Additional debt burden

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.