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)