Govt to plead for leniency in Paris

Govt to plead for leniency in Paris

Brought to its knees by almost US$140 billion in foreign and
domestic debt, the Indonesian government is meeting again with
the Paris Club of sovereign creditors on Monday to ask for
another deferment of debt payments, which are due between April
and the end of 2003, to provide it with some breathing space in
coping with its severe liquidity crisis.

The three-day meeting of Paris Club III is widely predicted to
produce an outcome that will meet Indonesia's request for the
rescheduling of US$5.5 billion in debt principal and interest
falling due within the next 20 months, as the government has met
the most important condition imposed by the Paris Club -- a
reform agreement with the International Monetary Fund.

Nonetheless, it is almost unthinkable that the creditors would
abandon Indonesia, one of their largest debtors, in the midst of
this economic crisis which has been dragging on for more than
four years now. Moreover, almost all members of the Paris Club
are also affiliated with the Consultative Group on Indonesia
(CGI) donor consortium which has steadily, since 1968, assisted
the country with soft loans and grants.

In fact, the government had assumed a new debt rescheduling
agreement with the Paris Club long before the meeting this week.
The current 2002 state budget, for example, allocates only the
equivalent of $8.1 billion for debt principal and interest
payments, so it is clear the government presumed that at least
$2.5 billion in debt principal due after April would be
rescheduled.

The government, however, is not so sure yet as to whether its
request for a deferment of $3 billion in interest payments would
be fulfilled because the previous rescheduling agreements --
Paris Club I for $4.7 billion in September 1998 and Paris Club II
for $5.8 billion in April 2000 -- covered only debt principal.
Still, a firm accord seems to be in the bag.

But it would be dangerously misguided for the government to
take a debt rescheduling pact with the creditors for granted.
Indonesia's delegation to the Paris meeting will certainly be
grilled by creditor delegates about economic reform measures,
especially with regard to the drive to build good governance.

The creditors will thoroughly examine whether the government
has fully taken its share of the painful measures needed to cope
with the economic crisis. Such an inquiry should not be
considered undue intervention into Indonesia's internal affairs.
That is instead quite sensible and even imperative because
another debt rescheduling agreement would simply be rendered
ineffective if the government did not push through with its
reform commitments. Moreover, the government creditors have to
account for their loans because the bulk of the funds they lent
to Indonesia were derived from their taxpayers.

It would therefore be totally unfair to the taxpayers in the
creditor countries if the Indonesian government itself did not
take a fair share of the burden and instead continued its
wasteful ways, such as condoning corruption and gross
inefficiency in the public sector. That would especially be an
insult to the taxpayers in Japan who are now suffering the brunt
of the worst recession that country has seen since the 1940s. It
is worth reminding that the Japanese government, as the single
largest creditor to Indonesia, will account for more than 45
percent of the debts to be rescheduled under the Paris Club.

Another debt rescheduling with the Paris Club would greatly
help the government to keep its budget deficit at a manageable
level, especially because it is completely impossible to defer
the service payments on its Rp 640 trillion ($64 billion)
domestic debt. This is because more than 80 percent of the
capital of Indonesian private and state banks is made up of
government bonds and the bulk of their revenues now is derived
from interest on the bonds.

But the government should realize that debt rescheduling is
only a temporary relief measure in coping with short-term cash
flow problems. It has only a marginal impact on the net available
cash.

The permanent solution to the huge debt problems is only
sustainable, robust economic growth that is able to generate
larger tax revenues for the government.

However, the country will only be able to regain a
consistently, high growth rate only if the billions of dollars
worth of distressed assets currently managed by the Indonesian
Bank Restructuring Agency are recovered quickly, the inefficient,
corruption-infested state companies are sold to private investors
and the fragile banking industry is reinvigorated.