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.