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

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.