Jakarta – The World Bank's private sector arm said on Wednesday it had temporarily frozen all funding to Indonesia mainly because of a court ruling over one of its debtors.

The announcement by the International Finance Corporation (IFC) marks another public relations black eye for Indonesia's faltering efforts to revive its economy and comes on the eve of the naming of new President Megawati Sukarnoputri's cabinet.

The IFC – which has total investments of around $800 million in Indonesia – recently lost a second Supreme Court appeal over a bankruptcy case involving local finance company PT Panca Overseas Finance .

"It's a freeze, a temporary freeze," IFC's Indonesia manager Amitava Banerjee told Reuters. When asked what would be required for funding to resume, he said: "... The government has to demonstrate its commitment and its concern for foreign direct investment by actually signalling what can be done." He said $250 million worth of projects currently in the pipeline – of which the IFC would invest $60 million – had also been frozen.

Indonesia's graft-ridden legal system has been a key impediment to foreign investment, which plunged amid the Asian economic crisis of the late 1990s.