[asia-apec 1726] World Bank to cut Indonesian aid

[Kevin Yuk-shing Li]

INTERVIEW-World Bank to cut Indonesian aid

By Joanne Collins

JAKARTA, Jan 29 (Reuters) - The World Bank said on Monday it would cut its
$1.2 billion aid programme to Indonesia because it did not want to add to the
country's high debt burden and was fearful of giving money to newly-empowered
regions.

The magnitude of the cut will be decided in Washington on Tuesday and comes
as Indonesia is struggling to secure fresh loans from the International
Monetary Fund because of its poor progress in economic reforms.

"Because of Indonesia's high debt situation and because there is a move
toward decentralisation, the World Bank's lending programme will be lower
than it was in pre-crisis years," World Bank acting country director for
Indonesia Vikram Nehru told Reuters.

But he said the cut would come as no surprise to the government which had
already agreed to the revised programme.

"The actual amounts are being discussed and have been discussed with the
government and the government is in agreement with this policy," he said.

Indonesia, still suffering badly from the financial crisis of the late 1990s,
is one of the World Bank's biggest debtors, owing a total $12.5 billion.

Indonesia's total foreign debt stood was about $140 billion by the end of
September.

LOCAL GOVERNMENTS NOT READY

The Bank said it was not happy with the government's progress on
decentralisation and feared newly-empowered districts and provinces were not
ready to deal with financial matters.

"Local governments have very little if any capacity at this point," Nehru
said.

Indonesia's regional autonomy laws took effect on January 1 and aim to give
the country's 30 provinces and more than 300 districts a greater say in
running their affairs.

Problems with decentralisation was also one of the reasons the IMF stalled on
a $400 million in December.

Nehru said the cuts were also linked to Indonesia's failure to meet certain
economic targets but it was not a key reason.

"The level of lending will be clearly linked to progress and policy reforms,
he said"

SOFTEN THE BLOW

Tuesday's meeting of the Bank's board of executive directors is likely to
approve a more favourable loan programme for Indonesia, softening the blow of
the funding cut.

Nehru said there would be more International Development Agency (IDA) loans,
which are interest free and have a longer maturity than some of the Bank's
other loans.

"We are trying to improve the terms by allocating a larger share of IDA loans
which are 35-year loans at zero percent interest."

He said IDA loans would be blended with its International Bank Restructuring
and Development (IBRD) loans which have a 20-year maturity and 6.5-7 percent
interest.

"The IBRD loans are ones we give on the basis of what we borrow from capital
markets...the combination of the two would obviously ease the terms for
Indonesia and this is also in recognition of the debt problem," he said.

He said the Bank's new funding strategy would be in place for several years
but would be revised every six months.


ECONOMY BETTER THAN EXPECTED

Nehru also said Indonesia's economy was faring better than expected with GDP,
wages and excess capacity utilisation all rising, but he was somewhat
concerned about inflationary pressures and the lack of investor confidence.

"The financial part of the economy, which is really a reflection of what
people think about the future, is not doing as well," Nehru said.

"Interest rates are beginning to rise, the exchange rate has been decreasing
steadily over the year, the risk premiums for Indonesian securities have also
been rising  -- all these are indications that investors' view the future
with some concern."

($1 - 9,400 Rupiah)