Delaying loan payments to get RI back on track

Delaying loan payments to get RI back on track

Herbert J. Liem, Capital Markets Observer, Jakarta/NewYork, USA

As Dorodjatun Kuntjoro-Jakti, the Coordinating Minister for
Economic Affairs of Indonesia recently mentioned, the pay-back
track record of the country with the International Monetary Fund
(IMF) thus far is an unblemished one and he would prefer to leave
it that way for the future (if at all possible).

Additionally, as a member of the IMF since its establishment
in 1953, Indonesia paid membership dues of more than US$3 billion
thus far. The unblemished pay-back track record is also with the
World Bank, the Consultative Group on Indonesia (CGI) and other
international lending institutions.

Undoubtedly, the country should be proud, since only a handful
at best of developing member-countries can claim the same. In
banking circles, Indonesia would be considered one of its best
clients.

Today keeping this unblemished pay-back track record to
infinity is an impossibility. If the country would not get one
cent more loan from now on, it is estimated, that it would take
approximately 600 (!) years for this country to pay off its
outstanding loans.

Moreover, at the upcoming CGI meeting in Nusa Dua, Bali, the
government is asking the donor countries for an additional loan
of about $3 billion, to close the gap of the heavy budget deficit
of 2003, which most likely will be approved. The outstanding
national debt will grow even bigger. When will this finally end
and where are we heading?

At one point in the future, the government will have to admit
to its creditors, that it would no longer be able to remit the
payments coming due. It just seem like a time bomb ready to
explode with all horrendous economic consequences for literally
everyone in the world's fourth largest country.

Who will take the blame and what difference will it make? The
situation would certainly effect the world economy, as Indonesia,
with its 220 million people, is also a full member of the World
Trade Organization (WTO) and the ASEAN Free Trade Agreement
(AFTA), among others.

The easiest and fastest way-out would be, if all creditors
would agree to forgive all Indonesian debts. This however, would
be only a dream which will not come true.

The other possibility is, to assume that the current policy of
the government is the right one and just wait patiently for
something positive to happen. But whatever the government does,
foreign and domestic loans will not disappear by itself, both
principal and interest.

Instead, they will grow larger (as the government year after
year needs additional loans to finance its budget- deficit).
This, in turn will one day force the government to regretfully
admit to the world (the creditors), that its national budget is
completely out of control.

By that time, Indonesia will have less or even no longer say
over their own affairs and are completely under the control of
outsiders, i.e. foreign and domestic creditors.

This would be a situation, unthinkable at present, but a
logical consequence of the current government policy of
"borrowing from Peter to pay Paul".

However, the government might consider a third option to
solving the matter; A five-year moratorium on all debts, foreign
and domestic.

Any creditor would agree with the first two options as
described before, including its consequences. As to the second
option, no person in its right mind would wish the disastrous
fallouts to happen. Given the three options, any creditor would
opt for the moratorium. However, the initiative ought to come
from the debtor (in this case the Indonesian government).

The debtor must convince the creditor, that we are not talking
about eliminating the principle of loans, but just of five year
interest payments due or part thereof; but that in any way, any
payments due should be delayed for the duration of the
moratorium.

During that time the debtor would be able to fully concentrate
on the reorganization of its own financial matters with utmost
diligence, while increasing the national output and the per
capita income of the people, strengthen its national economy,
increasing the economic growth to previous levels, without having
to worry about paying back debts (i.e. interest).

Any creditor would be agreeable to such a proposal, because he
sees a clear sign that the debtor is very serious in remitting
its debts and the economy would be a very strong one again after
the agreed five years, hence also benefiting the creditors.

Should the creditors not agree with the terms, the decision
could be made unilaterally. Indonesia would be considered
determined and decisive, which in turn will increase trust in
Indonesia and accordingly bring back badly needed foreign
investments and tourism to the country.

Since the moratorium pertains all foreign as well as domestic
debts, the government ought to advice all creditors on time of
their intentions on the moratorium. And to stress to all of them
the measures are taken for the good of the population.

The government should also have a close look at rampant
corruption here in Indonesia and act at once. Yet, virtually
nothing is done to eliminate this cruel crime wave.

So since barely a handful of the biggest corruptors have
landed in jail let's do it the other way; start to pick up all
small fishes and gradually go to the bigger and biggest ones
systematically. On a remote, relatively island among the more
than 10,000 islands here, build a large no-nonsense prison and a
large factory on it (without any air-conditioning).

The products manufactured here should be export-oriented goods
only and should be labor-intensive. Since the prisoner-factory
worker would only make Rp 2000 for an eight-hour day shift, their
products would undoubtedly be very cheap on the international
market.

To deter any would-be corruptor, the prisoners should not be
allowed to receive any visits. The prison factory should be run
by a privately held firm, with net profits shared on an equal
basis with the government, of which the share of the latter
should solely benefit the poorest of the poor.

No export taxes and any other taxes are to be charged to the
goods produced.

Corruptors, who voluntarily return the ill-gotten money before
they are caught, will serve only a third of the prescribed
sentence for the crime.

Any success with such measures, depends of course on the
political will of the government.