The economist, Masahiro Kawai, also said debt reduction wasnot a realistic solution for the new government of President Abdurrahman Wahid, who arrived in Tokyo on Monday for a two-day visit. Kawai said Jakarta's external debt is expected to swell to 98 per cent of gross domestic product next year, doubling from 48 percent at the end of 1997, as more public money needs to be injected into the banking system.

"Recapitalisation of the banking sector is estimated to costIndonesia about 30 to 40 percent of GDP, putting the country's finances in a very severe condition," said Kawai.

Indonesian banks' non-performing loans are estimated by analysts to exceed 60 per cent of their total loans, while the nation's foreign debt already stands at nearly $70 billion.

Foreign money inflow to stop if debt reduced Still, debt relief cannot solve Indonesia's problems, as such a move would trigger a decline in the inflow of fresh foreign money into the Southeast Asian nation, Kawai said. "If new money kept pouring in after a debt cut, all debtor countries would ask for such a move," Kawai said. "But Indonesia's largest creditor, Japan, is saying that it in Principle could not give fresh loans to countries receiving debt relief from it. So it would be difficult for Indonesia to insist on a cut in its debt."

Former Japanese vice finance minister Eisuke Sakakibara said on Monday after a meeting with Wahid that they agreed external debt restructuring, both public and private, was very important for Indonesia. The two did not touch on specifics of debt restructuring, Sakakibara said.

Cleanness doesn't guarantee success Kawai also said the advice given Indonesia by the International Monetary Fund (IMF) and the World Bank will be more important in coming months than before, as many ministers in the Wahid government are inexperienced in economic policy.

"The new government seems to be trying to give an impression that the economy will improve under a clean, corruption-free government," Kawai said. "But being clean and being able to conduct sound economic management are different matters."

Indonesia moved a step closer to receiving new loans from the IMF and the World Bank after meetings in Washington on Friday between senior managers from the two lending bodies and Wahid.

An IMF spokesman said the IMF mission in Jakarta will start discussing a new loan programme early this week. The fund hopes to sign a letter of intent with Indonesia sometime in December, the spokesman said on Friday.

--REUTER