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Japan mulls debt rescheduling for Indonesia

TOKYO: Japan may join other creditor nations in rescheduling Indonesia's debt to help ease Jakarta's debt-servicing burden, government sources in Tokyo say.

Japan is Indonesia's largest creditor, owed about 35 percent of its $70 billion in external debt.

Rescheduling would mark a shift in Japan's aid policy, as Tokyo in the past has dealt with Indonesia's debt problems by giving new loans for Jakarta to use to repay maturing loans, instead of offering to reschedule existing loans.

But no decision has yet been made, as discussions are still underway among ministries involved in Indonesian aid, said one government official.

Japan has been strongly opposed to debt rescheduling out of concern doing so increases "moral hazard", or the risk recipient countries will squander assistance if they believe the money does not have to be repaid.

But a more flexible aid stance is now being considered, as Japan wants to strongly back the three-month old reformist government of President Abdurrahman Wahid, the official said.

The International Monetary Fund (IMF) signed a new letter of intent with Indonesia, assuring Jakarta that an external financing gap of about $4.3 billion in 2000 will be met by new loans.

Separately, U.S. Treasury Secretary Lawrence Summers said on Thursday that the United States is ready to cooperate with other creditors to offer a "generous rescheduling" of Indonesia's debt.

"The IMF-Jakarta agreement has set the stage for the international community to back Indonesia," said a Japanese government official. "We are also eager to support Indonesia's economic reform efforts."

In an irregular budget for the April-December period unveiled on Thursday, Jakarta planned to seek rescheduling of $2.1 billion in sovereign debt.

Japan's outstanding soft loans to Indonesia stood at 1.9 trillion yen as of the end of last March, accounting for about 20 percent of Tokyo's total soft loans, or money lent at well-below market rates of interest.

Those loans were mainly used to finance big public works projects in the Southeast Asian nation. Japanese officials said fresh project-oriented aid is unlikely to be requested this year.

"The Wahid government seems to be putting a long-term priority on reducing its huge foreign borrowing of about $70 billion," said a government official.

"So our assistance for Indonesia this year is more likely to be focused on filling the expected revenue shortfalls rather than fresh project-type aid," he said.-Reuters