parliament oppose a renewal.

The Financial Times

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