Doing without the IMF: Figuring out where the money comes from
Doing without the IMF: Figuring out where the money comes from
Juergen Kaiser, Jubilee.De, Dusseldorf, Germany
State Minister of National Development Planning Kwik Kian Gie
has not been the first influential politician of a southern
country ever to suggest, Indonesia might actually do better
without the IMF. From Peru's Alan Garcia to Zambia's Kenneth
Kaunda and more recently Nigeria's Olusegun Obansanjo, southern
statesmen and government leaders have for honest or somewhat less
honest reasons pointed their fingers to the "colonialists" from
Washington, and suggested their respective countries would do
better on their own.
They all have made the same fatal mistake, which only very few
of their colleagues (Prime Minister Mahathir Mohamad of Malaysia
being one of them) have managed to avoid: They have stood up,
made a strong statement and then they have waited for the sky to
fall upon their heads. They failed to do the decisive step, as
they never answered the key question, where the money they needed
was actually to come from, once the Fund personnel had cleared
their offices in the Finance Ministries.
The Fund invests much efforts into making governments believe
that there is no economic future without the seal of approval by
the Fund. Paradoxically enough the opposite is true, the more
indebted a country is. Where could the Funds come from? From the
debt service which a country saves, once it stops servicing them.
Indonesia in fact, like most severely indebted countries, is
producing a primary surplus; i.e. leaving interest payments
aside, the central government is receiving more money than it
actually pays out. In the 2002 budget the surplus amounts to the
equivalent of some US$5.3 billion. Internal interest payments of
some 59.6 trillion rupiah ($6.5 billion) and external interest
payments of some $3 billion, turn the surplus into a deficit of
$4.2 billion.
It is the interest on the foreign and domestic debt which
forces the administration to seek new loans from inside or
(mostly) outside the country. This goes not only for Indonesia.
Even for such a prominent insolvency case as Argentina, this has
been true until very recently.
So, first of all: If the government wants to bring the public
finances back into balance, receiving new loans to pay off old
ones is only a viable solution, if you assume that the country is
going to have disproportional growth rates. These have been
projected by the World Bank in a full series of diagnoses, but
never have materialized since the outbreak of the crisis.
So, it is adequate for a government to pay tribute to the
IMF's poor track record as an economic consultant and to seek
alternative ways of organizing its economy. However, if the
government really took this initiative, it would need to do a few
things at the same time:
* It would need to come up with a viable proposal of how to
deal with its external and its internal debt. It needs to propose
a regulation tailored according to the country's needs and debt
servicing capacities. This would necessarily pose the bunch of
the burden on external creditors, including the international
financial institutions; however, it needs to steer the
distribution of internal hardships as well. Internal creditors,
including the Banks which are enjoying a quite steady and risk-
free stream of income, would have to have their haircuts as well.
* It needs to work for a fair and transparent framework
through which it could implement a solution, which has a real
chance to meet with general, albeit sometimes grumbling consent
of the creditors. The most important element of this is an
impartial institution, which would actually arbitrate between
Indonesia and its creditors on the basis of an equally impartial
assessment of the country's economic situation.
One of the most important results of such an impartial
procedure would be the key incentive for private (and some
official) creditors, to join into such a far-reaching solution:
The perspective of finding in Indonesia a new financially viable
partner and thus an investment sphere. Contrary to the favorite
argument by creditors, that debt cancellation will cut the
debtor off from financial markets, such a clear cut has for
private as well as for public debtors regularly restored the
debtor's access to capital markets.
Does Indonesia have a chance to go any alternative way?
The answer is a double yes, for two quite different reasons.
The first is: There is in fact no alternative to a new
approach, unless the country is prepared to engage itself in an
endless series of reschedulings with its external creditors, and
to suffer internal financial turmoil, when it will have to
default selectively on some of its internal commitments (and has
to decide, which ones), or through trying to work itself out of
its Rupiah-denominated debt by starting an inflationary spiral.
In 2004 the internal debt service will increase to some Rp 80
trillion ($7 billion) and then remain in that range for about a
decade. With annual external debt service also rising to over $5
billion from 2005 on, there is no way for the Indonesian economy
to produce enough revenue in order to afford that huge tribute to
internal and external capital owners.
Nobody in the administration has a clue about where this money
might actually come from. If the government wastes the precious
time it has won through the latest Paris and London Club
reschedulings between futile attempts to accomplish the
extraordinary growth rates demanded by the international
financial institutions and occasional tough rhetoric, it will
find itself quite empty-handed, when the moment of truth comes in
January 2004.
The second reason is that creditors themselves have started to
consider new frameworks, particularly an international insolvency
procedure, first of all in order to overcome their internal
coherence problems.
The proposal for a new Sovereign Debt Restructuring Mechanism
(SDRM), started last November by the IMF Deputy Director Anne
Krueger bears a huge potential for Indonesia.
It can pave the way for some neutral institution to judge over
Indonesia's debt problem -- instead of allowing the creditors to
further claim this role for themselves. It can bind all creditors
into a solution which is based on a realistic assessment of the
country's debt sustainability, and it can halt resource outflows,
in order to allow for an orderly debt workout.
Again, however, the crucial role will be with the Indonesian
government. Only when Jakarta stops accommodating itself at the
receiving end of decisions being taken elsewhere, can the reform
debate in the Fund and in the broader international community
(which has not been set in motion to please Indonesia), become
fruitful for the country. That is why the debate started by
Minister Kwik must not be allowed to die down.
Jubilee.De (Jubilee 2000) is an international organization
seeking alternatives on debt issues.