Borrowing to survive

Borrowing to survive

The Indonesian government appears to lead a hand-to-mouth
existence. The US$5.9 billion in new loan pledges obtained by the
government from creditors at the annual meeting of the
Consultative Group on Indonesia (CGI) in Paris on Wednesday has
secured state budget financing. But the loans only provide a
breathing space until March, the end of the current (1999/2000)
fiscal year.

The new government, which will be formed in November, will
hardly have any time for celebrations. Securing new foreign loans
will be its first demanding task. Even though the hole in the
upcoming 2000/2001 budget is estimated at only 5 percent of gross
domestic product, or $8.3 billion, lower than the 5.8 percent or
almost $10 billion in the current fiscal year, foreign debts will
remain the salvation of public finance.

The problem is that despite promising signs of a recovery, a
fiscal stimulus or budget deficit is still needed to rev up the
economic engine, as most production facilities still operate at
20 percent below capacity. But given the severely limited
domestic resources, foreign borrowings are the only viable
alternative to finance the deficit, at least until next year.
Money creation or printing would lead to massive inflationary
pressures and could subvert the incipient recovery.

This foreign borrowing requirement is alarming, given the
already monstrous overhang of government external debts. As of
June, these debts were estimated at more than $70 billion, in
addition to domestic debts of Rp 550 trillion ($81 billion) in
treasury bonds to finance costs related to the bank
recapitalization and the government guarantee of bank deposits.
Total debt service payments in the coming fiscal year could more
than double the Rp 78 trillion allocated in the current fiscal
year.

New massive borrowings, besides increasing the risk of leading
the country into a choking debt trap and unmanageable debt
service burdens, are increasingly difficult to come by. Indonesia
has almost hit a ceiling on creditors' lending exposure to a
single country.

The heavy loan exposure, however, is not as damaging to
Indonesia's creditworthiness as the apparent disgust of creditors
about blatantly excessive corruption in the country. Recent
disclosures concerning the loss of billions of dollars in the
state budget, including funds derived from foreign loans, and the
pillage of state companies through numerous forms of malfeasance,
obviously raises the question as to whether a government that is
so corrupt-ridden deserves more international aid. It is a
staggering fact that the amount of public funds lost every year
to corruption often exceeds the sum of official foreign
borrowings.

Chief economics minister Ginandjar Kartasasmita, who led
Indonesia's delegation to the CGI meeting, appeared to be aware
of the moral issue. In a campaign to convince the donors that the
present government is cracking down on corruption, creditors
received a special background sheet outlining the concerted
efforts undertaken by the government to combat graft.

Ginandjar, however, appeared to be fighting a losing battle.
He failed to impress creditor delegates because his presentation
lacked concrete examples of action or vigorous legal proceedings
to back up his claim.

The extreme lack of political will on the part of the present
government to combat corruption will sabotage Indonesian requests
for more foreign aid at a time when its depressed economy is in
dire need of continued international assistance. Increasingly,
corruption has also become a thorn in the side of foreign
creditors and international donor institutions themselves, which
have often been criticized for wasting resources.

Pervasive corruption practices also testify to the absence of
rule-based behavior within a country's government and society.
These factors are inimical to private investment, both domestic
and foreign, which is sorely needed now to consolidate the
economic recovery, at a time when the government is required to
gradually reduce its foreign borrowings.

It is therefore imperative that the new government should be
perceived as clean and highly credible to enable it to maintain
creditors' trust and to regain investor confidence.