Wishful thinking vs debt crisis<\/p>\n
This is the first of two articles on Indonesian debt by
\nJuergen Kaiser, campaign coordinator of Erlassjahr 2000, the
\nGerman Jubilee 2000 campaign, an international civil society
\ninitiative for debt cancellation and the reform of international
\ndebt negotiation procedures.<\/p>\n
ESSEN, Germany (JP): As the Consultative Group on Indonesia
\nmeeting ended on Oct. 18 in Tokyo with new pledges amounting to
\nUS$4.8 billion to Indonesia in public external loans, one cannot
\nhelp thinking about Indonesia's indebtedness.<\/p>\n
The total external debt of Indonesia has reached around $144
\nbillion, consisting of both private and public debt, which is
\nmore than 90 percent of Indonesia's gross domestic product.<\/p>\n
As such, Indonesia's indebtedness is very severe, in which
\ndebt servicing would mean putting the burden even more on
\nIndonesia's poorest.<\/p>\n
On May 22, the World Bank (WB)'s Jakarta office published a
\ndocument entitled Managing government debt and its risk. The
\ndocument acknowledges that Indonesia is confronted with a severe
\ninternal and external debt problem.<\/p>\n
Its problem assessment, suggested solutions and visions of a
\npossible workout strategy merit a closer look.<\/p>\n
Both reveal a high degree of either naivete or well-aimed
\nwishful thinking on the part of the international institutions
\nwhich happened to host the meeting crucial to Indonesia's
\neconomic future.<\/p>\n
According to international practice, debt renegotiations of an
\nindebted sovereign borrower must be based on an evaluation of how
\nmuch stress the foreign debt will impose on the country's budget
\nand hard currency (i.e.export) earnings in the future.<\/p>\n
The World Bank's projections to this regard are highly
\nunrealistic, as shown from its table of government outstanding
\ndebt.<\/p>\n
Table 1. Indonesia: Government Debt Outstanding
\n(US$ billion, end of period)<\/p>\n
FY 96\/97 FY 97\/98 FY 98\/99 FY 99\/00 2000<\/p>\n
Actual Projection
\n Total 52,6 51,2 78,1 134,2 157,2
\n Domestic a\/ 0 0 18,9 71,5 91,5
\n External
\n Memo items (%)
\n Total\/GDP 22,9 61,9 67,3 83,3 90,7
\n External\/GDP 22,9 61,9 51,0 38,9 37,9<\/p>\n
Source: Bank Indonesia, Ministry of Finance and World Bank
\nestimates. Assuming an exchange rate of Rp 7,000 per US dollar
\nfor 2000.<\/p>\n
This table assumes a nominal GDP growth rate of some 25
\npercent from fiscal year 1998\/1999 to 1999\/2000 to accomplish a
\nreduction of the total external debt to GDP ratio from 51 percent
\nto 38.9 percent, while the government's external debt is rising
\nfrom $59.2 billion to $62.7 billion.<\/p>\n
As the relative stress imposed by the debt is the common key
\nindicator, when it comes to discussing the necessity of debt
\nrelief, the presumed good news of a reduced relative burden of
\nthe foreign debt, is all too telling from the Bank's point of
\nview.<\/p>\n
In the present document, the optimistic outlook is
\nadditionally underlined by an impressive diagram; it is the same
\ntype of graphs the World Bank displays in its \"sustainability
\nanalysis\" all over the world.<\/p>\n
They reveal the build-up of a (debt) problem through rising
\nparameters and right at the transition from actual data to World
\nBank projections, the graph starts to fall.<\/p>\n
This notoriously optimistic scenario normally is produced by
\nsimply assuming a sharp rise in the denominator's value in the
\nfuture; the denominator in this case is the Indonesian GDP.<\/p>\n
Of course, this kind of wishful thinking has hardly anywhere
\nmaterialized over the last 10 years. However, it has provided
\ncreditor governments (for example during Paris Club negotiations)
\nwith the outlooks on a country's economic future which they
\nwanted to see, to justify their inaction or inadequate relief.<\/p>\n
It is interesting to note that the document contains two
\nvulnerability scenarios in order to estimate effects of economic
\nfactors which could impede Indonesia's foreseen growing out of
\nher debt. One is displayed vastly and contains the message that
\neven with a smaller than foreseen fiscal surplus, Indonesia will
\nstill stay largely on track.<\/p>\n
The other one is displayed in a very small graph. It shows
\nthat in a scenario which the WB calls \"weaker economic
\nmanagement\", the debt ratio to government revenues will not fall
\nat all. Indonesia's history in the last two years teaches that
\nproblems related to the IBRA restructurings make the weaker
\nscenario far more likely than the World Bank's base scenario.<\/p>\n
Fig.5 on page 11 on avoiding adverse shocks, it rightly
\nassesses the extreme risks connected to external shocks. What it
\ndoes not reveal is that a sudden and dramatic worsening of the
\nIndonesian situation, which is here called \"a sudden drop in
\ninvestors confidence\" could result from a broad spectrum of
\nexternal shocks, most of which are totally or partially beyond
\nthe government's control.<\/p>\n
The most important ones are certainly the conflicts in Aceh,
\nMaluku, West Timor and West Papua.<\/p>\n
So what does the World Bank recommend the Indonesian
\ngovernment to do? The World Bank's recipe, \"How to reduce the
\ndebt burden\", starts with a highly ideological and unfounded
\nassumption by stating:<\/p>\n
\"As noted above, macroeconomic stability, good governance, and
\nmarket friendly policies are essential...\"<\/p>\n
Nothing of all this is mentioned, not to speak of the
\nevidenced above. One rather gets the impression that this kind of
\nWashington-consensus-liturgy is being automatically posted from a
\ncentral World Bank server, before the first sentence of an actual
\ndocument is written.<\/p>\n
Most of the subsequent recommendations regarding good debt
\nmanagement practices are certainly beyond doubt. On the material
\nside, however, one finds as a centerpiece of the WB strategy the
\nsuggestion \"to sell government assets to reduce government debt\".<\/p>\n
It is not only poor market behavior to \"sell aggressively\"
\nwhen everybody knows, the seller is in urgent need of cash. (The
\nBank quite audaciously and without displaying its alleged
\nevidence tries to sell even this as sound strategy).<\/p>\n
It is moreover problematic to sell exactly those elements of
\nold or new state property which, if anything, will be able to
\ncontribute to the current income, while in reality what Indonesia
\nneeds is medium-term reliable current income.<\/p>\n
The Bank acknowledges that government finances are exposed to
\nsignificant risk. However, all the World Bank does in order to
\ndeal with this risk, is recommending \"a prudent and transparent
\nfiscal management\"; while in other countries like HIPCs (Heavily
\nIndebted Poor Countries\") contingencies are at least marginally
\nimplemented by allowing for enhanced (\"more robust\") debt relief.<\/p>\n
Of course, there is nothing wrong with a \"prudent and
\ntransparent fiscal management\".<\/p>\n
However, distinct from the treatment other low-income
\ncountries receive in the HIPC framework, nothing is being done in
\norder to bolster the fragile economy of this country from the
\nacknowledged risks.<\/p>\n
Instead the Bank expects Indonesia to simply grow out of its
\nsevere indebtedness by assuming an absurdly optimistic scenario
\nbetween 2002 and 2010, arguing that the government debt will
\ndecline by the Year 2010.<\/p>\n
Looking at the assumption underlying the assumed reduction in
\nthe government debt service ratio, one finds assumptions of a
\nconstant six percent growth rate and an equally constant two
\npercent primary fiscal surplus, both of which are admittedly far
\nfrom being accomplished in the current fiscal years for which the
\nWorld Bank displays data.<\/p>",
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