Independent assessment on debt urgent for Indonesia

Independent assessment on debt urgent for Indonesia

By Juergen Kaiser

SIEGBURG, Germany (JP): In the running up to this week's
meeting of the Paris Club of official bilateral creditors, Vice
President Hanzah Haz had -- surprisingly for some -- stated that
Indonesia was "in dire need of debt rescheduling and relief."
This was an important and welcome act of realism, contrasting
sharply with the repeated claim of the International Monetary
Fund, that Indonesia would neither need nor win form debt relief.

This week's meeting will not bring any new arrangement for
Indonesia, as it will only re-implement the suspended agreement
of April 2000. The next new arrangement needs to be made in
April 2002, however, when the present one will expire. What will
be at stake for Indonesia there?

A country may qualify for debt relief in the Paris Club on
three premises: It needs to have an unsustainable debt burden;
it needs to be poor, and it is likely to lack creditworthiness in
the future.

Indonesia would qualify for any relief internationally
available under the poverty criterion. Her per-capita income
hovers around US$600, which is well below the $895 threshold set
up for "IDA-countries", in reference to the World Bank-related
International Development Association dealing with the poorest
countries.

There is not much positive to be said about Indonesia's
creditworthiness either. Ever since the outbreak of Asian crisis,
the country has suffered from net outflows on private capital,
which normally is a standard indicator. Private rating agencies
have categorized Indonesia clearly below investment grade.
Does Indonesia then have an unsustainable debt burden? The Paris
Club itself does not have clear criteria for what
"unsustainability" means in figures.

The multilateral initiative of the Highly Indebted Poor
Countries, however, classifies a country's debt burden as
unsustainable, if the present value of its external debt burden
is beyond 150 percent of annual export earnings or if it is
beyond 250 percent of annual fiscal revenue. Both apply to
Indonesia and are likely to remain there in the next couple of
years.

Despite the proven need to receive not only some postponement
of debt obligations into the future (a rescheduling), but to have
a partial write-off (a "haircut" like finance minister Boediono
meant but did not say last Tuesday), creditors will prevent
Indonesia from receiving it. The instrument for doing so is the
withholding of the formal "IDA-only"-status, which means that,
unlike other severely indebted low-income countries, Indonesia is
still entitled to borrow from the nonconcessional International
Bank for Reconstruction and Development, and not only from the
World Bank's soft loan soft loan window, IDA. This status is
unilaterally bestowed to a country by the Bank's board.

For Indonesia this results in a trade-off between around $1
billiion in hard IBRD-loans to which it would loose access on the
one hand versus a possible relief on the basis of the so-called
"Lyon Terms", to which it could get access as a "Severely
Indebted Low Income Country (SILIC). Lyon Terms imply as a first
step the reduction of the debt service falling due to the
official bilateral creditors in the Paris Club by 80 percent.

Moreover they do oblige the debtor government to seek an
equally favorable treatment from other bilateral creditors
(governments beyond the Paris Club, private banks, bondholders).
Debt service to official bilateral creditors, which could then be
subject to an 80 percent haircut amounts to some $4.5 billion in
2002 alone. Private creditors -- which according to Paris Club
rules would then be called upon to provide comparable
concessions, expect $14 billion in 2002 from Indonesia.
Indeed such a far-reaching solution seems hardly imaginable --
although it would not be more than equal treatment with other
indebted countries, which find themselves in the same category
regarding poverty and indebtedness. So, what could a solution
look like?

The mere fact that Indonesia needs not just rescheduling which
simply shifts the current burden onto the shoulders of future
generations of Indonesians is beyond any doubt. The problem is
that the existing mechanisms, which the creditors have set up,
leave Indonesia on the wrong side of the huge gap between those
happy few which qualify for relief and the rest of the indebted
world, from which it is withheld under a formal pretext.

In this situation Indonesian and international non government
organizations have launched the proposal to start a consultative
process under the leadership of a neutral mediator. The mediation
process would start with an independent stock taking of
Indonesia's debt burden. This independent assessment might lead
to a quite different picture from the World Bank's recent
analysis which have notoriously underestimated the medium-term
unsustainability of Indonesia's foreign debt, in order to provide
the Bank's important shareholders with a pretext to deny
Indonesia debt relief. The assessment would cover all qualitative
as well as quantitative aspects of the debt.

In a second step the mediator would then propose a solution
not necessarily in terms of a reduction quota but certainly in
terms of a time horizon which would go beyond anything the Paris
Club actually has on offer.

The writer is with the Jubilee Alliance Germany, which is part of
the international movement campaigning for debt relief for a
number of countries.