Donors set to approve vital Indonesia aid
By Stuart Grudgings

TOKYO, Oct 17 (Reuters) - Indonesia got a vote of confidence from its biggest aid benefactor on Tuesday as donors began a two-day meeting in Tokyo to approve a $4.8 billion aid package aimed at keeping the fragile economy afloat.

Japan, Jakarta's biggest single donor, said it would maintain its "robust stance" towards helping President Abdurrahman Wahid's government.

"The administration is facing difficulties but they are tackling the issue of structural reform and the security situation," Foreign Ministry spokesman Ryuichiro Yamazaki told reporters. "As we see it, overall, things are moving in the right direction."

Economists and diplomats say criticism of Jakarta's handling of the volatile situation in West Timor is unlikely to stand in the way of approval of the $4.8 billion aid package, which the country needs to help plug a gaping budget deficit.

Japan pledged $1.56 billion at the last Consultative Group on Indonesia (GGI) meeting and, with much of its oil and gas passing through Indonesian shipping lanes, has a big interest in maintaining stability there.

The CGI, chaired by the World Bank, is scheduled to announce its response to Indonesia's aid request for 2001 at a Tokyo news conference on Wednesday.

In a report released last Friday, the World Bank said Indonesia's economy was showing signs of recovery, but cautioned that financial markets remained unconvinced.

"Factors such as political uncertainty, regional unrest and periodic outbursts of violence, combined with policy slippage on the structural reform agenda, could still derail the economic recovery," the report warned.

WARNING SHOT

The World Bank, along with the United States and other leading donors, has said Indonesia's chances of getting the aid depend partly on how firmly it can rein in pro-Jakarta militias in West Timor, following the murder of three U.N. workers at a border town there last month.

But economists say this is more of a warning shot than a serious attempt to impose sanctions on the crisis-hit country.

Most donors have already given vague pledges to stump up the aid, which will be available to Jakarta in the form of loans and grants.

At the last CGI in February, donors pledged around $4.7 billion in aid for this year.

"All indications are that the World Bank is happy with the progress the Indonesian government has been making and it will want to nurture this process," said Graham Parry, an economist at Lehman Brothers in Tokyo.

But he added that Jakarta could still expect some strings to be attached, including further progress in corporate restructuring, which some analysts say has been slipping.

Indonesian activists and members of parliament have called on the CGI to go a step further and forgive some of the nation's massive foreign debt -- around $143 billion, according to the central bank -- much of which is a hangover from the discredited regime of former president Suharto.

But this is seen as unlikely, partly because Jakarta would risk further undermining its reputation among international creditors.

More on CGI meeting