Hamish McDonald – The World Bank warned yesterday that if a political or economic crisis broke out in Indonesia it would cease all new lending until stability is restored.
In a report released in Jakarta, it said a crisis was possible if the Indonesian Government's agreement with the International Monetary Fund collapsed, if there was increased political instability or a widespread deterioration in law and order.
Although the bank said the "most likely scenario" was that Indonesia would continue to "muddle through", with "some slippage in structural reforms" the report has highlighted concerns about a rift between the Government and the IMF.
The IMF has withheld $US400 million due in December because of concerns over Jakarta's proposed bill to amend the central bank law, the new fiscal decentralisation policy and delays in the sale of the government's stakes in Bank Central Asia (BCA) and Bank Niaga.
Indonesia's Co-ordinating Minister for the Economy, Mr Rizal Ramli, has been in Washington this week, meeting IMF first deputy managing director Mr Stanley Fischer and US Treasury Secretary Mr Paul O'Neill in an effort to free up the overdue IMF loan tranche.
The Jakarta Post yesterday reported that the most difficult issue appeared to be the central bank law, which some say could threaten the independence of Bank Indonesia.
Singapore's Business Times quoted unnamed government officials as saying the two sides were at loggerheads on just how involved the IMF should get in micro-managing Indonesia's economic recovery program.
A senior official was quoted as saying: "Mr Rizal does not want the IMF to dictate specifics, for example, when he should privatise Bank Central Asia and Bank Niaga, but the IMF, on the other hand, wants the Government to adhere strictly to the Letter of Intent which is signed by the Government.
"The IMF wants the Government to take decisive action and not to hide behind political excuses."
Financial analysts see agreement with the IMF as critical for Indonesia's major aid donors, including Australia, which are grouped under the Paris Club, which meets in early April to reschedule debt due this year.
The rift with the IMF, which began a three-year $US5 billion loan program for Indonesia at the start of last year, has increased fears of further defaults on Indonesia's huge debt, put by Morgan Stanley Dean Witter at $US262 billion or 170 per cent of GDP.
In a report this week the investment bank said Indonesia was a prime candidate for a permanent debt trap, in which a rising proportion of its economic output was devoted to servicing domestic and foreign debt.
Indonesia's public and corporate debt became a monumental issue because the rupiah's steep depreciation in 1997 and 1998 caught banks and corporations unprepared. A meltdown in the banking system led to nationalisation of most banks.
Since then the Government has made little progress in liquidating assets pledged as security against bank loans that have turned bad, or in selling off equity in banks such as BCA and Bank Niaga – largely because original investors have used political and legal manoeuvres to frustrate the Indonesian Bank Restructuring Agency.
The London investment bank thinks the failure to make progress in reducing debt is putting Indonesia at risk of being caught in a permanent debt trap, where a rising proportion of national output goes to servicing debt.
It said that already in 2000, 8 per cent of GDP was spent on servicing external liabilities, and 40 per cent of the central government's operating expenditure was used to service central government debt.
To get out of this debt trap, Indonesia would have to reduce its public and external debt, excluding short-term foreign debt, to less than 70-80 per cent of GDP.