Tue, 06 Aug 2002

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.