New Cabinet needs to negotiate on odious debt

New Cabinet needs to negotiate on odious debt

The new Cabinet faces a tight schedule in the following weeks.
Political economist Revrisond Baswir of the Yogyakarta-based
Gadjah Mada University shares his concerns.

Question: What do you see as President Megawati
Soekarnoputri's priorities?

Answer: Her priority should be the management of the budget
which is related to many things that are right before us, such as
the Paris Club meeting (in September), the meeting of the
Consultative Group on Indonesia and also the government's budget
proposal for 2002. The Paris Club talks are related to the 2001
budget; if we fail (to negotiate for debt rescheduling) at the
Club we could experience a default.

We need here a grand design on how to manage such matters.
What is the fundamental solution of the government regarding our
maturing debts? Are we going to ask for amnesty or is there
another way? This needs to be clear.

The threat of a deficit is there because of our these debts,
both (to lenders) inside and outside the country. Domestic debts
reaching Rp 53 trillion must be paid this year to Bank Indonesia
(central bank). With BI's interest rate of some 17 percent the
amount could reach Rp 60 trillion.

Interest for overseas debts which must be paid this year alone
will reach at least Rp 23 trillion ... The government also has
the burden of the earlier rupiah value of Rp 9,600 to the dollar
this year. This means until the end of this year the rupiah must
stay below Rp 9,000. All such problems are in front of us --
which must be resolved before September.
The Australian government and the World Bank has signaled that it
will consider amnesty of part of Indonesia's debts. Your comment?

Our debt should indeed be wiped out. The World Bank has all
the information showing that Indonesia has fallen into a very
heavy debt trap. So if the World Bank says it will conduct a
study it wouldn't be about how deep we're in debt; it would be
more likely on the prospects of Megawati's Cabinet. If the
government is friends with the International Monetary Fund it
will receive positive signals from them. They also want to see
whether the government can hold out to 2004 and what the
political map of the Cabinet is like. If they are satisfied with
everything they should be helping us wipe out our debt.

So Megawati's government should immediately follow up on this
green light from the World Bank?

Of course. The amount of foreign debt compared to our gross
domestic product has reached over 100 percent; this is the
strongest indication of our debt trap.

At the same time the government has a domestic debt of Rp 600
trillion. The burden of installments for our due foreign debts
this year is around US$14 billion. Meanwhile next year the burden
of debt installments to our export revenues will reach 54
percent; this means a continuous, annual threat to our foreign
exchange reserves.

So I see no choice for Indonesia other than to try to obtain
debt amnesty. We should not be ashamed of being declared as
having defaulted on our debt payments, given the circumstances.
The World Bank and Australia seem to be taking into account the
corruption under the New Order regime.

This is indeed the strongest reason (for appealing for
amnesty). So our request for debt forgiveness would not only be
because of the above condition but because of our historic
reality that such huge debts have not reached the people because
of the corruption of the New Order elite. This is categorized as
odious debt.

We should be grouped under the "heavily indebted poor
countries" which get a reduction of 60 percent on debt
repayments. Thirty-five countries are now in this category.

With a targeted deficit of 3.7 percent from the gross domestic
product for this year, the government must seek income by getting
as much as possible from state firms, mainly through
privatization. What are the prospects of privatization of state
firms in the near future?

If Megawati's Cabinet is really market friendly, there's a big
possibility that the pace of privatization will increase. This
means contributions from state firms (to state revenue) will no
longer be from distribution of dividends but from the sale of
private firms.
What about the relation to other policies?

The success of privatizing state firms is related to other
policies. If the Cabinet is market friendly the response will be
a stronger rupiah which will eventually attract investors to come
here.

Our sacrifice would be having to let go of the state firms
because foreign investors will clearly buy the firms whatever
their price in rupiah. Investors in strategic sectors will first
conduct due diligence studies before bargaining for the firms.
I'm sure the state firms will still be bought at the lowest price
levels.

What about the role of the Indonesian Bank Restructuring
Agency (IBRA)?

Their contribution is expected but the main priority is
restructuring the organization and revamping their work program.
The impression is that IBRA is too messed up. An overhaul is
needed although the target of its contribution to the state
budget can still be determined. The government is also slated to
increase fuel prices again this year given subsidy reduction.

This is quite sensitive. The fuel prices will depend on the
development of the rupiah and interest rates. I think subsidies
and the fuel price are still debatable; is an increase really
needed to cover the deficit or is another review needed, given
that some things are not yet clear on the actual production costs
of Pertamina.

What about the fiscal balance between Jakarta and the regions?

Very early in her term Megawati has had to face this problem
in the form of the CPP Block contract (with PT Caltex Pacific
Indonesia) .... This is a good start. So (the government) should
not harbor any wish to reduce regions' revenue, because regions
of course want more, not less. In general the Megawati government
should also resolve the implementation of regional autonomy and
pay attention to issues around Aceh, Papua (Irian Jaya) ... and
other potentially restive areas.

The government must realize that the crucial issue raised by
resource-rich areas affects investors' interest. Pride and
identity are important but the Acehnese would not raise their
voice if they didn't know there were gas resources there;
likewise people in gold-rich Papua and oil-rich Riau.

Megawati's government which seems to be compromising and
pragmatic has promised to please the market. This will lead to a
paradox; even the military may be used to face the regions, which
will face the demands of the local public.

Wiping out corruption is also important in securing investors'
trust. What can this government do?

Megawati's government is compromising here and there,
accommodating a number of political forces, so we can't expect
much regarding corruption. The paradox is while the government
has to be market friendly, corruption and money politics
continues to be widespread.

Combating corruption is related to decentralization of the
fiscal balance. By reducing the concentration of funds at the
center, the possibility for abuse of state funds at the center
becomes smaller.

It's true that giving regions the authority to manage big
funds can also lead to corruption but at least the management of
local administrations is closer to their people, enabling better
control. Strong monitoring by the public must be established.

I'm worried about the influence of (Megawati's) Indonesian
Democratic Party of Struggle (PDI Perjuangan) which gives too
much emphasis on the notion of unity, which may imply reducing
the spirit of giving a chance to regional administrations. The
party could very well sponsor efforts to amend the regional
autonomy law. (Asip A. Hasani)