Sat, 03 Jun 2000

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)