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.