Jakarta – The Indonesian government faces an uphill task to stay on the road to recovery this year and will need loans of between 4.2 billion dollars and 4.7 billion dollars from its main donors to finance the 2000 budget, the World Bank said Friday.

In a report prepared for a meeting of the Consultative Group on Indonesia (CGI), the country's largest donor group, here next week the bank said there were "strong reasons to guard against undue optimism" for Indonesian recovery.

Jakarta, still struggling to emerge from the 1997 financial crisis, is also seeking to reschedule 2.2 billion in foreign debt, the report said.

Short-listing the problems bedevilling the government, it named the main hurdles as record levels of government debt, ongoing sectarian violence and deep structural faults and plummetting investment, all of which were casting "a dark shadow over the country."

Government debt it said had "exploded" from 23 percent of Gross Domestic Product before the crisis in March of 1997 to about 90 percent of GDP three years later.

On the plus side it said the country at long last had a popular government with a strong political mandate, macro-economic indicators were stable and oil prices strong.

"Inflation has been virtually eliminated, the rupiah has traded within a narrow range, domestic interest rates have fallen to pre-crisis levels and the risk premium on Indonesian yankee bonds continues to decline," it said.

Recovery so far had been fuelled by "resilient private consumers" at the top end of society, but "consumers cannot fuel recovery for ever," it warned, saying that hopes of a non-oil export-led recovery had been dashed.

At the heart of Jakarta's problems, still, it said, was the restructuring of both the collapsed banking system and mountains of corporate debt. While there had been slow progress on the first, progress in corporate debt had been "glacial," it said.

"The bottom line is ... that the economy is recovering gradually and tentatively through its own internal recuperative powers. For this to be sustained, will be difficult but not impossible."

At a minimum, the report warned, "peace must prevail, sectarian violence cease and political stability remain assured" before foreign investors have the confidence to return.

In a chilling description of how millions of the crisis-affected had avoided falling below the absolute poverty line, it said families had cut down on the amount and quality of their food, three percent had pulled their children out of school and others had relied on pawn shops and borrowing.

But 19.34 percent of the population lived in absolute poverty, it said, and half of Indonesia's households have a 50-50 chance of not being able to stay above it.

The bank said the government of President Abdurrahman Wahid had been caught between a rock and a hard place in drawing up the 2000 budget, with its five percent deficit.

Any larger deficit, it said, would have meant "an unacceptably large increment in government debt" while a smaller deficit would have put contractionary pressures on the economy.

The amount the Indonesian government was asking from the group, it said was enough to finance half of the deficit – or 4.2 to 4.7 billion dollars, with the rest to be financed through taxes.

The 18-page bank report ended with strong warnings to the government against embarking on "ad hoc" decentralization to defuse growing regional demands for a greater share of the economic pie without careful advance planning.

"Managed badly," it said, decentralization could "hurt the poor, squander resources and bring fiscal instability."