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Down to Earth IFIs Update

No. 19, September 2001

A New Letter of Intent (LoI) Signed

Indonesia finally signed a new Letter of Intent (LoI) with the International Monetary Fund (IMF) on August 28, 2001, to resume the Fund's USD 5 billion bail-out package to Indonesia. The IMF Executive Board is expected to approve the LoI on September 10, 2001, after which the USD 400 million disbursement will be made.

The LoI contains 35 points of reform that focus on macroeconomic stability. The tone of the new LoI is more co-operative than directive. However, the agreement requires hard work by the Indonesian government, including (1) keeping the budget deficit at 3.7% of the GDP (currently 5%); (2) meeting a timetable for sales of assets taken over by the state from the failed banking system, and (3) partially privatising state-owned companies to raise cash for the budget. The Fund also demands that asset sales be accelerated to create an economy that is more open to foreign investors and allows for a more rapid restructuring of the banking system.

Indonesia is also required to keep inflation between 9 and 11% (above an earlier target of 9.3%) and achieve GDP growth of between 3 to 3.5% (down from 4.8% last year). This will not be an easy job for the government. According to Bustanul Arifin of INDEF -- a Jakarta-based think-tank -- for every increase of 1% of GDP, the governmenthas to provide 400,000 new jobs. Meanwhile, the Fund also requires contingency funds to help support the local economies of provinces in deficit.

The signing of the LoI is considered a major achievement for Megawati's administration. The market reacted positively to the incoming disbursement of USD 400 million and saw it as a sign of confidence from the IMF. The LoI also requires the Government of Indonesia (GoI) to obtain a rescheduling facility from the Paris Club of creditor nations, which meets on September 10, 2001.

The economic team's ability to implement the LoI targets remains to be seen. Although many of the targets are achievable, they will be challenging for the GoI. However, the public as well as donor agencies are willing to give the government the benefit of the doubt. Observers said that the IMF move might help resuscitate the economy in the short-term, but long-term recovery very much depends on whether or not Jakarta has the political will to push through painful reform measures.

In the mean time, President Megawati Soekarnoputri reminded Indonesians that the recommencement of the IMF loan program did not mean that Indonesians could simply celebrate. The IMF package is a loan and not a grant. She further asserted that Indonesia should not continue to be a debtor nation.

(Sources: Dow Jones Newswire, August 27, 2001; Business Times, August 28, 2001; Strait Times, August 28, 2001; Kompas, August 28, 2001. Jakarta Post, August 28, 2001; AFP, August 28, 2001.)

Indonesia Needs More than USD 4.1 Billion from CGI This Year

Last year, the donor countries and organisations in the Consultative Group on Indonesia (CGI) pledged USD 4.1 billion in loans and USD 500 million in grants to Indonesia. This year, the Group will need to raise its pledge in order to provide Indonesia the funds it needs for the budget. Indonesia is scheduled to repay USD 7.3 billion in foreign debt this year. Another USD 4.4 billion in short-term debts are due by April 2002, although the Paris Club of creditor countries is expected to reschedule USD 2.8 billion of the debt that is due in November 2001. State Minister for National Development Planning (Bappenas), Kwik Kian Gie, refused to disclose the exact amount requested from the CGI which meets in November 2001 in Indonesia.

The Consultative Groups (CGs) are informal bodies under the facilitation of the World Bank which comprise countries and public international financial institutions that provide loans and grants to applicant countries. The Consultative Group on Indonesia (CGI) meets once or twice a year to pledge new loans and grants to Indonesia. The Paris Club is an informal group of official creditors whose role is to find co-ordinated and sustainable solutions to the payment difficulties experienced by debtor nations.

(Sources: Jakarta Post, August 29, 2001; Dow Jones Newswire, August 28, 2001).

Indonesia's National Banks' Foreign Debt Bailed Out by the State According to the Frankfurt Agreement

At the end of August 2001 and continuing for the next five years, the 38 Indonesian national banks grouped under the Frankfurt Agreement are obliged to start making debt repayments in instalments to their foreign creditors who are represented by 13 foreign banks. The total debt of these banks is USD 6 billion, with the first instalment of USD 1.2 billion.

Signed in 1998, the Frankfurt Agreement allowed the Indonesian banks a three-year grace period for repayment of principal debts. Under the terms of the agreement, the Indonesian Central Bank fully guarantees all debt repayments for banks that have been closed down, but not for banks that are still operational. If operational banks fail to repay their debts, the Indonesian Bank Restructuring Agency (IBRA) will take over the responsibility. In either scenario, the burden of repayment will eventually pass to the Government of Indonesia (GoI). The GoI will sell the failed banks' assets to cover payments, even though there is no guarantee that the sale will cover the bail-out.

(Source: Tempo, August 28 – September 3, 2001)

Australia and World Bank Initiate Study of Indonesia's Debt Structure

Australian Foreign Minister Alexander Downer said that Australia is undertaking a joint study with the World Bank on the composition and management of Indonesia's foreign debt. This effort aims to ease the massive debt burden of Indonesia and find out how the international community could help. Downer claimed that the joint study was agreed upon during World Bank President Wolfensohn's visit to Australia in early August 2001.

The study will investigate the amount of loans misused by corrupt officials and determine whether adjustments to payment schedules – beyond those already agreed by the Paris Club – could ease the burden for the new administration of President Megawati. Australia has shown very strong support to Megawati since she was elected President on July 23, 2001.

(Source: Reuters, August 7, 2001).

World Bank "Global Development Gateway" Seen as an Attempt to Control Information

Calling itself the "knowledge bank", the World Bank is building a new, multi-stakeholder, USD 70 million supersite, called the "Global Development Gateway" (GDG). The GDG website aims at providing an overview of key policy issues and links to sites about the Bank. The Bank is recruiting editors to examine websites across the world to see what exists on pertinent issues, and post links to materials that meet their quality standards. The Bank claims that the GDG will deliver knowledge and expertise to communities world wide through transparency, inclusion, and interactivity.

Critics including Alex Wilks from the Bretton Woods Project in the UK have raised concern that this attempt will weed out diverse and conflicting views on development. Anriette Esterhuysen, Executive Director of theAssociation for Progressive Communications, said that the GDG will pose as a filter for development-related information that would decontextualize the content it disseminates, neutralize and de-politicize information, and create an illusory atmosphere of consensus and universality. Most significantly, Esterhuysen stated that no matter how inclusive the GDG attempts to be, it is still mediated by the North. The World Bank website already gets over four million page hits per month. Combined with the GDG, these sites can be seen as a strategic attempt to capture control over information technology on development resources and themes.

(Summarized from "World Bank in Major Internet Move" by Alex Wilks. February 2001.
Contact: Alex Wilks at

Indonesia to Pay USD 400 Million Compensation to Guarantee Company and Creditors

On July 31, 2001, former Finance Minister Rizal Ramli signed an agreement with the US Ambassador to Indonesia, Robert Gelbard, for the payment of OPIC's claim against the state-owned power company, PLN. PLN failed to keep a contract with U.S. company Cal Energy to build the Dieng and Patuha geothermal power plants. Former Minister Ramli was in President Abdurrahman Wahid's cabinet which became defunct when Megawati Sukarnoputri took over the presidency. Ramli, however, claimed that President Megawati had asked him to continue his role while a new cabinet was being formed.

Sources inside the government said that Ramli was under strong US pressure to sign the agreement. Ambassador Gelbard repeatedly threatened to confiscate the government's or PLN's assets if the OPIC claim was not settled. Furthermore, the US government also threatened not to sign debt rescheduling in the Paris Club if the claim was not settled. It is most probably this threat that pressured former Minister Ramli into signing the agreement. It was also reported that the signed agreement states an interest rate of 6.21%, different from the originally agreed rate of 6.125%. As a result, Indonesia would have to pay out an additional USD 225,000 in interest per year.

The agreement was signed without the knowledge of the House of Representatives (DPR) even though the compensation will be paid out of the State Budget, which requires approval from the DPR.

Minister of Energy and Mineral Resources, Purnomo Yusgiantoro, said that the USD 400 million compensation payment would be pursued through the Paris Club mechanism, allowing a three-year grace period and 14 years of instalment payment, with annual interest rate around 6 percent. However, a source in the Central Bank revealed that it would not release the payment unless the new President and the DPR approved the agreement.

The GoI obligation to OPIC emerged when it decided to postpone the development of the Dieng and Patuha geothermal power plants following the financial crisis in 1997. Cal Energy, the contractor, bought a risk guarantee from OPIC. The postponement of the two projects has forced OPIC to pay Cal Energy risk coverage. In return, OPIC is demanding that Indonesia pay compensation for the postponement. An international arbitration panel ordered Indonesia to pay OPIC USD 260 million and another USD 140 million to Cal Energy's bank creditors, Credit Suisse, First Boston, BNP Paribas, and MBIA Insurance Corporation.

It is alleged that power purchase agreements between PLN and independent power producers, including Cal Energy, were marked up during Soeharto era.

(Sources: Petromindo, August 4, 13 and 14, 2001; Tempo Magazine, August 7-13, 2001 and August 28 – September 3, 2001)

World Bank Funds Road Project in Central Kalimantan

A road project in Central Kalimantan is being built with a World Bank loan of Rp 100 billion (approximately USD 11 million). The project that began at the end of 2000 will shorten the time needed to travel from Central Kalimantan's Capital of Palangkaraya to South Kalimantan Capital of Banjarmasin, from 5 hours to 3.5 hours. The project is 50% completed.

The Governor of Central Kalimantan, Asmawi Agani, is convinced that the project will boost the economic development of Central Kalimantan. He said that the Provincial Government is also seeking funds to open access to isolated areas.

(Source: Kompas, August 27, 2001)

The WB/IMF Annual Meeting 2001 cancelled

The World Bank and IMF decided on September 17, 2001 to cancel the Bank/Fund's Annual Meeting scheduled on September 29-30, 2001 in Washington, D.C. due to the attacks on the U.S. on September 11, 2001. World Bank President James Wolfensohn and IMF Managing Director Horst Köhler said in their press release that the decision was taken out of deepest respect and sympathy for the families of all those touched by the horrific events of September 11, 2001, and in order to dedicate law enforcement personnel fully to the extraordinary and immediate priorities at hand.

Most of the public events and activities around the Annual Meeting initially organised by different citizen groups have also been cancelled. A number of teach-in events will continue to take place while some organisers are turning their events into themes on courses of action by the U.S. Update on the activities can be found at the Bank Information Center's website

This IFI update is published by Down to Earth, the International Campaign for Ecological Justice in Indonesia.

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