Ensuring aid effectiveness
The Consultative Group on Indonesia (CGI) predictably approved on Thursday US$2.8 billion in new loans and $600 million in new grants to help the government plug part of the big hole in its budget.
It is roughly similar to the pledges made by the creditor group last year, but the sum is less than half of the $7.2 billion the government has to transfer overseas in debt service payments this year.
On top of these pledges, the creditor consortium also committed $1.7 billion in soft loans and grants especially for the rehabilitation and reconstruction of Aceh.
Since 2003, the government's annual debt service payments overseas have been more than twice as large as its new foreign borrowing, because the government is no longer entitled to a debt rescheduling facility from its sovereign creditors and more debts are now maturing.
However small the new pledges may seem, compared to the annual interest charges and debt amortization, the new aid commitments will nonetheless help greatly, especially now as the fiscal burdens have sharply increased after the cataclysm in northern Sumatra.
The terms and conditions of CGI loans are concessional in that their interest rates are way below what the government can obtain from the international financial market and their maturity extends to as long as 40 years, including a 10-year grace period. More than one-fifth of the pledges consist of grants.
For example, the $1.07 billion in new pledges made by Japan, Indonesia's largest sovereign creditor, carry annual interest rates of only between 0.4 to 1.3 percent a year, as compared to the more than 10 percent, which the government has to pay for its ten-year global bonds that were floated last year. Even the interest rates charged by the World Bank and Asian Development Bank, which raise their lending resources from the capital market, are more than 5 percentage points lower than the government's borrowing costs.
Moreover, the CGI loans are used entirely for sectors, which promise high productivity and high economic returns, but which are not attractive to private investors, such as basic infrastructure like roads, ports and water networks, as well as education and health facilities.
However, as past experiences have shown, what is more important is not the amount of pledges, but how well the soft loans are used. Tens of billions of dollars in past CGI loan commitments had been cancelled due to long delays in their disbursement, caused mainly by problems on the part of the government: lack of counterpart funds, poor project preparations and some confusion in the division of responsibility between the central and local governments.
On top of these problems, the long delay in the establishment of a national public procurement office has undermined project implementation. Analysts can only scratch their heads and wonder why such an important agency, which can simply be set up with a presidential decree, is taking so much time to establish, while public procurement of goods and services has long been a main source of corruption both at government institutions and state companies.
No wonder good governance practices are the primary condition to which creditors tie their aid pledges. Almost all major donors reiterated last week the importance of corruption eradication. The primary reason, as ADB Vice President Joseph Eichenberger noted, is quite obvious: The donors have to prove to their own taxpayers (in the case of government creditors) and their shareholders (in the case of multilateral donors) that the money is used for the purposes intended.
This condition makes a lot of sense because the creditors would simply waste their money and make the new debts completely unsustainable if the government did not improve governance practices and implement projects according to schedules.
In fact, problems related to bad governance practices and poor infrastructure have been cited as the main barriers to private investment. Various surveys have found that costs associated with policy and regulatory uncertainty and unreliable infrastructure amounted to as large as 20 percent of company sales.
President Susilo Bambang Yudhoyono personally reemphasized the vital role of good governance and good quality infrastructure in his address at the CGI meeting, and economic ministers elaborated on key reforms that were planned to improve the investment climate.
The market and investors, which have often been disillusioned with false starts in reform programs, expect immediate, concrete implementation of these promises, lest even the Susilo government, supported by a strong political mandate, would not be able to seize upon the emerging cyclical upturn so the economy would grow faster.