Debt, trapped with no solutions in sight

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Indonesia's debt: no end in sight

Riyadi Suparno The Jakarta Post Jakarta

Saddled with massive, mounting debt amid the monetary crisis, Indonesia resembles a sinking ship that has almost completely disappeared beneath the waves.

That was the grim assessment by Vice President Hamzah Haz in early November to describe how Indonesia was faring in its life- and-death struggle to survive economically.

Hamzah, nevertheless, was quick to add "it is fortunate that the country has not yet sunk".

But the sinking of the Indonesian ship will be just a matter of time if no breakthrough is found to break the impasse of its all too serious debt problems.

The Indonesian government, for instance, could easily become insolvent if the debt burden it has taken on continues to rise.

The heaviest debt burden that Indonesia has to shoulder is its foreign debt, which consists of US$72 billion in government debt and $67 billion in private debt (as of April).

In addition, the government also has a huge domestic debt, totaling $60 billion.

Altogether, the Indonesian government must shoulder a total of $130 billion in debt -- more than four times the amount of its annual budget.

With such a mammoth level of debt, the government has to allocate a huge fund from its budget to service its debts annually, including the principals and interest.

This year, for instance, the government has to pay out Rp 108 trillion ($10.4 billion) to service its debts

Of the total debt service payment, Rp 61.7 trillion is interest on domestic debt, Rp 28.4 trillion interest on foreign debt and Rp 20 trillion in foreign debt repayments.

This amount of debt servicing accounts for 31 percent of the government's total expenditure this year. This is unhealthy.

This high level of debt servicing reduces considerably the budgetary flexibility the government needs to stimulate growth through increased investment, and to finance social safety net programs.

In time of crisis and low investor confidence, government spending, especially on development projects, is an important source for productive investment.

As in previous years, the government has no money in its coffers to fund development projects and, to some extent, routine spending.

And the solution offered from year to year is always the same: new loans.

Fortunately enough, Indonesia has some influential and loyal creditors, such as the World Bank, the Asian Development Bank and Japan, all of which have been continually plugging Indonesia's budget deficits for years.

In addition, Indonesia also has the assistance of the International Monetary Fund (IMF), which has been guarding the country's balance of payments for the past three years.

All these creditors help keep the government solvent.

Starting in 2000, creditors not only gave new loans to maintain the country's solvency, they also rescheduled more of the government's debt through the Paris Club of creditors.

No less than $5.8 billion in debt principal due this year and in the first quarter of next year has been rescheduled through the Paris Club. The loans' maturity has been extended several years, thus reducing financial pressure on the 2001 state budget.

And the government earlier this month filed an official request to the Paris Club to reschedule Indonesian sovereign debt due next year to the first quarter of 2003.

This time, the government is seeking rescheduling of both the principal and the interest. However, total amount the government is seeking to reschedule is not clear.

According to the 2002 state budget, overseas debt payments next year will reach Rp 68.5 trillion, Rp 41.5 trillion of which is principal and the remaining Rp 27 trillion is interest.

However, what creditors have so far been doing is only offering a temporary solution to Indonesia's long-term debt problems. They help solve the debt problems based only on the government's annual budgetary needs.

The government and creditors sit together and solve debt problems, or more precisely, financing needs for one fiscal year; and in the next fiscal year, the government faces the same problem again, and is compelled to sit down again with the creditors and find another solution.

With this mechanism, the government will continue to be shackled by its debt burden forever.

The debt-reduction proposal presented by non-governmental organizations such as the International NGO Forum on Indonesian Development (INFID) sounds like a sensible way to solve Indonesia's debt problem.

They argue that Indonesia's debt burden is the result of the practice of both the government and foreign creditors.

During the Soeharto regime there was significant corruption involving loans, including development loans, but at the same time many foreign creditors repeatedly turned a blind eye to the pervasive corruption.

The World Bank, for instance, loaned the Soeharto regime some $30 billion between 1966 and 1998. And the bank's records show that some 30 percent of its funds were diverted for purposes other than those for which they were intended.

In addition, a large portion of the increase in debt, especially from domestic debt, was caused by bank restructuring, which was recommended by the International Monetary Fund.

In October 1997, the IMF instructed Bank Indonesia to immediately close down 16 banks, thereby causing a run on all local banks. The central bank was therefore forced to bail out the whole banking system.

Therefore, the NGOs contend that it is only logical that the creditors also share a portion of Indonesia's debt burden by giving debt cuts.

The creditors, however, are adamantly against cutting Indonesia's debt, and are instead willing to negotiate alternative solutions for Indonesia's economic woes.

The problem also lies with the government, which is very reluctant to seek debt reductions.

The argument is that once the government looks for a reduction in debt, its reputation would plummet, and, over a certain period of time, it would not be able to raise any more funds because no foreign creditor would be willing to lend it more money.

As debt reduction is a remote possibility, it would be fruitful for the government to pursue debt relief through existing channels, such as from the Paris Club.

The creditors, for their part, should also take responsibility for Indonesia's soaring debt, thereby reducing it.

They could do this in two ways: by giving more grants, or soft loans, to Indonesia and rescheduling the debts that fall due in the next five to ten years with new grace periods and longer maturity.

That way, the government would be able to divert limited resources initially earmarked for servicing debt to finance development projects and improve basic utility services.