Down to Earth IFIs Update

On January 20, 2000, the Indonesian Co-ordinating Minister for Economy, Finance and Industry Kwik Kian Gie, signed on behalf of the Indonesian government (GoI), a new loan agreement with the IMF.

The new agreement will gradually release US$5bn (of which US$4bn is new commitment) from the IMF and would facilitate up to a total of US$10bn from February CGI according to USA Treasury Secretary, Lawrence Summers.

Of the US$43bn rescue package the IMF has now almost fully disbursed it's commitment US$11bn.

The new IMF agreement had a number of changes. New conditions and target dates were attached to the loan. The government promised to undertake ambitious structural reforms in many areas, including the banking system; fiscal and trade policies; fiscal decentralization; corporate restructuring; legal reform and governance; reform of the energy sector; investment policy; agriculture policy and forestry. The 43-page memorandum includes proposals for doubling the share of the provinces in government spending by 2002, further privatisation and reduction of the very large public-private sector pay differentials.

Perhaps the most contentious condition is the reduction and eventual elimination of fuel and fertiliser subsidies. The Letter of Intent (LoI) says the Indonesian government agrees "to start the process of gradually reducing untargeted subsidies, while protecting small household users from their impact" and that "no reintroduction of fertilizer subsidies is planned. However, for social reasons, we will continue with subsidies for transportation and fertilizers to remote areas, as identified by decree."

This less dogmatic IMF position appears to reflect the Fund's new mandate (from Autumn 1999) to focus on poverty reduction rather than stabilisation and growth. However concern remains that even if targeting is possible only the very poor will retain subsidies. Evidence from the Social Safety Net funding has been that effective targeting is incredibly difficult and has led to resentment and conflict in certain parts of Indonesia.

Following the signing of the agreement, the IMF's Executive Board is expected to meet on Feb. 4 to approve a total of US$5 billion in loans to Indonesia. Dodsworth, IMF Indonesia Staff, said the IMF would likely release the first instalment of the loans, $400 million, the same day as the CGI meeting. He said. "I think we would be wrong to hold up support for the new government because of faults in the past." The IMF suspended loans to Indonesia last September after the Bank Bali corruption scandal and East Timor violence.

The full Letter of Intent is available at:

http://www.imf.org/external/np/loi/2000/012000.HTM

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On February 2, 2000 the CGI (Consultative Group on Indonesia) met in Jakarta. The group of donor countries and agencies pledged up to US$4.7bn to cover the GoI budget deficit of US$6.6bn (5% of GDP). On the same day, the World Bank released half of the US$0.6bn of Social Safety Net loan. These funds are in addition to the new US$4bn of IMF lending announced in January.

The total amount, although less than last years CGI of US$5.9bn was still unexpectedly high and slightly more than the US$ 4.4bn the Indonesian government asked for. The size of funds demonstrated the international donor communities' intention to support Indonesia's new democratic government, according to the World Bank East Asia Vice President Jean Michel Severino.

Over 1000 protestors outside the CGI meeting and 180 NGOs dubbed it 'the Coalition of Global Imperialists'. NGOs and protestors were not allowed to address the meeting. They called on GoI to reject new loans, seek debt reduction of 20% and cancellation of corrupt Suharto period debts. NGOs said new loans would only cause more suffering and that so far loans had only benefited a small group of people whilst by- passed most Indonesians. The World Bank says Indonesia does not qualify for debt reduction.

Although the GoI had asked for 2.2bn in debt rescheduling there was no discussion on this contentious issue. Half of government revenue is used for domestic and foreign debt repayment, the majority of which is recapitalizing the banking system.

Opening the CGI meeting, Vice President Megawati said Indonesia's economic problems were due to the corruption of the Suharto years and that globalisation was not to blame, rather GoI would pursue globally orientated economic development.

The CGI includes 33 donor countries, the World Bank, the Asian Development Bank, the Islamic Development Bank, European Union countries, Australia, South Korea, USA and Canada. Of the CGI commitment of US$4.7 bn only US$0.52bn was grant, the rest being loans. The largest contributors were Japan (US$1.56bn) World Bank (US$1.5bn) and the Asian Development Bank (US$1.07bn).

For more information about the Consultative Group Meeting on Indonesia, contact Kimberly Versak, World Bank Indonesia External Affairs Office, Tel.: (62-21) 5299-3084, Fax: (62-21) 5299-3111, or Loty Salazar, World Bank Washington External Affairs Office, Tel. (202) 458-2559; Fax: (202) 522-3405;

CGI 2000 web-site

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