Debt, trapped with no solutions in sight<\/p>\n
or<\/p>\n
Indonesia's debt: no end in sight<\/p>\n
Riyadi Suparno
\nThe Jakarta Post
\nJakarta<\/p>\n
Saddled with massive, mounting debt amid the monetary crisis,
\nIndonesia resembles a sinking ship that has almost completely
\ndisappeared beneath the waves.<\/p>\n
That was the grim assessment by Vice President Hamzah Haz in
\nearly November to describe how Indonesia was faring in its life-
\nand-death struggle to survive economically.<\/p>\n
Hamzah, nevertheless, was quick to add "it is fortunate that
\nthe country has not yet sunk".<\/p>\n
But the sinking of the Indonesian ship will be just a matter
\nof time if no breakthrough is found to break the impasse of its
\nall too serious debt problems.<\/p>\n
The Indonesian government, for instance, could easily become
\ninsolvent if the debt burden it has taken on continues to rise.<\/p>\n
The heaviest debt burden that Indonesia has to shoulder is its
\nforeign debt, which consists of US$72 billion in government debt
\nand $67 billion in private debt (as of April).<\/p>\n
In addition, the government also has a huge domestic debt,
\ntotaling $60 billion.<\/p>\n
Altogether, the Indonesian government must shoulder a total of
\n$130 billion in debt -- more than four times the amount of its
\nannual budget.<\/p>\n
With such a mammoth level of debt, the government has to
\nallocate a huge fund from its budget to service its debts
\nannually, including the principals and interest.<\/p>\n
This year, for instance, the government has to pay out Rp 108
\ntrillion ($10.4 billion) to service its debts<\/p>\n
Of the total debt service payment, Rp 61.7 trillion is
\ninterest on domestic debt, Rp 28.4 trillion interest on foreign
\ndebt and Rp 20 trillion in foreign debt repayments.<\/p>\n
This amount of debt servicing accounts for 31 percent of the
\ngovernment's total expenditure this year. This is unhealthy.<\/p>\n
This high level of debt servicing reduces considerably the
\nbudgetary flexibility the government needs to stimulate growth
\nthrough increased investment, and to finance social safety net
\nprograms.<\/p>\n
In time of crisis and low investor confidence, government
\nspending, especially on development projects, is an important
\nsource for productive investment.<\/p>\n
As in previous years, the government has no money in its
\ncoffers to fund development projects and, to some extent, routine
\nspending.<\/p>\n
And the solution offered from year to year is always the same:
\nnew loans.<\/p>\n
Fortunately enough, Indonesia has some influential and loyal
\ncreditors, such as the World Bank, the Asian Development Bank and
\nJapan, all of which have been continually plugging Indonesia's
\nbudget deficits for years.<\/p>\n
In addition, Indonesia also has the assistance of the
\nInternational Monetary Fund (IMF), which has been guarding the
\ncountry's balance of payments for the past three years.<\/p>\n
All these creditors help keep the government solvent.<\/p>\n
Starting in 2000, creditors not only gave new loans to
\nmaintain the country's solvency, they also rescheduled more of
\nthe government's debt through the Paris Club of creditors.<\/p>\n
No less than $5.8 billion in debt principal due this year and
\nin the first quarter of next year has been rescheduled through
\nthe Paris Club. The loans' maturity has been extended several
\nyears, thus reducing financial pressure on the 2001 state budget.<\/p>\n
And the government earlier this month filed an official
\nrequest to the Paris Club to reschedule Indonesian sovereign debt
\ndue next year to the first quarter of 2003.<\/p>\n
This time, the government is seeking rescheduling of both the
\nprincipal and the interest. However, total amount the government
\nis seeking to reschedule is not clear.<\/p>\n
According to the 2002 state budget, overseas debt payments
\nnext year will reach Rp 68.5 trillion, Rp 41.5 trillion of which
\nis principal and the remaining Rp 27 trillion is interest.<\/p>\n
However, what creditors have so far been doing is only
\noffering a temporary solution to Indonesia's long-term debt
\nproblems. They help solve the debt problems based only on the
\ngovernment's annual budgetary needs.<\/p>\n
The government and creditors sit together and solve debt
\nproblems, or more precisely, financing needs for one fiscal year;
\nand in the next fiscal year, the government faces the same
\nproblem again, and is compelled to sit down again with the
\ncreditors and find another solution.<\/p>\n
With this mechanism, the government will continue to be
\nshackled by its debt burden forever.<\/p>\n
The debt-reduction proposal presented by non-governmental
\norganizations such as the International NGO Forum on Indonesian
\nDevelopment (INFID) sounds like a sensible way to solve
\nIndonesia's debt problem.<\/p>\n
They argue that Indonesia's debt burden is the result of the
\npractice of both the government and foreign creditors.<\/p>\n
During the Soeharto regime there was significant corruption
\ninvolving loans, including development loans, but at the same
\ntime many foreign creditors repeatedly turned a blind eye to the
\npervasive corruption.<\/p>\n
The World Bank, for instance, loaned the Soeharto regime some
\n$30 billion between 1966 and 1998. And the bank's records show
\nthat some 30 percent of its funds were diverted for purposes
\nother than those for which they were intended.<\/p>\n
In addition, a large portion of the increase in debt,
\nespecially from domestic debt, was caused by bank restructuring,
\nwhich was recommended by the International Monetary Fund.<\/p>\n
In October 1997, the IMF instructed Bank Indonesia to
\nimmediately close down 16 banks, thereby causing a run on all
\nlocal banks. The central bank was therefore forced to bail out
\nthe whole banking system.<\/p>\n
Therefore, the NGOs contend that it is only logical that the
\ncreditors also share a portion of Indonesia's debt burden by
\ngiving debt cuts.<\/p>\n
The creditors, however, are adamantly against cutting
\nIndonesia's debt, and are instead willing to negotiate
\nalternative solutions for Indonesia's economic woes.<\/p>\n
The problem also lies with the government, which is very
\nreluctant to seek debt reductions.<\/p>\n
The argument is that once the government looks for a reduction
\nin debt, its reputation would plummet, and, over a certain period
\nof time, it would not be able to raise any more funds because no
\nforeign creditor would be willing to lend it more money.<\/p>\n
As debt reduction is a remote possibility, it would be
\nfruitful for the government to pursue debt relief through
\nexisting channels, such as from the Paris Club.<\/p>\n
The creditors, for their part, should also take responsibility
\nfor Indonesia's soaring debt, thereby reducing it.<\/p>\n
They could do this in two ways: by giving more grants, or soft
\nloans, to Indonesia and rescheduling the debts that fall due in
\nthe next five to ten years with new grace periods and longer
\nmaturity.<\/p>\n
That way, the government would be able to divert limited
\nresources initially earmarked for servicing debt to finance
\ndevelopment projects and improve basic utility services.<\/p>",
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