Stephen Fidler, Washington – The International Monetary Fund has warned Indonesia its proposed central bank reforms could jeopardise release of new IMF loans. The IMF fears the reforms could threaten the central bank's independence.

This is one of three principal areas where the Indonesian government needs to take action before the Fund goes ahead with $400m in new credit under the $5bn programme it agreed last year. Some $1.1bn has already been released.

A rescheduling by the Paris Club of creditor governments of Indonesian debts also hangs on agreement between the IMF and Jakarta.

The IMF has been under increasing pressure to explain why the latest part of the agreement has been held up. Amid political turmoil in the country, the institution is trying to walk a fine line between not contributing further to market uncertainty and pressing for what it sees as essential reform.

According to senior fund officials, the fund is urging the Indonesian government to undertake a review of central bank practices in other countries before moving ahead with its legislation.

They said the IMF was also seeking safeguards to prevent government decentralisation worsening public finances and guidelines for the Indonesian Bank Restructuring Agency, which holds some $40bn in bank assets taken over during the country's 1997-98 financial crisis.

With evidence of past corruption at the central bank, the government and parliament are working on legislation that could make it easier to remove its governor and board, and requiring it to report directly to the government and legislature.

"An independent central bank is crucial to a credible macroeconomic framework," Anoop Singh, deputy director of the Fund's Asia and Pacific department, said in an interview. "The process that might be under way – if pursued and implemented - could in a lasting way damage the independence of Bank Indonesia," he said.