World Bank to Indonesia: "Restore confidence"

["Ian Murray" <seamus2001@xxxxxxxx>]

 [Jakarta Post]
 WB urges RI to restore confidence in 6 months
Berni K. Moestafa, The Jakarta Post, Jakarta

The World Bank urged the government on Wednesday to restore business
confidence in this country within six months, as opportunities to
revive that confidence was running out quickly.

The World Bank Vice President for the East Asia and Pacific Region,
Jemal-ud-din Kassum said investor confidence had fallen sharply on the
heels of a deteriorating global economy.

"We at the World Bank believe that Indonesia now has a narrow window
of opportunity over the coming six months to restore that confidence."
he said in his opening speech before participants of the Consultative
Group on Indonesia's two-day meeting in Jakarta.

Kassum chairs the meeting of the CGI, which groups together
Indonesia's major donor countries including multilateral donors such
as the World Bank, and the Asian Development Bank (ADB).

Indonesia hopes to secure some Rp 35.4 trillion (about US$3.32
billion) in new loans from the CGI, to help finance next year's state
budget deficit.

"This immediate opportunity needs to be seized urgently by Indonesia's
political leaders to lock in macroeconomic stability, restore momentum
to the policy reform agenda and move decisively to reduce poverty and
vulnerability," Kassum said.

Deteriorating confidence in the country's investment climate, has been
a constant barrier to revitalizing the economy since it first plunged
into crisis in 1997.

As a result, a World Bank report states that more than half of
Indonesia's population of over 210 million have descended into
poverty, living at less than $2 a day.

However, efforts to reverse this situation through economic growth may
rest more on the private sector than the government.

As budget constraints limit government spending capacity, the economy
must turn to the private sector for growth.

Even within Indonesia, a weak banking sector withholding affordable
funding sources, is causing domestic investment to run scarce.

For this reason instilling confidence among foreign investors is
vital, according to the World Bank.

Kassum gave no explanation for his six-month timeframe, but made it
clear that uncertainties on the global front are sure to cut short any
confidence remaining among foreign investors.

"For the first time since the onset of the crisis, the huge domestic
risks that Indonesia faces are now covered by a new layer of equally
dangerous external risks," Kassum explained.

He was referring to the Sept. 11 terrorist attacks in the United
States that accelerated the slump into a global recession.

In addition to a scarcity in foreign investments, the downturn also
means a drop in export revenues, which last year, along with consumer
spending, had kept the country's economy afloat.

According to the World Bank, one major barrier to the return of
foreign investment was the country's weak legal system.

The issue of corruption tied to legal reforms formed part of the
discussion in the CGI meeting for the first time.

In the past few years there have been a string of legal disputes
involving foreign investors, which have had a negative impact on
market sentiment.

"We will look closely at the justice sector, a major factor in the
slow recovery of investment levels," Kassum said.

In response to the foreign criticism, Minister of Justice, Yusril
Mahendra questioned foreign lenders' perceived double standard,
stating that they show interest in legal consistency, but on the other
hand there have been cases where foreigners, have interfered with
legal proceedings to benefit one of their own companies.

"They sometimes try to use their political and economic influence to
obstruct legal proceedings," he said in an apparent reference to a
Canadian insurance company which had the government halt an
investigation.

The government, he said, must refrain from meddling in legal
proceedings, as it was asked to in the case of the Canadian-based life
insurance firm PT Asuransi Jiwa Manulife Indonesia.

"I told them that this is a matter for an independent court,"

Yet it is the court's independence, and lack of checks and balances,
that has often been questioned by foreign investors.

The World Bank lambasted the country's judicial system as carrying a
"systematic bias against foreign investors".

It said the impression among foreign investors was that acquiring
assets from the government was difficult and risky.

2002 external financing needs and the CGI request

(US$ billion): Budget deficit, 4.7; Domestic finance, 2.6; External
finance needed, 2.1; Payment of external debts, 4.9; Total external
financing needed, 7.0; Non CGI financing*, 3.7; CGI financing, 3.3;
Total CGI financing requested, 3.3-3.5

*Includes export credits as well as financing from other sources
including the Paris Club rescheduling.

Source: World Bank staff estimates