IMF's man in Jakarta upbeat on debt, economic prospects

The International Monetary Fund (IMF)'s senior resident representative in Jakarta, Stephen Schwartz, talked to The Jakarta Post's Kornelius Purba on Tuesday about the economic challenges that will face the new government. The following are excerpts from their conversation.

Question: What do you think the market expects from the new government during the first 100 days?.

Expectations in the market are indeed very high, as we have seen in recent days with the stock market reaching new highs and the exchange rate appreciating. The previous government has achieved much in bringing about macroeconomic stability, and is leaving behind a solid foundation for the new government to build upon.

Clearly, the market will be looking for early signs that the new government is committed to preserving the gains in macroeconomic stability and addressing weaknesses in the investment climate, including the need to enhance legal certainty for investors and improve tax and customs administration. Sending the right signals during the first 100 days will be important.

What other issues you think greatly concern the business community?

While the list of concerns may vary from business to business and sector to sector, one often hears a common set of issues. The list includes the lack of legal certainty for investors, arbitrary tax assessments without recourse to an efficient dispute mechanism, and labor market rigidities. Many businesses also point to the need to upgrade Indonesia's infrastructure.

Do you see any risks of instability over the next few weeks if the new government decides to raise fuel prices so as to ensure fiscal sustainability?

The question of what to do about fuel subsidies is really an issue of prioritizing spending. Given the high level of oil prices, spending on fuel subsidies has reached 3 percent of GDP, or around Rp 60 trillion. That's equivalent to the entire development budget. The new government will need to assess whether it wants to continue devoting such a large share of spending to these subsidies, weighed against the advantages of redirecting those funds for other purposes, such as antipoverty programs, social and infrastructure spending, or on deficit reduction.

Naturally, the removal of subsidies can be politically difficult. One way to soften the impact would be to explain the rationale to the public clearly, and for higher prices to be introduced gradually, along a clear timetable. Removal of subsidies could also be done as part of a package that would include compensating measures, particularly for low income earners. Ultimately, of course, it will be up to the new government to decide whether to remove subsidies, and, if so, on the best timing.

What kind of cooperation is the IMF willing to offer the new government?

We look forward to establishing a cooperative and productive dialogue with the new government. The IMF program ended at the end of last year, so our role has changed from the program intensive role to a more normal surveillance role, the kind of role that we play with all of our 184 member countries. So over here, to foster a policy dialogue, to assist the government in any way we can. We plan to continue providing technical assistance in areas where the government would find that helpful.

Why do economists of the World Bank and IMF see the sovereign debt burden as still being sustainable?

While Indonesia faces a substantial debt burden, we believe that it is manageable. The overall public debt-to-GDP ratio has fallen from over 100 percent of GDP in year 2000, to less than 70 percent at present, divided roughly equally between domestic and external debt. The decline has come about through a reduction in the fiscal deficit in recent years, and has been aided by the rupiah's appreciation.

In assessing Indonesia's external debt, which currently stands at around $80 billion, it is useful to keep in mind that the overwhelming share is owed to official creditors, with some three-fourths of the debt at low, concessional interest rates. When we say that Indonesia's debt profile is sustainable, we mean that based on a continuation of sound policies and realistic assumptions for GDP growth and interest rates, the debt-to-GDP ratio is expected to remain on a declining path.

There is really no single set of parameters that determine whether or not a given debt burden is sustainable as this will depend on individual country characteristics. The IMF's World Economic Outlook from September 2003 discusses these issues in- depth.

There are, however, rules of thumb. For most emerging market economies, it is believed that a debt-to-GDP ratio of around 30 percent should be an appropriate goal over the medium term. Achieving this in Indonesia would require, among other things, further reductions in the fiscal deficit over time, along with reasonably high GDP growth rates of around 6 percent over the medium term.

Are there other alternatives that the IMF can offer to help reduce the Indonesian government's annual debt service burden so as to enable it to increase spending on investment (development spending), as the outgoing president, Megawati, suggested recently?

When I say that we consider Indonesia's debt service burden to be manageable, I mean that, with sound policies and based on reasonable assumptions for growth and interest rates, the government should be able to service its debt obligations -- both domestically and internationally -- without further formal debt rescheduling, all the while ensuring adequate spending on social needs and infrastructure.

In any case, at present the international community does not have a mechanism outside the Paris Club framework for directly reducing the debt of a country such as Indonesia. There is a mechanism available to low income countries, called the HIPC (Highly Indebted Poor Countries) initiative, but that would not apply to a country such as Indonesia, which has a relatively strong external position and access to international capital markets.

Is it true that such multilateral institutions as the World Bank, IMF and ADB never give debt-rescheduling facilities to their borrowers?

It is only sovereign creditors that are able to provide debt- rescheduling facilities, while the Paris Club of government creditors gives debt rescheduling facilities only to debtors that come under the IMF's special arrangements, which then provides a chance for the Indonesian government to reduce its debt burden.