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Friday, 23 February, 2001, 18:43 GMT
Indonesia at the crossroads
Sampit, Indonesia
Ethnic tension, such as recent violence in Kalimantan province, inhibits economic reform
Indonesia is wavering at the crossroads of its economic development.

One direction spells conflict with the International Monetary Committee and the World Bank, and subsequent loss of much-needed funding.

The other sign points to new loans and the chance to achieve increased economic growth.

The World Bank warned on Friday that it might be forced to withdraw from aid programmes for Indonesia if the country fails to resolve its current dispute with the IMF.

The IMF is unwilling to release a $400m loan until the government agrees to a package of reforms.

Map of Indonesia
The IMF believes Indonesia's progress on reform is slow
The stalemate occurred after the IMF became dissatisfied with Indonesia's progress on restructuring its banks and big companies.

With half of all Indonesians vulnerable to poverty, rife corruption and an entrenched bureaucracy, the country desperately needs to choose the path to economic reform.

The World Bank's assistance

On Friday, the World Bank unveiled its latest assistance programme for the country.

The programme has two tiers.


This is not a desirable outcome and not the one we should aim for

Mark Baird
World Bank
Under a "base case" lending programme - where Indonesia's economy grows at a low 4% for the next three years - the Bank would lend up to $400m a year.

"This is not a desirable outcome and not the one we should aim for," said Mark Baird, the country director for Indonesia at the World Bank.

However, if Indonesia manages growth of 5% to 6%, the Bank is willing to step up its lending to about $1bn a year from 2002.

This would be contingent on the accelerating the reform process in Indonesia. The government would also need to instigate institutional reform to protect public funds from misuse and channel them effectively to the poor.

Focusing on poverty

In its assistance programme, the World Bank plans to focus on supporting social services and basic infrastructure for the poor.

Mr Baird also said that it will strengthen its "portfolio management" to protect against the risks of corruption.

In the past the Bank has been embarrassed by the huge losses of loans in Indonesia through corruption in the banking system.

'Crippling legacies'

Mr Baird also said some progress had been made in Indonesia since the Asian financial crisis of 1997, but added the new government was "saddled with crippling legacies from the past".

These include weak political and market institutions, bureaucracy, corruption and ethnic and regional tensions.

Recently, violence has spread in the Indonesian province of Kalimantan, where more than 165 bodies were recovered after six days of fighting.

The choice for Indonesia may be obvious to many observers, but the country will have its work cut out implementing such reforms.

But talks earlier this week between IMF deputy managing director Stanley Fischer and Rizal Ramli, Indonesian economics minister, were apparently productive.

The two sides have agreed to "intensify" discussions, the IMF said on Friday.

Such hints of progress suggest Indonesia might just choose the right path.

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See also:

23 Feb 01 | Asia-Pacific
Violence spreads in Borneo
08 Dec 00 | Business
Indonesia bank chief in forgery row
02 Oct 00 | Business
Indonesia budget boost for regions
07 Sep 00 | Business
Indonesia signs new IMF deal
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