New Cabinet needs to take hard look at odius debt

Can the new Cabinet relieve the country of its debt trap? Political economist Revrisond Baswir of the Yogyakarta-based Gadjah Mada University (UGM) shares his concerns.

What are President Megawati Soekarnoputri's priorities?

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.

The new ministers like Dorodjatun Kuntjoro-jakti and Budiono are expected to be able to resume the government's relations with the International Monetary Fund (IMF). But can they negotiate the issue of debt reduction at the Paris Club and CGI? Dorodjatun is respected and accepted by the market but he should be critical towards foreign debt. His Ph.D thesis was in the political economic scope. Budiono, together with (economist) Mubyarto of UGM initiated the concept of "People's Economy."

But they've both been in the government for quite a while, especially Budiono, so he'd be more conservative and would likely go only as far as requesting debt rescheduling. But they should go further given a green light (for debt relief) from Australia and the World Bank.

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. So until the end of this year the rupiah must stay below Rp 9,000. All such problems must be resolved before September. What's your comment on signs from Australia and the World Bank that they are considering aamnesty of part of Indonesia's debts?

Our debt should indeed be wiped out. The World Bank has all the information showing that we've 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 IMF 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're satisfied with everything they should help us wipe out our debt.

So the government must follow up on this green light?

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. The government also 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. If Megawati's Cabinet is really market friendly, the pace of privatization may 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. A market friendly Cabinet will get a response of a stronger rupiah which will eventually attract investors.

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; IBRA is too messed up ... 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. 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.

So has the government delivered on its promise of a market friendly Cabinet?

Yes; the issue is if this "market friendly" approach will have to be paid dearly with IMF-suggested steps like increasing prices of fuel and electricity? Hopefully not, in view of Megawati's party image of "the little people." She should remember that.

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 ... The government should also resolve the implementation of regional autonomy and pay attention to issues around Aceh, Papua (Irian Jaya) ... and other potentially restive areas.

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

Megawati's government is compromising here and there, we can't expect much .. While the government has to be market friendly, corruption and money politics is still widespread.

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

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)