Indonesia's foreign debt burden called critical

JAKARTA (JP): Senior economist Sumitro Djojohadikusumo warned yesterday that Indonesia's foreign debt, estimated at around US$100 billion, had reached a critical level with a 32 percent debt-service ratio against exports.

Sumitro told reporters that serious efforts were needed to reduce the debt-service ratio to at least 25 percent by the end of the Sixth Five-Year Development Plan in 1999.

"This is a very worrisome condition and I have repeatedly sounded this warning in the past," he said after opening an annual meeting of civil servants' cooperatives.

"We have reached a red-light sign... which can only be weathered if we raise more revenue from both the industrial and service sectors."

He said a debt-service ratio of 32 percent meant that about a third of the country's revenue from exports would be used to pay and service its foreign debt.

"So if our exports currently reach around $45 billion, about $15 billion will be used to pay interest and debt principal. Don't you think this is an alarming situation?" he asked.

He said that slower export growth compared to import growth would cause Indonesia's current account deficit, estimated at $7.9 billion in 1996, to rise further.

Since imports are expected to continue to rise because of increased demand for capital goods, Indonesia's current account deficit is expected to lie between $10 billion and $11 billion in 1999, he said.

He estimated Indonesia's current account deficit was now as large as 3.4 percent of gross domestic product, which is lower than Mexico's which reached 9 percent during its December 1994 financial crisis.

"But we still need to cut back on imports by controlling aggregate domestic demand and to increase exports by issuing more deregulation measures for the real (production and distribution) sector.

"The government must show a serious political will to cope with vested interests of both businessmen and bureaucrats," he said in reference to hurdles facing further economic reform.

Sumitro conceded imports should continue to rise because the country still depended largely on imported capital goods and various basic and intermediate industrial materials.

"The question is whether the rise will really be generated by larger imports of capital goods or by imports of consumptive goods."

He questioned whether the government had the right economic policy priorities and whether they were properly implemented.

Sumitro acknowledged that stability was needed to sustain sound development: a dynamic stability, not one which aimed to maintain the status quo in favor of a small group.

Transparency

"To have stability, you need consistency (in economic policies) and to maintain consistency, you must allow transparency."

Transparency, he said, would allow people to judge whether a policy was implemented fairly and consistently for everyone, or whether it only favored a few.

"And I think this is what is lacking in the government policy- making mechanism," he said.

Responding to questions on Indonesia's access to concessional foreign aid, Sumitro said the country's rapid development would not allow it to receive aid for much longer.

To offset the expected decrease in foreign soft loans the government must mobilize more domestic savings or reduce the rate of Indonesia's economic growth.

The government is still capable of increasing domestic savings, especially if it boosts investment efficiency by lowering the incremental capital output ratio, he said. (pwn)

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