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.