Wed, 22 Jan 2003

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.