Can we avoid a 'debt trap'?

Can we avoid a 'debt trap'?

By Aleksius Jemadu

BANDUNG (JP): Foreign debt has been an important source of
funds for the New Order's economic development. In the last two
decades, Indonesia's foreign debt has increased rapidly and is
estimated to be more than US$100 billion.

Until 1992, foreign aid to Indonesia was organized by the
Intergovernmental Group on Indonesia (IGGI), a group of nations
that were committed to assisting Indonesia. The funds were
coordinated by the Dutch government, an arrangement that ended in
1992 when Indonesia rejected foreign aid from Holland. It was
replaced by the Consultative Group on Indonesia (CGI), under the
control of the World Bank.

The State Budget (APBN), on April 1 each year, divides state
revenue into two major sections. The first section relates to
revenue that originated from domestic oil/gas, tax and non-tax
revenue. The second section covers the development revenue of
foreign aid. It is clear that the role of foreign aid in the
State Budget is critical even though government officials tend to
consider it a complementary revenue.

The State Policy Guidelines 1993, for example, state that the
primary resource of funds for financing development projects
should be found within the country and the role of foreign aid is
complementary. It is also suggested that Indonesia become self-
reliant and try to minimize is dependence on foreign aid.
However, it seems unlikely that in the foreseeable future the
role of foreign aid will cease. This is partly due to the ever-
increasing government and private investments. Moreover, there is
no indication that the total amount of foreign aid has been
decreasing in the 1990s.

Following the analysis made by Steven Redelet (1995), we can
single out three major factors which have contributed to the
build-up of Indonesia's foreign debt since the early 1980s.
First, the continuous decline of oil prices and a world recession
during the 1980s resulted in an increase in the balance of
payments deficit. The deficit rose from US$5 billion in 1982 to
$6 billion in 1983. Borrowing from developed countries and
international finance institutions like the World Bank, IMF, and
the Asian Development Bank was considered the most practical way
to maintain economic growth and accelerate economic development.

Second, since most of the Indonesian foreign debt was
denominated in Yen (Japanese currency), the appreciation of this
currency would bring significant change to the total amount of
foreign debt to be repaid. Moreover, most of Indonesia's export
revenues (from oil and gas, other minerals, plywood, and
textiles), which would be used to service the debt, were
denominated in US dollar. Thus, when the value of the yen
appreciated (causing the depreciation of US dollar), the
government would need more US dollars to pay its foreign debt.
Consequently, more exports would be needed to service the debt
and Indonesia's real income would decrease accordingly. It was
said that the appreciation of yen from yen/dollar 220 to
Yen/dollar 100 between 1981 and 1994 had added an extra amount of
$13.2 billion to the dollar value of the government's debt,
equivalent to 22 percent of outstanding government debt at the
end of 1994.

Third, the government's deregulation policies since early
1980s resulted in a build-up of foreign debt at least in the
short term. The outcomes of deregulation were the rise of foreign
investments and the increase of imports both of capital goods and
intermediate goods which were used for business expansion by the
private sector. Apparently, foreign loans were a major source of
financing for these new private sector investments. The reasons:
lower offshore interest rates, the overseas banking connections
of foreign partners in Indonesian joint ventures and government
policies that encouraged domestic commercial banks and other
financial institutions to borrow offshore.

In addition to the government's insistence that exports be
promoted to deal with the foreign debt problem, there were two
other important steps taken. First, in September 1991 the
government established the Coordinating Team for the Management
of Offshore Commercial Loans (Tim Koordinansi Pengelolaan
Pinjaman Komersial Luar Negeri, or the PKLN team) which was to
control the acceleration of the seemingly rapid growth of
commercial offshore loans made by state enterprises and the
private sector.

The most notable actions of the team were to postpone four
large Pertamina (State Oil Company)-related projects, put tight
four-year limits on new borrowing by state enterprises, state
banks and for public sector-related projects.

Second, the sale of state enterprises' shares in foreign and
domestic capital markets so that the burden upon state export
revenues, for servicing the debt, might be reduced. If less
export revenue is used to service foreign debt the government
will have more funds to finance development programs to alleviate
poverty.

There is, however, a common danger for developing countries
who continuously rely on foreign aid. According to a study
conducted by the Organization of Economic Cooperation and
Development (OECD), during the period between 1982 and 1990
developing countries had become a net capital exporter. During
this period the developed countries gave foreign aid to
developing countries, up to $927 billion, but at the same time
there was a converse flow of funds as much as $1.345 billion
which caused the draining of $418 billion in capital of
developing countries. Moreover, developing countries had their
own internal circumstances which were not conducive to sustained
growth. These factors included inflexible bureaucracies,
monopolies by government-induced conglomerates, corruption,
inefficiency, etc.

On top of that, Sumitro Djojohadikusumo, one of the most
prominent government's economic advisers, noted that the leakage
of development funds in Indonesia had reached 30 percent. There
were two factors contributing to the leakage: pure corruption and
the practices of "marking up" and "multiplicity" in the same
projects. Included in the latter category was the establishment
of private foundations by using public funds (Rizal Ramli, 1994).

It is often argued that increasing foreign debt represents a
mixed blessing. On one hand we can secure sufficient financial
resource to maintain economic growth but on the other hand our
habitual dependence on foreign debt could lead us into a so-
called "debt trap". Cherryl Payer, who wrote The Debt Trap
(1974), argued that by opening the door to new official and
private sources of credit developing countries it could increase
their indebtedness and the tendency to "auction" domestic assets
to foreign investors. Our reliance on foreign debt will destroy
any basis which may have been laid for a more "autonomous"
development. We should avoid the danger of lurching from one
crisis to the next with continuous infusions of official and
private credit.

The Indonesian government is expected to establish a clear
agenda about when we might reduce our dependence on foreign debt.
Otherwise this nation could fall increasingly under the control
of multinational corporations, international banks and
industrialized countries. Our young generation would surely want
to see a prosperous and self-reliant nation instead of a debt-
ridden one.

The writer is the Director of the Parahyangan Center for
International Studies (PACIS) at the Catholic University of
Parahyangan, Bandung.

Window: Our reliance on foreign debt will destroy any basis
which may have been laid for a more "autonomous" development.