World Bank freezes all new loans to Indonesia

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THE WORLD Bank froze its $1bn-a-year loan programme to Indonesia yesterday in a move that will increase pressure on it to end the atrocities in East Timor.

The bank said the move was in protest at a serious banking scandal that had until recently dominated the political agenda. But it comes just a week after the International Monetary Fund put its lending on hold in protest at the violence in East Timor.

James Wolfensohn, president of the World Bank, said there would be no more lending until the controversy over a pounds 70m payment by Bank Bali to a leading figure in the ruling Golkar party had been resolved. "We have programmes of approximately $1bn a year to Indonesia, and they are all on hold until we can get this scandal clarified," he said.

"It is very clear that Indonesia needs to reorganise itself internally to continue to grow. If you want to ensure there is stability you need growth and resources need to be made available, but there would be no sense in putting resources in until you've got the base right."

Mr Wolfensohn said Bank Bali had been its top priority until the East Timor crisis erupted. Last week the World Bank called on Indonesia to quell the anti-independence rioters, saying it was "deeply concerned" by the violence.

The IMF has expressed "grave concern" over "the deteriorating situation". Indonesia's $45bn rescue package includes $12.3bn from the IMF, of which $2.3bn still has to be approved. The next pay-out would have been for $450m.

Syahril Sabirin, the head of Indonesia's central bank, said the suspension of loans would have an impact on its devastated economy, which contracted almost 14 per cent last year in the deepest recession for a generation. He said: "I have never said it will not have any impact on us if the IMF suspends loans."

Standard & Poor's said it was considering downgrading its ratings of Indonesia's short-term government debt and its currency credit. It said its decision to put its ratings on "credit-watch negative" was driven by the risk that loan suspensions by the IMF and World Bank could be for an extended period.

It said the $27bn of central bank reserves were sufficient but were vulnerable to currency movements. The rupiah has plunged 12 per cent since the crisis began, but recovered yesterday following the decision to allow in foreign troops. The rupiah rose 5.6 per cent while the Jakarta stock market rose 1.2 per cent.