No. 6 — February 11, 2000


Weekly Review

--- by Marc Castellano

International donors pledged up to $4.7 billion in aid for Indonesia at a February 1-2 meeting of the Consultative Group on Indonesia, organized by the World Bank. Japan, Indonesia's most important provider of development assistance, offered $1.6 billion, while the World Bank committed $1.5 billion and the Asian Development Bank pledged $1.1 billion. The balance will come from the nearly three dozen other countries and international organizations that make up the group. The money will be disbursed during FY 2000. About $1 billion of the total is new funding; the rest represents a restatement of previous commitments.

The aid announcement served as an important endorsement of Jakarta's three-month-old government and its new reform program, unveiled in January by President Abdurrahman Wahid. The plan, which emphasizes macroeconomic stability, bank and corporate restructuring, social justice and improved governance, was drawn up in conjunction with the FY 2000 budget and detailed in a late January letter of intent to the International Monetary Fund (see JEI Report No. 4B, January 28, 2000). Indonesia, the country hardest hit by the financial and economic crisis that struck East Asia in mid-1997, is struggling to deal with a host of enduring economic and political problems. Despite Jakarta's continued dependence on outside funding sources, recent allegations of corruption and long-standing concerns about political and social stability have led some frustrated donors to pull out.

Last August, a private audit of Bank Bali, an insolvent financial institution under the government's reform program, indicated that some $80 million may have been illegally transferred to a political party (see JEI Report No. 41B, October 29, 1999). This revelation followed months of public doubt on the part of IMF officials and other outsiders about Jakarta's commitment to economic, political and social reform. In the wake of the report's release, both the IMF and Tokyo suspended their lending programs. More recently, an independent audit found that Indonesia's central bank may be technically bankrupt.

Political factors also remain a major concern despite the change in administration. The resolve of the Wahid government has been tested by a growing separatist movement in Aceh province and by episodes of religious violence in areas around Ambon province. Moreover, fallout from the situation in East Timor, the territory that voted for independence from Indonesia in August amid violence by pro-Jakarta militia groups (see JEI Report No. 36B September 24, 1999), has caused tension with the military. An Indonesian human rights panel recently accused top military officials, including former armed forces commander Gen. Wiranto, of involvement in crimes against humanity in East Timor. Mr. Wahid not only has asked the general to resign his cabinet post but also has repeatedly refuted the rumor that a coup is imminent.

Despite the delicate situation, just days after the consultative group met, the IMF formally approved a three-year, $5 billion loan to support Jakarta's structural and economic reform program. About $349 million was released immediately; future disbursements are contingent on performance reviews. The restored relations between Jakarta and the IMF signaled another vote of confidence for Mr. Wahid's administration.

Most of the donor community, Japan included, is lining up behind the new leader, hoping that he will be able to get the country back on track. At the donor meeting, held in Jakarta, the Japanese participants expressed optimism about Indonesia's near-term future. They also highlighted Japan's latest contribution to the recovery effort. Roughly ¥28 billion ($254.5 million at ¥110=$1.00) in new loans, technical cooperation and grants will be provided. In addition, two recently committed yen loans, worth a combined ¥137 billion ($1.2 billion), will be released in FY 2000.

Ahead of the donor meeting, Tokyo indicated that it would reschedule the repayment of ¥100 billion ($909.1 million) in loans to Indonesia. An additional ¥200 billion ($1.8 billion) in repayments due between January 2001 and March 2002 also may be restructured. Because Japanese aid administrators traditionally have looked askance at debt relief or rescheduling, the action represented a policy break. Other creditor nations have allowed Indonesia to forgo debt repayments in order to cope with its severe cash-flow problems. Tokyo, in contrast, simply provided fresh loans, arguing that debt restructuring would make it difficult to extend loans in the future.

This time, however, Japanese officials apparently gave greater weight to Jakarta's attempt to gain more control over its already unwieldy debt burden. They also concluded that the new arrangement would support Mr. Wahid's reform agenda. Details of the rescheduling have not been released. The final agreement will be announced at the next meeting, possibly in March, of the Paris Club, an international group of lenders that convenes periodically to negotiate unified settlements with nations in imminent danger of default. Tokyo pledged that the debt rescheduling would not adversely affect future decisions about loans for Indonesia.

With a new administration and a fresh reform plan, Indonesia has managed to win back the support of the international community — at least for now. Japan, along with other donors, seems cautiously upbeat about the country's recovery prospects. A statement by Jean-Michel Severino, World Bank vice president for East Asia and chair of the consultative group meeting, summed up the prevailing sentiment: "There is a new sense of optimism that Indonesia can indeed resume the path of real development and yet, events in the past six months have shown us that stability is fragile and that optimism — without sound action and steady progress — can quickly fade."

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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