Govt prepays debts
Govt prepays debts
By prepaying the high-interest portion of its foreign debts,
the government has made a concerted, frontal attack on a main
cause of the large deficit in the current account of Indonesia's
balance of payments.
As Finance Minister Mar'ie Muhammad reported to the House of
Representatives last week, the government has over the last two
years prepaid US$1.04 billion of the $2.15 billion high-interest
loans derived from the World Bank and Asian Development Bank
(ADB). In the first quarter of the year, the government plans to
amortize another $498.1 million of the remaining $1.11 billion in
debts owed to ADB with annual interest rates exceeding 10
percent. The repayments were financed by revenue from the
government's divestment of a portion of its shares in state
companies PT Indosat, PT Tambang Timah and PT Telkom through
initial public offerings on both the domestic exchange and
international stock exchanges.
Not all loans from the two multilateral development banks bear
high interest rates. But because the two institutions rely on the
international capital market when financing their lending
operations and therefore set their credit interest rates at the
cost of their borrowings from the capital market, the cost of
their credit fluctuates according to the market rates. The
interest rates they charge are always much higher than the soft
loans provided by sovereign (government) creditors. The problem,
though, is that the institutions -- besides government donors --
have been a major source of long-term loans for the Indonesian
government in financing its investments. In fact, the ADB and
World Bank together account for about 38 percent of all the loans
obtained by the government annually from its creditor group, the
Consultative Group on Indonesia -- it replaced the Inter-
Governmental Group on Indonesia in 1992.
However, as its foreign debts accumulate and more loans become
mature for repayment, servicing its foreign debt has taken an
increasing portion of its budget. In the late 1980s, for example,
foreign debt servicing took up as much as 48.5 percent of the
government's operating budget. Even though the burden has
declined along with a steady rise in internal revenues, foreign
debt servicing still accounts for an estimated 38 percent of the
public sector's operating budget. In the next fiscal year,
starting in April, it will account for an estimated 35.5 percent
of the budget.
Selling portions of state companies to pay Indonesia's foreign
debts was foreshadowed by President Soeharto in the middle of
1994. Soeharto, in an effort to allay fear about the foreign debt
burdens, asserted that the foreign loans had been used to
increase the country's economic assets and that the debts could
easily be repaid by selling portions of state companies. They
were estimated to be worth $180 billion at the time.
The early amortization of the foreign debts which reflects the
government's determination to maintain prudent debt management
will have a positive impact on the current account of the balance
of payments. Interest payments on foreign debts, ranging from
$2.5 billion to $3.3 billion a year, have always contributed
greatly to the current account deficit.
The news about the debt prepayment is especially welcome now
as the current account deficit is estimated by the government to
more than double to almost $8 billion in the current fiscal year.
The measure could prevent unnecessary jitters among fund managers
and other businesspeople about Indonesia's external balance.