Crisis boosts govt debt to $134 billion
Crisis boosts govt debt to $134 billion
JAKARTA (JP): Indonesia's economic crisis increased government
debt to US$134 billion, or about 83 percent of gross domestic
product (GDP), in the early part of this year from $53 billion,
or 23 percent of GDP, before the crisis started in the middle of
1997, according to the latest World Bank report.
The bank said that nearly three-quarters of the increase was
domestic debt to finance the government's bank restructuring and
recapitalization program.
It said that debt service obligations would be over 40 percent
of government revenue for several years.
"This will severely constrain fiscal flexibility throughout
the term of the current government," the bank said, adding that
the government would need new external and domestic financing in
the coming years to meet expenditure needs.
"Though very large, Indonesia's government debt is
manageable," it said.
The bank pointed out that government debt could be cut down to
about 91 percent of GDP at the end of 2000 to 67 percent within
five years and 46 percent within 10 years.
"But achieving this will not be easy," the bank said.
The bank stressed that certain actions were necessary. These
include macroeconomic stability, improved governance and market-
friendly policies to rebuild investor confidence, keeping real
interest rates down and renew growth.
The bank said the government also had to generate significant
primary fiscal surpluses of at least 2 percent per annum over the
next few years.
"Every Rp 1 trillion more of fiscal surplus would reduce debt
the same amount," the bank said.
It said this could be achieved through an increase in tax
revenue by improving tax administration and policy, and
efficiency of state enterprises.
It added that the government must lower expenditures by
reducing subsidies and price controls, and deferring nonessential
expenditures.
The bank said actions were needed to minimize new debt arising
from off-budget obligations.
It said that off-budget losses included state enterprises
losses, local government spending in excess of revenues, directed
credit programs, potential additional costs of bank restructuring
and possible further costs to recapitalize Bank Indonesia.
"Without these actions, efforts to reduce debt can be offset
by the concurrent creation of new government debt," it said.
The bank said the government must also aggressively sell its
assets to reduce government debt.
"Early debt reduction would pay big dividends. So IBRA's
assets should be sold as quickly as possible," it said, referring
to the Indonesian Bank Restructuring Agency which controls
various banking assets with a face value of about Rp 600
trillion.
The bank said Rp 60 trillion from asset sales now would reduce
debt by about 5 percent of GDP.
The bank explained that IBRA asset sales would help establish
a virtuous cycle, as they would spur recovery by building
investor confidence, increasing the value of subsequent sales and
improving efficiency.
"It may be politically painful to sell assets below their book
value, but international evidence suggests that it is generally
better to sell assets early rather than wait and hope for a
higher price," the bank said.
It added that further privatization of state-owned enterprises
would also help reduce debt and increase efficiency.
The bank also suggested the government seek the best possible
terms for new borrowing.
"A very heavy debt service burden could delay recovery and
threaten the political sustainability of planned actions. Even
with a successful second Paris Club rescheduling, new lending
will be needed to mitigate the annual cash requirements of debt
servicing," it said.
The bank said the government needed to seek concessional loans
and grants, ensure productive use of borrowed and other public
resources, and smooth the profile of future debt service
payments.
The Paris Club creditor nations agreed in April to reschedule
some $5.8 billion in sovereign debt due between April 2000 and
March 2002.
The bank also said the establishment of an effective domestic
bond market would provide the government with more options for
strategic debt management, making it easier to smooth domestic
debt service payments that were expected to peak in 2004 and then
again in 2008.
The bank added that vigorous institutional capacity building
would be needed to manage debt well, deal with fiscal risks and
ensure that public resources were used well.
"High and potentially volatile debt service payments call for
a strategy to manage risks and develop new borrowing
instruments," it said. (rei)