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.