Indonesia given aid lifeline and more time for reforms

TOKYO - Indonesia won a US$5.3 billion aid lifeline as international donors gave President Abdurrahman Wahid's embattled government more time to implement vital economic reforms and restore order in troubled West Timor.

The Consultative Group for Indonesia (CGI), meeting in Tokyo and chaired by the World Bank, pledged an expected US$4.8 billion in aid for 2001 and said it would add US$530 million in technical assistance grants.

In return, Jakarta pledged to inject fresh life into flagging economic and corporate reforms and restore order to lawless West Timor, where three United Nations workers were murdered by pro-Jakarta militias last month.

Economists said the reform pledges were vague and that donors seemed to be giving Jakarta the benefit of the doubt for now.

"I don't think Indonesia can expect to be here at the same time next year asking for this amount of money," said Graham Parry, an economist at Lehman Brothers in Tokyo.

"There's definitely only a set amount of good will it can expect."

The United States and other donor nations had raised the possibility of withholding aid until Jakarta restored order in Timor, but fears this could destabilize the strategically important country eventually carried the day.

President Wahid has come in for widespread criticism during his 11-month rule, but there are few viable successors for the donor community to pin its hopes on.

Jemal-ud-din Kassum, the World Bank's vice president for East Asia and the Pacific, said the donors had strongly voiced their concern over the breakdown of order in West Timor, but added Indonesia had made material progress in recent days.

Jakarta had committed to disarm militias, re-establish order and bring the murderers to justice, and had invited a Security Council mission to the area in November, he said.

Painting a different picture, the United Nations Wednesday rejected Jakarta's claims it was safe to return to West Timor, saying pro-Jakarta militia gangs were still running wild.

Japan, Indonesia's biggest single donor, had rejected linking aid to West Timor and separately announced it would be providing new loans worth around 49.6 billion yen ($460.1 million) over the next few years, in addition to about $1.7 billion of the CGI's original $4.8 billion package.

The CGI comprises 21 countries and 13 institutions, including Japan, the United States, the World Bank and the Asian Development Bank.

The aid, a mix of loans and grants, is needed by Jakarta to plug a budget deficit expected to hit nearly $6 billion next year, but Chief Economics Minister Rizal Ramli said it would be used only as a last resort.

"These pledged resources will be adequate to finance the budget and our development programs, but we recognize they are mostly loans and will add to our government's already onerous debt situation," he said.

In return for the aid, the World Bank said Jakarta had set out a clear poverty reduction strategy and committed itself to further decentralization steps, as well as legal and judicial reforms.

The World Bank said particular attention had been paid to the pace and quality of corporate restructuring and that Jakarta had agreed to work to improve this with the Bank and the International Monetary Fund.

"One message that emerged strongly was the critical importance of keeping the reform program - as described in the government's letter of intent with the IMF - on track," the World Bank's Kassum said.

Separately to the CGI aid, the IMF is engaged in a bailout program for Indonesia's balance of payments in which it sets economic and reform targets in return for aid.

In one of the few concrete steps pledged by Jakarta, Kassum said Ramli had promised to return two nationalized banks, Bank Central Asia and Bank Niaga, to the private sector early next year.

Jakarta's decision to postpone the sales had disappointed investors who saw it as evidence of foot-dragging on reform.

"What's been done up to now (on banking and corporate reform) hasn't really been working and I think the donors would have been looking for more concrete assurances from the Indonesian government," said Lehman's Parry.

- REUTERS

Herald Online feature: Timor mission

UN Transitional Administration in E Timor