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.