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Wednesday, September 8, 1999 Published at 16:18 GMT 17:18 UK

Business: The Economy

Loans to Indonesia under threat

Indonesia's poor have suffered as prices of imported rice soared

Pressure is growing to use economic sanctions against Indonesia over the East Timor crisis. BBC News Online's Steve Schifferes examines how effective they might be.

Indonesia, which was hard-hit by the Asian crisis, is highly dependent on Western aid.

[ image:  ]
But any attempt to use that aid as a lever to pressure the government over East Timor could easily backfire - undermining the fragile move towards democracy in the world's fourth most populous nation.

It could also threaten the recovery elsewhere in Asia, as any economic meltdown in Indonesia could send shockwaves to financial markets worldwide.

'Grave concern'

Nevertheless, the World Bank and the International Monetary Fund (IMF), which organised a $47bn (£29bn) bailout of the economy in 1997, say they are deeply concerned about the security situation in East Timor.

The IMF says it is reviewing its plan to send a mission to Jakarta in mid-September, a prerequisite to the release of the next instalment of IMF assistance, saying it viewed the situation with "grave concern."

The World Bank went further, reminding Indonesia that it had pledged to keep to international agreements on East Timor at a donor conference in July where $5.9bn in additional aid was pledged.

[ image:  ]
"We join with the IMF and our other partners in supporting a rapid response to the deteriorating security situation, in order that initiatives for economic recovery and poverty reduction may proceed in both Indonesia and East Timor," it said.

"There is only one threat that Indonesia will really listen to, and that's cash," said a Western diplomat. "As long as funds are not cut off to Jakarta, they will continue to defy the world."

Economy still weak

Worries about the threat to withdraw aid hit the Indonesian currency, the rupiah, which fell to a six-month low against the dollar.

By 9 September the rupiah was quoted at 8,725 to the dollar compared with 7,870 two days before, despite an attempt by the Central Bank to boost the currency.

And the Jakarta stock market fell by 4.5% as investors sold off across the board.

Other Asian currencies also came under pressure, including the Korean won, the Thai baht and the Philippine peso.

The Indonesian economy is still recovering from the collapse of the currency in 1997, when the value of the rupiah fell by 80% - leading to the economy as a whole shrinking by 16% the following year.

[ image: Savings disappeared as banks failed]
Savings disappeared as banks failed
The currency collapse boosted the price of exports like rice, dramatically increasing the poverty rate among Indonesian citizens.

It also made it impossible for Indonesia to repay its vast commercial loans to Western banks, who had lent Indonesian companies around $45bn (£30bn).

Among those creditors are HSBC, Standard and Chartered, Barclays, and NatWest. The huge losses facing Western banks may explain the reluctance of the US and the UK to intervene.

Xenophobic backlash

Ultimately, any freeze on aid to Indonesia will be a political decision.

It will be discussed at the APEC summit at New Zealand this weekend- a meeting Indonesia's leader, BJ Habibie, is now boycotting.

US Secretary of State Madeline Albright bluntly warned Indonesia it would "suffer in a variety of ways" unless it moved decisively.

[ image: Indonesia's economics minister still hopes for rescheduling]
Indonesia's economics minister still hopes for rescheduling
But any major withdrawal of aid could have major repercussions both for Indonesia's transition to democracy - with Presidential elections scheduled for November - and for Western banks.

"A xenophobic backlash could grow in Indonesia as the international community wields its big financial sticks at Indonesia's moribund economy," said Gerry van Klinken of Inside Indonesia magazine.

The military, who have pledged not to stage a coup, are particularly sensitive to foreign interference.

Japan, Indonesia's largest foreign aid donor, says it has no plans to withdraw its aid.

"We will strongly urge Indonesia to fulfil its obligation, and now is not the time to discuss measures about what to do if it didn't," said Japanese foreign minister Masahiko Komura.

Indonesia's economy minister, Ginanjar Kartasasmita, meanwhile, is still pressing Western donors to reschedule some $6bn in debts that fall due next year.

He said talks were taking place with the US, the IMF and other donors about the rescheduling. "Let's wait for the outcome," he added.

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