When assumptions behind debt do not work<\/p>\n
Bahtiar Arif, Center for Indonesian Reform, Jakarta,
\nbahtiararif@yahoo.com<\/p>\n
Blessed are the young, wrote former U.S. president Herbert
\nHoover, for they shall inherit the national debt.<\/p>\n
The level of government debt has reached a staggering Rp 1,300
\ntrillion (US$ 151 billion) of which Rp 670 trillion is domestic.
\nThis means every infant or adult out of some 200 million
\nIndonesians would be indebted by at least Rp 6.5 million.<\/p>\n
The repaying of the loan accounts for at least 95 percent of
\nthe gross domestic product; and the government, through the
\nextension of its relations with the Internationl Monetary Fund
\n(IMF), has decided that loans are still necessary.<\/p>\n
Loans, especially when they are foreign, are supposed to fill
\ninvestment and trade gaps to achieve sustainable growth until the
\neconomy "takes off". The underlying assumption is that the loan
\nis used effectively and is well managed.<\/p>\n
The effectiveness of loans must be evaluated. In general loans
\nmade to Indonesia have been corrupted by around 30 percent. Loans
\nare often not entirely based on real needs, but have in some
\ncases been pushed by creditors. Foreign loans were drawn as a
\ncomplementary source of financing, in particular for development
\nexpenditures. Some of them were conducted without sound project
\nappraisal techniques, measuring costs and benefits and the net
\npresent value of the projects.<\/p>\n
Domestic loans used to finance bank restructuring seem to be
\nan instant solution, without much consideration on how to repay
\nthe loan. And for all its debts the government has never provided
\na cash flow projection, which is crucial to know how to repay
\nloans.<\/p>\n
Moreover, the level of debt has never been reported and
\nsubmitted to the legislature as part of the government's
\naccountability. The government has only submitted a statement of
\nrealization of budget revenues and expenditures.<\/p>\n
Without a balance sheet made available to the public, people
\ndo not know the level of the country's wealth and how much debt
\nhas to be paid.<\/p>\n
The drawing of more loans should be delayed until the
\nfollowing conditions exist. First, fundamental regulations
\ndealing with loans and other public finance matters should be
\nestablished. Second, loans should only be drawn following a
\nproper feasibility study showing a cost-benefit analysis, the
\nrate of return of project loans, and a cash flow projection to
\nrepay the debt.<\/p>\n
Third, the government has to produce a financial
\naccountability report for a loan, and submit it to the
\nlegislature after it has been audited by an independent auditor.<\/p>\n
An investigative audit would be needed if there were
\nsuspicions of corruption, followed by prosecution and efforts to
\nregain the money.<\/p>\n
Finally, the assessment of debt sustainability may be the most
\nimportant consideration. The government should measure how much
\nof the debt can be repaid based on financial reality. Then, with
\nthe approval of the legislature the government should propose
\nrestructuring schemes according to the level of debt
\nsustainability.<\/p>\n
The budget shows that it will obviously be hard to repay
\ndomestic loans. Therefore, alternatives must be explored such as
\ndebt-to-asset swap, debt-to-nature swap -- or debt relief.<\/p>",
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