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.