Can we avoid a 'debt trap'?<\/p>\n
By Aleksius Jemadu<\/p>\n
BANDUNG (JP): Foreign debt has been an important source of
\nfunds for the New Order's economic development. In the last two
\ndecades, Indonesia's foreign debt has increased rapidly and is
\nestimated to be more than US$100 billion.<\/p>\n
Until 1992, foreign aid to Indonesia was organized by the
\nIntergovernmental Group on Indonesia (IGGI), a group of nations
\nthat were committed to assisting Indonesia. The funds were
\ncoordinated by the Dutch government, an arrangement that ended in
\n1992 when Indonesia rejected foreign aid from Holland. It was
\nreplaced by the Consultative Group on Indonesia (CGI), under the
\ncontrol of the World Bank.<\/p>\n
The State Budget (APBN), on April 1 each year, divides state
\nrevenue into two major sections. The first section relates to
\nrevenue that originated from domestic oil\/gas, tax and non-tax
\nrevenue. The second section covers the development revenue of
\nforeign aid. It is clear that the role of foreign aid in the
\nState Budget is critical even though government officials tend to
\nconsider it a complementary revenue.<\/p>\n
The State Policy Guidelines 1993, for example, state that the
\nprimary resource of funds for financing development projects
\nshould be found within the country and the role of foreign aid is
\ncomplementary. It is also suggested that Indonesia become self-
\nreliant and try to minimize is dependence on foreign aid.
\nHowever, it seems unlikely that in the foreseeable future the
\nrole of foreign aid will cease. This is partly due to the ever-
\nincreasing government and private investments. Moreover, there is
\nno indication that the total amount of foreign aid has been
\ndecreasing in the 1990s.<\/p>\n
Following the analysis made by Steven Redelet (1995), we can
\nsingle out three major factors which have contributed to the
\nbuild-up of Indonesia's foreign debt since the early 1980s.
\nFirst, the continuous decline of oil prices and a world recession
\nduring the 1980s resulted in an increase in the balance of
\npayments deficit. The deficit rose from US$5 billion in 1982 to
\n$6 billion in 1983. Borrowing from developed countries and
\ninternational finance institutions like the World Bank, IMF, and
\nthe Asian Development Bank was considered the most practical way
\nto maintain economic growth and accelerate economic development.<\/p>\n
Second, since most of the Indonesian foreign debt was
\ndenominated in Yen (Japanese currency), the appreciation of this
\ncurrency would bring significant change to the total amount of
\nforeign debt to be repaid. Moreover, most of Indonesia's export
\nrevenues (from oil and gas, other minerals, plywood, and
\ntextiles), which would be used to service the debt, were
\ndenominated in US dollar. Thus, when the value of the yen
\nappreciated (causing the depreciation of US dollar), the
\ngovernment would need more US dollars to pay its foreign debt.
\nConsequently, more exports would be needed to service the debt
\nand Indonesia's real income would decrease accordingly. It was
\nsaid that the appreciation of yen from yen\/dollar 220 to
\nYen\/dollar 100 between 1981 and 1994 had added an extra amount of
\n$13.2 billion to the dollar value of the government's debt,
\nequivalent to 22 percent of outstanding government debt at the
\nend of 1994.<\/p>\n
Third, the government's deregulation policies since early
\n1980s resulted in a build-up of foreign debt at least in the
\nshort term. The outcomes of deregulation were the rise of foreign
\ninvestments and the increase of imports both of capital goods and
\nintermediate goods which were used for business expansion by the
\nprivate sector. Apparently, foreign loans were a major source of
\nfinancing for these new private sector investments. The reasons:
\nlower offshore interest rates, the overseas banking connections
\nof foreign partners in Indonesian joint ventures and government
\npolicies that encouraged domestic commercial banks and other
\nfinancial institutions to borrow offshore.<\/p>\n
In addition to the government's insistence that exports be
\npromoted to deal with the foreign debt problem, there were two
\nother important steps taken. First, in September 1991 the
\ngovernment established the Coordinating Team for the Management
\nof Offshore Commercial Loans (Tim Koordinansi Pengelolaan
\nPinjaman Komersial Luar Negeri, or the PKLN team) which was to
\ncontrol the acceleration of the seemingly rapid growth of
\ncommercial offshore loans made by state enterprises and the
\nprivate sector.<\/p>\n
The most notable actions of the team were to postpone four
\nlarge Pertamina (State Oil Company)-related projects, put tight
\nfour-year limits on new borrowing by state enterprises, state
\nbanks and for public sector-related projects.<\/p>\n
Second, the sale of state enterprises' shares in foreign and
\ndomestic capital markets so that the burden upon state export
\nrevenues, for servicing the debt, might be reduced. If less
\nexport revenue is used to service foreign debt the government
\nwill have more funds to finance development programs to alleviate
\npoverty.<\/p>\n
There is, however, a common danger for developing countries
\nwho continuously rely on foreign aid. According to a study
\nconducted by the Organization of Economic Cooperation and
\nDevelopment (OECD), during the period between 1982 and 1990
\ndeveloping countries had become a net capital exporter. During
\nthis period the developed countries gave foreign aid to
\ndeveloping countries, up to $927 billion, but at the same time
\nthere was a converse flow of funds as much as $1.345 billion
\nwhich caused the draining of $418 billion in capital of
\ndeveloping countries. Moreover, developing countries had their
\nown internal circumstances which were not conducive to sustained
\ngrowth. These factors included inflexible bureaucracies,
\nmonopolies by government-induced conglomerates, corruption,
\ninefficiency, etc.<\/p>\n
On top of that, Sumitro Djojohadikusumo, one of the most
\nprominent government's economic advisers, noted that the leakage
\nof development funds in Indonesia had reached 30 percent. There
\nwere two factors contributing to the leakage: pure corruption and
\nthe practices of \"marking up\" and \"multiplicity\" in the same
\nprojects. Included in the latter category was the establishment
\nof private foundations by using public funds (Rizal Ramli, 1994).<\/p>\n
It is often argued that increasing foreign debt represents a
\nmixed blessing. On one hand we can secure sufficient financial
\nresource to maintain economic growth but on the other hand our
\nhabitual dependence on foreign debt could lead us into a so-
\ncalled \"debt trap\". Cherryl Payer, who wrote The Debt Trap
\n(1974), argued that by opening the door to new official and
\nprivate sources of credit developing countries it could increase
\ntheir indebtedness and the tendency to \"auction\" domestic assets
\nto foreign investors. Our reliance on foreign debt will destroy
\nany basis which may have been laid for a more \"autonomous\"
\ndevelopment. We should avoid the danger of lurching from one
\ncrisis to the next with continuous infusions of official and
\nprivate credit.<\/p>\n
The Indonesian government is expected to establish a clear
\nagenda about when we might reduce our dependence on foreign debt.
\nOtherwise this nation could fall increasingly under the control
\nof multinational corporations, international banks and
\nindustrialized countries. Our young generation would surely want
\nto see a prosperous and self-reliant nation instead of a debt-
\nridden one.<\/p>\n
The writer is the Director of the Parahyangan Center for
\nInternational Studies (PACIS) at the Catholic University of
\nParahyangan, Bandung.<\/p>\n
Window: Our reliance on foreign debt will destroy any basis
\nwhich may have been laid for a more \"autonomous\" development.<\/p>",
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