Aid builds confidence

Aid builds confidence

As Indonesia's official foreign debt servicing and installment
payments have been greater than its annual loan from its creditor
consortium, the Consultative Group on Indonesia (CGI), it is easy
to get the impression that the government has been forced into a
debt trap; borrowing from Peter to repay John.

The latest CGI meeting in Paris pledged US$5.3 billion in new
loans on Thursday for the current 1996/1997 fiscal year. It was
similar to its commitment last year. The government's foreign
debt servicing and installment budget for the same fiscal year,
however, is almost $8.5 billion. The official resource flows have
also been negative in the previous two fiscal years, amounting to
$3.9 billion in 1995/1996 and $3.1 billion in 1994/1995.

The country's large foreign debts have been large indeed,
totaling $58.2 billion in official debts and $42 billion in
private sector loans. The annual interest and installment
payments will continue to increase in the next few years before
they start to decline as a result of the accelerated amortization
of debt principals. The government has been trying to reduce its
debt servicing burdens by prepaying loans which carry high-
interest rates. For example, $738 million in high-interest loans
from the Asian Development Bank and the World Bank were prepaid
in fiscal 1995/1996.

The significance of the CGI's aid pledge is, however, much
more than its absolute monetary amount. Loans from CGI creditors
are long-term debts, maturing up to 25 years. Their interest
rates are very low, amounting to less than 3 percent a year for
loans extended by sovereign creditors who usually account for
more than 50 percent of the total aid committed by the
consortium. The government, already bearing a heavy foreign debt
burden, cannot borrow much from the market without it adversely
affecting Indonesia's external balance.

CGI's aid accounts for about 35 percent of the government's
investment. True, the private sector is now responsible for the
bulk of national investment, and an increasing portion of public
utilities and basic infrastructure have been opened to private
investors, but government investment still plays a significant
role in human resource development, poverty alleviation, and
building basic infrastructure outside Java. The government will
remain the leading investor in basic infrastructure in remote
areas in the eastern provinces despite the privatization drive
because private investors lack interest in those areas.

Of no less importance is the confidence the new aid commitment
builds. CGI includes reputable, multilateral institutions such as
the World Bank, Asian Development Bank, the International
Monetary Fund, and such economic powerhouses as the U.S., Japan,
Germany, Britain, Canada, and several other industrialized
nations.

Indonesia's credit standing in the international financial
market would be devastated if CGI members suddenly or sharply cut
their aid.

Hence, the new aid pledge serves as a vote of confidence for
the long-term prospects of Indonesia's economy and as a third-
party endorsement of the government's macroeconomic management.
The endorsement is sorely needed now that the government is
taking flak for its capricious national car policy and the heavy
tariff protection several politically well-connected
petrochemical companies enjoy.