The IMF's Asia-Pacific representative, Hubert Neiss, said after talks with President Abdurrahman Wahid that it was vital that the country strengthened its banking supervision and ensured the political independence of the Indonesian Bank Restructuring Agency.

Anoop Singh, IMF's Deputy Director for Asia Pacific Region

However, he welcomed publication of a full report on the Bank Bali scandal, which had been cited by the International Monetary Fund as one of the main reasons it suspended lending in September amid international condemnation of violence in East Timor.

Bank failiures were compounded by corruption

The IMF was concerned that an $80m payment by Bank Bali to a government agency connected to the ruling Golkar party had been used to fund its election campaign.

The previous administration had blocked the publication of the results of an audit of the bank by international accountancy firm PricewaterhouseCoopers.

But on Tuesday the new finance minister Kwik Kian Gie handed a full copy of the report to the IMF.

He denied that Jakarta had bowed to international pressure.

"It's not correct to say the IMF pressured us," he said. "We did in fact promise to disclose this audit."

Talks on lending

Mr Neiss said that the IMF is prepared to resume lending before the full legal process in regard to Bank Bali is complete - but he insisted that "full transparency" - including the publication of the audit was necessary.

An IMF team will arrive in Indonesia next week to begin discussions that could lead to the release of up to $4.6bn in aid.

The money is sorely needed to support the flagging economy that has made the weakest recovery of any Asian country.

Poverty levels have increased dramatically, while many of the country's firms and banks are virtually bankrupt, awaiting recapitalisation by the government.

The IMF said that although private bank restructuring has progressed, there was still much to do to restore confidence in the country's state-owned banks.

Endemic corruption

The Bank Bali report confirmed the endemic corruption that has so undermined the economy.

It said that $2.2m was paid directly by the Bank to the Golkar party's funds, and it called for further investigation of the role of two former ministers and the central bank governor Syarhil Sabirin.

But many people remain sceptical that they will ever be brought to justice, despite calls from the IMF for full legal action.

The Jakarta stock market even fell slightly on fears that there would be no concrete action following the publication of the report.

Overseas investors are also watching to see whether the new government of Mr Wahid will address the issues of corruption and lack of accountability before they will resume lending.