87703
                                                                                                                       CONFIDENTIAL
                                                                                                                         EDS2001-0037

                                                                                                                          January 29, 2001




Statement by Franco Passacantando
Date of Meeting: January 30, 2001


                                      Indonesia: Country Assistance Strategy

Overall Assessment

1.      We share the Bank's assessment of the considerable uncertainties and challenges faced
by the Indonesian economy. We welcome the candid discussion of governance issues and of
the risks of continued Bank involvement in the country. We agree on the need to remain
engaged in the country during this transition period. Nevertheless, we are concerned by the
suitability of the CAS scenarios and triggers, the appropriateness of moving to a programmatic
approach, and the possible disengagement in the financial sector.

Suitability of triggers and sustainability of the base case scenario

2.      The CAS identifies the "muddle-through" scenario as the base case scenario. We
commend the transparency of the staff's assessment that this constitutes the most likely
scenario at this time. However, we question the lack of any meaningful trigger for the
proposed level of Bank support in the base case. Specifically, even the base case scenario
should require sustained macro stability and no slippage in structural reforms. We know that
the sustainability of the macroeconomic situation requires progress in the areas indicated in the
high case triggers. We believe, in particular, that the country should be very cautious in
managing and in further increasing Government debt and should make an additional effort to
accelerate bank and corporate restructuring.

3.     We also wonder why the base case does not envisage concrete actions to implement a
broad-based poverty reduction strategy. This is in contrast with the CAS explicit message that
poverty reduction is the focus of continued IBRD and IDA involvement in Indonesia.

4.     Our concerns are highlighted by the IBRD exposure to Indonesia. Given the high level
of Indonesia's outstanding debt to the IBRD ($11.8 billion by end-FYOO) and its status as a
blend country, the financial risks to the Bank are severe. We believe that the guiding principle
for continued IBRD financial involvement should be one explicitly linking continued high
exposure levels to substantive reforms leading to improved creditworthiness.



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may not otherwise be disclosed without the consent of the Executive Director concerned.
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 Appropriateness of moving towards a programmatic approach

5.      The CAS anticipates a move towards programmatic lending in support of governance
and sectoral programs as capacity and fiduciary controls improve at the sub-national level.
The document, however, highlights (in Box 1.1.) that the decentralization process and the
associated regulations issued by the Government on financial management and procurement of
the regions pose the risk of a weakening of the country's fiduciary environment. The report
also notes the impossibility of fully insulating Bank-financed projects from the country
environment (Box 2.1). The CAS is also very transparent in its assessment that the current
"muddle-through" situation will continue, with some slippage in structural reforms.

6.      As we have stressed in other occasions, this Chair believes that the programmatic
approach is not suitable for all borrowers; this instrument should be used selectively and only
for the more mature reforming countries. We do not believe that the programmatic approach
would be appropriate for Indonesia, at least in the short-term. Prior to supporting such an
approach, this Chair would want to see the high case reforms implemented, the
decentralization process advanced, and fiduciary controls at both the national and sub-national
level strengthened.

Continued involvement in the financial sector

7.      Macroeconomic stability will not be sustainable unless fundamental reforms in the
financial sector are implemented. We commend the leadership role taken by the Bank in this
area to date. Going forward, we have three concerns. First, the reform agenda remains
daunting, particularly in the area of bank and corporate restructuring. The Government should
soon implement a medium-term strategy to strengthen the entire fmancial sector.
Consequently, we believe that the base case should include actions to accelerate reforms in
these policy areas. Second, we would have liked to see in the CAS a deeper analysis of and
involvement in the development of non-bank fmancial intermediaries, such as insurance and
contractual savings and the deepening of securities markets. Third, we understand that
financing for the bulk of World Bank technical advice to the financial sector will terminate in
July 2001. World Bank presence in the financial sector must be maintained. We would
welcome management efforts to further explore avenues to continue financing technical
support in this critical area.




This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents
may not otherwise be disclosed without the consent of the Executive Director concerned.