Additional debt burden

The US$4.8 billion of new loans approved by the 35-member Consultative Group on Indonesia (CGI) creditor consortium in Tokyo on Wednesday can be seen from different perspectives. The Indonesian high-powered delegation to the CGI meeting that included seven Cabinet ministers may boast of the new aid package as a vote of international confidence in the government, notably its economic team. That had always been the view expressed and promoted by economics ministers under the Soeharto administration. The young generation may, however, feel apprehensive and greatly concerned about the huge burden of state debts that they have to bear in the future.

But the market seemed to have expected that outcome, as can be seen in the relatively small impact of the new loan pledges on the rupiah exchange rate and share prices. Most analysts have argued that Indonesia, with government foreign debt already reaching $75 billion, is too big a borrower to fail. Refusing to bail out Indonesia would certainly be greatly detrimental to the economic interests of the CGI creditors and to the business interests of numerous banks and companies in the creditor countries which have lent more than $69 billion to Indonesian corporations.

However one may look at the new loan commitment, there is one thing that the Abdurrahman Wahid government should never do -- let the CGI creditor endorsement get into their heads and feel complacent. There is nothing to feel proud of about the new aid pledges as foreign debt repayment and servicing have exceeded $5.4 billion a year, not to mention the massive burden of the equivalent of $73 billion in government domestic debts incurred just over the past 12 months. Moreover, the $4.8 billion pledged on Wednesday was not entirely fresh loans. Quite a portion of that sum consists of funds held over from last year's $4.7 billion commitment that has not been spent.

We should naturally be grateful for the new aid commitment as it will provide a breathing space for the state budget -- the new loans will partly plug the Rp 52.2 trillion ($7.1 billion, based on the Rp 7,300-to-the dollar average rate assumed for next fiscal year) budget deficit next year.

Most importantly, though, is that instead of rejoicing over the new loan pledge, the government should pay serious attention to the warning shots given by major creditors at the Tokyo meeting. The creditors expressed disappointment with the sluggishness of economic reforms, especially the pace and quality of corporate restructuring. They voiced great concern over political uncertainty, regional unrest, periodical outbursts of violence and policy slippage on the structural reform agenda.

The government should magnanimously accept and act firmly and consistently on the warnings. It is honest advice from creditors who sincerely want to see Indonesia resume robust growth.

The CGI creditors realize that their loan pledges and endorsement are not enough to regain market confidence in Indonesia. Without market confidence, Indonesia's economy will never rise from its multidimensional crisis. The International Monetary Fund itself which has led Indonesia's bailout program since November 1997 has often admitted that the market remains unconvinced about the nascent economic recovery since early this year. It acknowledges that the rupiah exchange rate that has been hovering at Rp 8,800 to the dollar over the last few months, compared to Rp 7,000 early this year, is actually grossly undervalued, not related to the marked improvements in the economic fundamentals. But the IMF assessment does not mean anything in so far as the market sentiment is concerned.

The test of Indonesia's resolve and the benchmark for market confidence is the pace and consistency of the implementation of the reform programs, notably those in bank, corporate and debt restructuring and good governance in the public and private sectors. Bold actions are imperative to ensure a return of law certainty and social justice, the lack of which is rooted deeply in the recent wave of regional tension, sectarian violence and mob atrocities against legitimate, resource-based businesses in remote areas. Failure to take appropriate action could weaken the market sentiment and slow or even subvert recovery.