Five myths about the CGI

Five myths about the CGI

By Vikram Nehru

JAKARTA (JP): The Consultative Group on Indonesia -- or CGI --
meets each year to discuss Indonesia's external financing needs
from the international donor community.

Each time it does so, there is enormous press coverage and
considerable speculation as to whether Indonesia will receive its
target level of foreign aid.

Commentators argue back and forth whether the money is needed
or not, or whether or not the new debt can be afforded. But most
lack a real understanding of what the CGI is about or what it
does.

And myth is often peddled as fact. Here I list five common
myths about the CGI and try to debunk them with some simple
facts.

Myth No. 1: The CGI lends Indonesia money.

This myth is most common. It assumes the CGI is a single
financial institution -- which, of course, it is not. As its name
clearly implies, the CGI is a group (of 30 bilateral and
multilateral donors) -- who consult with government and each
other on Indonesia's development priorities and the external
financing the country needs to meet those priorities.

The key objective of the group is to better understand
Indonesia's development policies and programs, and to improve
coordination between donors and government, and among donors
themselves, so that external aid is used as effectively as
possible and in the nation's best interests.

The CGI meets formally once a year at a time designed to be
most helpful to the government in its budget formulation process.
Since the government moved to a calendar year budget, the CGI
meeting is held every October. This allows the draft budget
(prepared in September) to inform the CGI proceedings, and at the
same time allows the CGI pledges to inform parliament when
finalizing the budget in November.

Each CGI member pledges in accordance with the policies of
their institution or nation. Some pledge more than others. Of the
total pledge at the Tokyo CGI held in October 2000, three members
-- Japan, the ADB, and the World Bank -- accounted for almost 90
percent. Note that the IMF does not pledge at the CGI, because it
lends its money to Bank Indonesia, not the government.

Since the crisis broke in 1997, pledges have been based on
estimates of disbursements -- that is, the amount of money that
donors actually expect to release to the Indonesian government.

In the last two years, actual disbursements have been much
less than pledged disbursements. This year they are expected to
be less than half.

Many factors account for this -- project implementation has
been slower than expected, policy reforms were delayed (thereby
holding up program loans -- see below), or the government did not
need the money (thanks to higher-than-expected oil prices).

So adding the total pledges in each year does not give any
indication of the buildup in debt. Some commentators have done
this, saying the consequent increase in debt is intolerable. In
fact, the increase in external debt is appropriately calculated
by adding actual (not pledged) disbursements and then subtracting
amortization. This is a much, much smaller amount than the
pledge.

Myth No. 2: External finance from CGI members is expensive.

This is also not true. First, a small but growing share of
external funds received through CGI members is in the form of
grants -- free money requiring no repayment. But even loans from
CGI members are cheaper and of longer maturity than anything
Indonesia could find in the commercial markets.

True, Indonesia bears the risk of appreciation in the value of
the Japanese yen, but these risks can be hedged. Official loans
to Indonesia that cost the most are from the ADB and the World
Bank, but even these are some 500 basis points below what the
Indonesian government could raise in international capital
markets and have much longer maturities.

Moreover, both the ADB and the World Bank are providing
increasing amounts of "soft" money which is repayable over 35
years and bears no interest.

Myth No. 3: Indonesia does not need loans and grants from CGI
members.

Whether the Indonesian government borrows or not is, of
course, entirely of its own choosing. Borrowing makes sense when
the resources it generates are put to good use and yield high
economic and social returns.

In Indonesia's present situation, the government fully
recognizes that its debt has grown recently to mammoth
proportions, thanks largely to the huge cost of bank
restructuring.

This increase in debt, most of it in the form of domestic
bonds, has imposed a huge cost on the budget in the form of
increased interest payments. Adding to this would be foolhardy at
this point, as the emphasis should now be on reducing the debt
burden to sustainable levels.

Similarly, lenders would also not be particularly interested
to lend to a government already deeply in debt unless they felt
it served an important development purpose.

So, why is the Indonesian government still borrowing from CGI
members? The reason is simple. It must finance a development
budget that has already been cut by a third in real terms.
Indeed, the development budget is already low by historical
standards.

Any further cuts would hurt programs such as education,
health, and basic infrastructure that help the poor -- and lead
to an unacceptable deterioration in the country's physical
infrastructure.

Of course, the extent of reliance on external borrowing could
be reduced if the government raised more in taxes, sold yet more
IBRA assets, and accelerated the privatization program.

But it is finding it hard enough to reach its current targets
in these areas, let alone exceeding them.

It is, however, likely to raise higher-than-targeted oil
revenues, thanks to high international oil prices. Much of this
bounty will be absorbed by higher domestic fuel subsidies (which
also rise as international oil prices rise).

But if it is able to capture the net benefits, it should use
the windfall gain to curb increases in government debt and indeed
try to lower that debt if it can -- rather than fritter it away
in increased spending.

The government committed to the CGI members in Tokyo that to
the extent it could raise higher-than-expected net oil revenues,
it would lower its foreign borrowing. This was welcomed by the
international community.

The government also committed to use these resources wisely --
by ensuring they would support programs that help the poor and by
making certain that funds were used for the purposes intended and
did not "leak".

The international donor community, for its part, emphasized
the importance of good financial management, improved public
procurement processes, effective anti-corruption measures, and
transparent budget preparation and implementation, and many made
their pledges contingent on improved government performance in
this critical area.

Myth No. 4: The CGI imposes conditions on the Indonesian
government.

The CGI meeting does not impose any conditions on Indonesia.
But the purpose of the CGI meeting is for donors to assess
whether the government's policies are conducive for development
and thus warrant international financial support.

So there is undoubtedly pressure on the government to meet
these expectations. This is a good thing, because these
expectations are raised in an international forum and can be
tempered or even altered in dialogue with government
representatives.

On its part, the government can make its priorities and
expectations clear to the international donor community. It can
also request enhanced cooperation from donors -- as it did in
Tokyo recently when asking for increased flexibility in donor-
financed projects.

While the CGI meeting itself does not impose conditions on the
Indonesian government, individual lenders or grantors may very
well link their financial support to certain government actions.

The World Bank and the Asian Development Bank, for example,
regularly link their project aid to effective implementation, and
require key policy reforms before disbursing their adjustment
loans. These conditions are negotiated in advance -- and are
designed to ensure that the funds are used to meet the
development priorities of the country.

Myth No. 5: The CGI is an exclusive club of lenders.

To be effective, CGI meetings have to walk a fine line between
being transparent (so that the public knows what is discussed and
why) and being candid and spontaneous (to facilitate frank
interchange between donors and government).

The press is, therefore, not invited into the meetings
themselves, although there is a full press conference convened
immediately afterwards at which the chairman's closing remarks
are circulated.

Furthermore, the various statements of CGI delegates are
posted on the World Bank's Indonesia website
(www.worldbank.or.id) a day after the meetings close.

Finally, civil society groups were represented as observers at
the CGI for the first time in February, 2000 (in Jakarta). Five
civil society groups were represented in Tokyo and made a joint
presentation to CGI members. These steps are indicative of a
rapid trend toward increased openness going forward.

In the latest CGI meeting in Tokyo in October, the donors
emphasized the importance of corporate restructuring, poverty
reduction, good governance (with forestry as a vivid example),
and sound financial management.

At the same time, they appreciated the difficulties faced by
the government -- notably the complexity of the issues, most of
which are a legacy from the past and a burden on the future.

To assist Indonesia in resolving these issues, the members of
the CGI pledged financial and technical assistance as they have
done in years past.

The total pledge (in terms of estimated disbursements) going
through the budget came to about US$4.8 billion and grants and
technical assistance outside the budget amounted to US$660
million (see table for details).

The government vowed not to draw on these resources if it did
not need them -- for example, if average international oil prices
exceed the budget assumption as happened this year -- because the
priority at this stage is to bring down government debt and
ensure that external borrowing is undertaken only to finance high
priority expenditures that cannot be financed from domestic
sources.

The writer is lead economist of the World Bank Office in
Jakarta.