Meeting with creditors

Meeting with creditors

The Indonesian government is again coming under the sharp
scrutiny of non-governmental organizations -- which have been
campaigning against new foreign borrowings -- and from several
analysts who have been attacking the country's creditor
consortium, the Consultative Group on Indonesia (CGI), as a
cartel ganging up on the country to extract loan terms that would
best benefit themselves.

The new wave of criticism has arisen in view of the CGI's
annual meeting in Jakarta this week, with an agenda to set new
loan and grant commitments to help plug the hole in the
government's budget next year.

Indonesia's foreign debts alone are already quite burdensome,
amounting to more than US$75.18 billion as of July, not to
mention another $70 billion in domestic debts incurred over the
past six years of the continuing economic crisis. Of the total
amount of foreign debt, $45.70 billion comes from CGI members.

However, blaming only the foreign creditors for our great debt
burdens now would by no means solve our problems. Where is our
national dignity and propriety if we resorted to blaming others
for something that came about partly because of our own mistakes?

The NGOs' demand that the government abruptly halt new foreign
borrowings seems irrational, given the gap between huge domestic
savings gap and domestic and foreign debt service burdens. In
fact, according to the latest study by the National Development
Planning Biard, the government will still need new loans from the
CGI to finance its budget deficit until 2007.

The problem is that our economy has been bleeding since the
onset of the economic crisis in late 1997, and the economy needs
a blood transfusion, as has been provided by the CGI under the
coordination of the World Bank.

Likewise, simply rejecting the tough loan terms demanded by
the creditors as intervening into our domestic affairs, as some
analysts have suggested, is also insensible. It must be
remembered that the CGI, besides providing hundreds of millions
dollars in grants, also charge much lower interest than the
current market.

The hard truth is that the donors would be merely wasting
their money and would make the new debts completely unsustainable
if the government didn't push through those badly-needed reform
measures to generate strong economic recovery.

For example, the foreign loans would not create new revenue-
generating assets, but instead cause only additional burdens if
corruption or other forms of bad governance continued to wreck
the effectiveness of government investment expenditures.

Simply put, Indonesia would never get out of its current
economic debacle without pushing through reforms in the banking,
corporate, public, government and judicial sectors.

The government should, however, strongly bargain for the
correct sequence of reforms so they are socially and politically
acceptable and feasible within the existing capacity of the
implementing institutions.

We think the creditors sensible enough to realize that many of
the reforms would take a considerable time to accomplish. They
only want to see that the government maintains a coherent policy
and remains on the right path to reform.

How could we justify our asking for the help of taxpayers in
other countries if we do not take our full share of the burden,
or lack the determination to take on the painful, necessary
reforms to remove the woes that caused the crisis in the first
place?

The government expects to get at least US$2.5 billion in new
foreign loan commitments from the CGI, much smaller than the
$3.14 billion in new loans and grants the consortium pledged for
the 2003 state budget.

But even with these new loan pledges, next year's official
capital account will still see a net resource outflow of around
$1.8 billion. This outflow is due to a 152.4 percent increase in
foreign debt service burdens, as Indonesia will no longer be
entitled to the debt-rescheduling facility from the Paris Club of
sovereign creditors. This, finally, is the logical consequence of
the government's decision to end its program with the
International Monetary Fund this year.

Moreover, the government may still need to float $600 million
in bonds on the international market and, on top of this, it will
have to draw down about Rp 19.2 trillion ($2.2 billion) from its
deposits at the central bank.

Thus, it is quite clear as to the magnitude of the domestic
savings gap that the government has to plug up next year, and in
direct proportion, the great importance the annual loan
commitments from the CGI holds for our country.